FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
COMMISSION FILE NUMBER: 001-13931
PENTACON, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE, SUITE 700 HOUSTON, TEXAS 77042
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-860-1000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT, PAR VALUE $.01 PER SHARE,
OUTSTANDING AT APRIL 30, 1999 WAS 16,668,129.
<PAGE>
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Historical Consolidated Balance Sheets - Pentacon, Inc. as of
March 31, 1999 and December 31, 1998.......................................................3
Consolidated Statements of Operations - Pentacon, Inc. Historical for the
Three Months ended March 31, 1999 and 1998
and Pro Forma for the Three Months ended
March 31, 1999 and 1998.....................................................................4
Historical Consolidated Statements of Cash Flows - Pentacon, Inc. for
the Three Months ended March 31, 1999 and 1998..............................................6
Notes to Consolidated Financial Statements............................................................7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................11
Part II - Other Information
Item 2 - Change in Securities.............................................................................17
Item 6 - Exhibits and Reports.............................................................................17
Signature.................................................................................................17
</TABLE>
<PAGE>
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 768 $ 744
Accounts receivable ........................................ 38,087 34,610
Inventories ................................................ 118,968 116,390
Deferred income taxes ...................................... 5,371 4,216
Other current assets ....................................... 517 897
-------------- -----------------
Total current assets ................... 163,711 156,857
Property and equipment, net of accumulated
depreciation .......................................... 8,667 7,404
Goodwill, net of accumulated amortization .................. 135,503 134,528
Deferred income taxes ...................................... 672 672
Other assets ............................................... 4,743 1,892
-------------- -----------------
Total assets ........................... $ 313,296 $ 301,353
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ........................................... $ 31,039 $ 33,895
Accrued expenses ........................................... 11,585 8,875
Income taxes payable ....................................... 3,504 3,384
Current maturities of long-term debt ....................... 402 31,957
-------------- -----------------
Total current liabilities .............. 46,530 78,111
Long-term debt, net of current maturities .................. 149,832 106,632
-------------- -----------------
Total liabilities ...................... 196,362 184,743
Commitments and contingencies
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding .......... -- --
Common stock, $.01 par value, 51,000,000 shares
authorized, 16,668,129 shares issued and outstanding .. 167 167
Additional paid in capital ................................. 100,566 100,501
Retained earnings .......................................... 16,201 15,942
-------------- -----------------
Total stockholders' equity ............... 116,934 116,610
-------------- -----------------
Total liabilities and stockholders' equity $ 313,296 $ 301,353
============== =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------------
March 31,
------------------------
1999 1998
-------- --------
(in thousands, except
per share data)
Revenues ....................................... $ 66,550 $ 19,856
Cost of sales .................................. 44,648 12,387
-------- --------
Gross profit ......................... 21,902 7,469
Operating expenses ............................. 15,012 7,219
Goodwill amortization .......................... 858 79
-------- --------
Operating income ..................... 6,032 171
Write-off of debt issuance costs ............... 2,308 --
Other (income) expense, net .................... (18) (5)
Interest expense ............................... 3,192 312
-------- --------
Income (loss) before taxes ........... 550 (136)
Income taxes ................................... 291 (45)
-------- --------
Net income (loss) .................... $ 259 $ (91)
======== ========
Net income (loss) per share:
Basic ................................ $ 0.02 $ (0.02)
Diluted .............................. $ 0.02 $ (0.02)
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-------------------------
March 31,
-------------------------
1999 1998
-------- --------
(in thousands, except
per share data)
Revenues ..................................... $ 66,550 $ 41,297
Cost of sales ................................ 44,648 27,169
-------- --------
Gross profit ....................... 21,902 14,128
Operating expenses ........................... 15,012 9,790
Goodwill amortization ........................ 858 374
-------- --------
Operating income ................... 6,032 3,964
Write-off of debt issuance costs ............. 2,308 --
Other (income) expense, net .................. (18) (30)
Interest expense ............................. 3,192 260
-------- --------
Income before taxes ................ 550 3,734
Income taxes ................................. 291 1,684
-------- --------
Net income ......................... $ 259 $ 2,050
======== ========
Net income per share:
Basic .............................. $ 0.02 $ 0.13
Diluted ............................ $ 0.02 $ 0.13
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 31,
----------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ........................................... $ 259 $ (91)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ............................... 1,406 159
Deferred income taxes ....................................... 131 (188)
Compensation expense related to issuance of
management shares ...................................... -- 1,800
Write-off of debt issuance costs ............................ 2,308 --
Changes in operating assets and liabilities:
Accounts receivable ............................ (3,532) 1,158
Inventories .................................... (3,444) (2,760)
Other current assets ........................... 86 185
Accounts payable and accrued expenses .......... (3,214) (1,057)
Income taxes payable ........................... 120 (3,675)
Other assets and liabilities, net .............. (991) 1,259
--------- ---------
Net cash used in operating activities .................. (6,871) (3,210)
Cash Flows From Investing Activities:
Capital expenditures ........................................ (1,673) (1,403)
Cash paid for Founding Companies, net of cash acquired ...... -- (21,948)
Other ....................................................... -- 10
--------- ---------
Net cash used in investing activities .................. (1,673) (23,341)
Cash Flows From Financing Activities:
Principal payments on debt .................................. (98,528) (35,768)
Borrowings of debt .......................................... 110,133 15,800
Proceeds from issuance of common stock, net of offering costs -- 50,815
Debt issuance costs ......................................... (3,037) (207)
--------- ---------
Net cash provided by financing activities .............. 8,568 30,640
Increase in cash and cash equivalents ................................ 24 4,089
Cash and cash equivalents, beginning of period ....................... 744 --
--------- ---------
Cash and cash equivalents, end of period ............................. $ 768 $ 4,089
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
Pentacon, Inc. ("Pentacon" or the "Company") was incorporated in
March 1997. On March 10, 1998, Pentacon and separate wholly-owned subsidiaries
acquired in separate transactions, simultaneously with the closing of its
initial public offering (the "Offering") of its common stock, five businesses
(the "Initial Acquisitions"): Alatec Products, Inc. (Alatec), AXS Solutions,
Inc. (AXS), Capitol Bolt & Supply, Inc. (Capitol), Maumee Industries, Inc.
(Maumee), and Sales Systems, Limited (SSL), collectively referred to as the
"Founding Companies." The consideration for the Initial Acquisitions consisted
of a combination of cash and common stock. Because (i) the stockholders of the
Founding Companies owned a majority of the outstanding shares of Pentacon common
stock following the Offering and the Initial Acquisitions, and (ii) the
stockholders of Alatec received the greatest number of shares of Pentacon common
stock among the stockholders of the Founding Companies, for financial statement
presentation purposes, Alatec has been identified as the accounting acquiror.
The acquisitions of the remaining Founding Companies have been accounted for
using the purchase method of accounting. Therefore Alatec's historical financial
statements for all periods prior to March 10, 1998 are presented as the
historical financial statements of the registrant. Unless the context otherwise
requires, all references herein to the Company include Pentacon, the Founding
Companies and acquisitions subsequent to the Offering ("Subsequent
Acquisitions").
In October 1998, the Company changed its year end from September 30
to December 31. A Transition Report on Form 10-Q was filed for the three-month
transition period ended December 31, 1998. The accompanying unaudited interim
financial statements are prepared pursuant to the Rules and Regulations for
reporting on Form 10-Q. Accordingly, certain information and footnotes required
by generally accepted accounting principles for complete financial statements
are not included herein. The Company believes all adjustments necessary for a
fair presentation of these statements have been included and are of a normal and
recurring nature. The statements should be read in conjunction with the
financial statements and related notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998 and the
Transition Report on Form 10-Q filed for the three-month transition period ended
December 31, 1998.
The pro forma financial information for the three months ended March
31, 1998 includes the results of Pentacon combined with the Founding Companies
as if the Initial Acquisitions had occurred at the beginning of the three-month
period. The pro forma financial information includes the effects of (i) the
Initial Acquisitions (ii) the Offering (iii) certain reductions in salaries and
benefits to the former owners of the Founding Companies to which they agreed
prospectively (iv) certain reductions in lease expense paid to the former owners
of the Founding Companies to which they agreed prospectively (v) elimination of
non-recurring, non-cash compensation charges related to common stock issued to
management (vi) amortization of goodwill resulting from the Initial Acquisitions
and (vii) advances under the Bank Credit Facility (see Note 4) including
decreases in interest expense resulting from the repayment or refinancing of the
Founding Companies' debt and (viii) adjustments to the provisions for federal
and state income taxes. Subsequent Acquisitions are included in the Historical
and Pro Forma Consolidated Statements of Operations only for those periods
subsequent to the dates of acquisition. The pro forma financial information may
not be comparable to and may not be indicative of the Company's post-acquisition
results of operations because the Founding Companies were not under common
control or management.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There has been no significant change in the accounting policies of
the Company during the periods presented. For a description of these policies,
refer to Note 1 of the Notes to Consolidated Financial Statements of Pentacon
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998.
3. ACQUISITIONS
During the year ended December 31, 1998, the Company completed four
acquisitions in addition to the acquisitions of the Founding Companies. In May
1998, the Company acquired Pace Products, Inc., a distributor of fasteners and
other small parts which also provides inventory procurement and management
services primarily to the telecommunications industry. In June 1998, the Company
acquired D-Bolt Company Inc., a distributor of fasteners and other small parts
primarily to the fabrication, construction and mining industries. In July 1998,
the Company acquired Texas International Aviation, Inc., a distributor of
fasteners and other small parts which provides inventory procurement and
management services primarily to the aerospace industry. In September 1998, the
Company acquired ASI Aerospace Group, Inc., a distributor of fasteners and other
small parts which provides inventory procurement and management services
primarily to the aerospace industry. The consideration paid for the Subsequent
Acquisitions consisted of an aggregate of 1,134,010 shares of common stock and
approximately $77.0 million in cash. The acquisitions were accounted for using
the purchase method of accounting and the results of operations of the acquired
companies are included from the date of acquisition. The allocations of purchase
price to the Founding Companies' assets acquired and liabilities assumed was
assigned and recorded based on fair market values. The allocation of purchase
price to the Subsequent Acquisitions' assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of fair
market value and may be revised as additional information concerning the
valuation of such assets and liabilities becomes available.
If all completed acquisitions, including the Founding Companies, were
effective on the first day of the period being reported, the unaudited pro forma
revenues, gross margin, operating income and net income would have been:
Three Months Ended
March 31,
---------------------
1999 1998
-------- --------
(in thousands, except
share data)
Revenues .................... $ 66,550 $ 69,366
Gross margin ................ 21,902 23,673
Operating income ............ 6,032 8,698
Write-off of debt issuance
costs ................... 2,308 --
Net income .................. 259 3,265
Net income per share:
Basic ................... $ 0.02 $ 0.20
Diluted ................. $ 0.02 $ 0.20
4. LONG-TERM DEBT
In March 1999, the Company sold $100 million of Senior Subordinated
notes (the "Notes") due April 1, 2009. The net proceeds of $94.2 million, after
paying discounts and commissions, from
<PAGE>
the offering were used to repay indebtedness under the Company's credit
agreement (the "Bank Credit Facility"). The Notes accrue interest at 12 1/4% due
and payable on April 1 and October 1. The interest rate on the Notes will
increase to 12 3/4% per annum if earnings before interest, taxes, depreciation,
amortization and write-off of debt issuance costs ("EBITDA") for each of the
quarters ended March 31, 1999 and June 30, 1999 is not at least $7.25 million.
The Company's EBITDA for the quarter ended March 31, 1999 was $7.5 million. Each
of the Company's subsidiaries which are wholly-owned, fully, unconditionally and
jointly and severally guarantees the Notes on a senior subordinated basis. The
Notes are subordinated to all existing and future senior subordinated
obligations and will rank senior to all subordinated indebtedness. The indenture
governing the Notes contains covenants that limit the Company's ability to incur
additional indebtedness, pay dividends, make investments and sell assets. In
addition, the Company is required to comply with a fixed charge ratio. The
Company has registered the Notes so that the noteholders can exchange the
privately-placed Notes for publicly-registered notes with identical terms.
Separate financial statements of the guarantors are not presented because
management has determined that they would not be material to investors.
In connection with the issuance of the Notes in March 1999, the
Company amended its Bank Credit Facility to provide a revolving line of credit
of up to $85 million (subject to a borrowing base limitation) to be used for
general corporate purposes, future acquisitions, capital expenditures and
working capital. The Bank Credit Facility is secured by Company stock and
assets. Advances under the Bank Credit Facility bear interest at the banks'
designated variable rate plus a margin of 25 to 150 basis points. At the
Company's option, the loans may bear interest based on a designated London
interbank offered rate plus a margin of 175 to 325 basis points. Commitment fees
of 25 to 50 basis points per annum are payable on the unused portion of the line
of credit. The Bank Credit Facility contains a provision for standby letters of
credit up to $5.0 million. The Bank Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial covenants
including a minimum net worth, senior debt leverage ratio, subordinated debt
leverage ratio, and minimum fixed charge ratio. At March 31, 1999, the Company
was in compliance with the covenants. The Bank Credit Facility will terminate
and all amounts outstanding thereunder, if any, will be due and payable December
31, 2001. At March 31, 1999, the Company has approximately $31.3 million
available under the Bank Credit Facility. In connection with the amendment of
and reduction in the Bank Credit Facility, the Company recorded a $2.3 million
($.07 impact on earnings per share) noncash charge for the write-off of debt
issuance costs.
5. EARNINGS PER SHARE
Pro forma and historical net income per share for the period ended
March 31, 1998 is computed based on the weighted average shares of common stock
outstanding. The pro forma calculation assumes the Initial Acquisitions and
Offering occurred at the beginning of the period. The computation of historical
and pro forma net income per share for the three-month period ended March 31,
1999 is based on the weighted average shares of common stock outstanding.
<PAGE>
Basic and diluted historical net income per share is computed based
on the following information:
Three Months Ended
---------------------
March 31,
---------------------
1999 1998
------- -------
BASIC: (in thousands)
Net income (loss) .......................... $ 259 $ (91)
======= =======
Average common shares ...................... 16,668 6,040
======= =======
DILUTED:
Net income (loss) .......................... $ 259 $ (91)
======= =======
Average common shares ...................... 16,668 6,040
Common share equivalents:
Warrants ............................... -- --
Options ................................ -- --
Total common share equivalents ..... -- --
------- -------
Average common shares and
common share equivalents .............. 16,668 6,040
======= =======
Basic and diluted pro forma net income per share is computed based on
the following information:
Three Months Ended
---------------------
March 31,
---------------------
1999 1998
------- -------
(in thousands)
BASIC:
Net income ................................. $ 259 $ 2,050
======= =======
Average common shares ...................... 16,668 15,530
======= =======
DILUTED:
Net income ................................. $ 259 $ 2,050
======= =======
Average common shares ...................... 16,668 15,530
Common share equivalents:
Warrants ............................... -- 25
Options ................................ -- 170
------- -------
Total common share equivalents ..... -- 195
------- -------
Average common shares and
common share equivalents .............. 16,668 15,725
======= =======
<PAGE>
6. INCOME TAXES
The provision for income taxes included in the Historical
Consolidated Statement of Operations for the three-month period ended March 31,
1999 assumes the application of statutory federal and state income tax rates and
the non-deductibility of goodwill amortization. The provision for income taxes
included in the Historical Consolidated Statement of Operations for the
three-month period ended March 31, 1998 reflects the activity of the accounting
acquiror prior to the Initial Acquisitions, the non-deductibility of goodwill
amortization and the non-deductibility of compensation related to common stock
sold to management. The provision for income taxes included in the Pro Forma
Consolidated Statements of Operations for the three-month periods ended March
31, 1999 and 1998 assumes the application of statutory federal and state income
tax rates and the non-deductibility of goodwill amortization.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen
in the ordinary course of business. While it is not possible to predict the
outcome of such proceedings with certainty, in the opinion of the Company, all
such proceedings are either adequately covered by insurance or, if not so
covered, should not ultimately result in any liability which would have a
material adverse effect on the financial position, liquidity or results of
operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
financial statements of the Company and related notes thereto and management's
discussion and analysis of financial condition and results of operations related
thereto which are included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 and the Transition Report on Form 10-Q
filed for the three-month transition period ended December 31, 1998. As noted in
the transition report, the Company's year end has been changed to December 31
from September 30. This discussion contains forward-looking statements that are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Key factors that could cause actual results to differ materially
from expectations include, but are not limited to (i) estimates of costs or
projected or anticipated changes to cost estimates relating to entering new
markets or expanding in existing markets (ii) changes in economic and industry
conditions (iii) changes in regulatory requirements (iv) changes in interest
rates (v) levels of borrowings under the Company's Bank Credit Facility (vi)
accumulation of excess inventories by certain customers in the aerospace
industry and (vii) volume or price adjustments with respect to sales to major
customers. These and other risks and assumptions are described in the Company's
reports that are available from the United States Securities and Exchange
Commission.
RESULTS OF OPERATIONS
In October 1998, the Company changed its year end from September 30
to December 31. A Transition Report on Form 10-Q has been filed for the three
month transition period ended December 31, 1998.
<PAGE>
The pro forma financial information for the three months ended March
31, 1999 and 1998 includes the results of Pentacon combined with the Founding
Companies as if the Initial Acquisitions had occurred at the beginning of each
respective three-month period. The pro forma financial information includes the
effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain
reductions in salaries and benefits to the former owners of the Founding
Companies to which they agreed prospectively (iv) certain reductions in lease
expense paid to the former owners of the Founding Companies to which they agreed
prospectively (v) elimination of non-recurring, non-cash compensation charges
related to common stock issued to management (vi) amortization of goodwill
resulting from the Initial Acquisitions and (vii) advances under the Bank Credit
Facility (see Note 4 to the Financial Statements) including decreases in
interest expense resulting from the repayment or refinancing of the Founding
Companies' debt and (viii) adjustments to the provisions for federal and state
income taxes. Subsequent Acquisitions are included in the Pro Forma Consolidated
Statements of Operations only for those periods subsequent to the dates of
acquisition. The pro forma financial information may not be comparable to and
may not be indicative of the Company's post-acquisition results of operations
because the Founding Companies were not under common control or management.
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, assimilation costs, costs of opening new facilities,
gain or loss of a material customer and variation in product mix. Accordingly,
the operating results for any three-month period are not necessarily indicative
of the results that may be achieved for any subsequent three-month period or for
a full year.
PRO FORMA THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
The following table sets forth certain selected pro forma financial
data as a percentage of pro forma revenues for the periods indicated:
Pro Forma
Three Month Period Ended
March 31,
----------------------------------
1999 1998
--------------- ---------------
(dollars in thousands)
Revenues ................................. $66,550 100.0% $41,297 100.0%
Cost of sales ........................... 44,648 67.1 27,169 65.8
------- ----- ------- -----
Gross profit .................. 21,902 32.9 14,128 34.2
Operating expenses ....................... 15,012 22.5 9,790 23.7
Goodwill amortization .................... 858 1.3 374 0.9
------- ----- ------- -----
Operating income .............. $ 6,032 9.1% $ 3,964 9.6%
======= ===== ======= =====
REVENUES
Pro forma revenues increased 61.3% to $66.6 million for the three
months ended March 31, 1999 from $41.3 million for the three months ended March
31, 1998. The increase in pro forma revenues was attributable primarily to the
Subsequent Acquisitions and, to a lesser extent, internal revenue growth of the
Founding Companies. The increase in the Founding Companies' pro forma revenues
was 4.0% and resulted primarily from increases in sales to existing customers.
However, the internal growth rate of the Founding Companies' revenues was
adversely affected during the three months ended March 31, 1999 due to lower
pricing and reduced sales into the agricultural equipment market and lower sales
growth in our aerospace business.
<PAGE>
COST OF SALES
Pro forma cost of sales increased $17.4 million, or 64.0%, to $44.6
million for the three months ended March 31, 1999 from $27.2 million for the
three months ended March 31, 1998. As a percentage of pro forma revenues, pro
forma cost of sales increased from 65.8% in the three months ended March 31,
1998 to 67.1% in the three months ended March 31, 1999. The increase in pro
forma cost of sales as a percentage of pro forma revenues was a result of lower
margins historically attained by the Subsequent Acquisitions as the ratio
remained approximately the same for the Founding Companies.
OPERATING EXPENSES
Pro forma operating expenses increased $5.2 million, or 53.1%, to
$15.0 million for the three months ended March 31, 1999 from $9.8 million for
the three months ended March 31, 1998. As a percentage of pro forma revenues,
pro forma operating expenses decreased to 22.5% for the three months ended March
31, 1999 from 23.7% for the three months ended March 31, 1998. The decrease was
primarily attributable to lower operating expenses as a percentage of revenues
historically attained by the Subsequent Acquisitions.
OPERATING INCOME
Due to the factors discussed above, pro forma operating income
increased $2.0 million to $6.0 million for the three months ended March 31, 1999
from $4.0 million for the three months ended March 31, 1998. As a percentage of
pro forma revenues, pro forma operating income decreased to 9.1% for the three
months ended March 31, 1999 from 9.6% for the three months ended March 31, 1998.
NON-OPERATING COSTS AND EXPENSES
The write-off of debt issuance costs during the three months ended
March 31, 1999 resulted from the amendment of the Company's Bank Credit Facility
in connection with the Senior Subordinated Notes Offering. Interest expense for
the three months ended March 31, 1999 totaled $3.2 million compared to $0.3
million for the three months ended March 31, 1998. The increase in interest
expense primarily results from additional debt incurred for the Subsequent
Acquisitions.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31,
1999 was $0.3 million (an effective rate of 52.9%) compared with $1.7 million
(an effective rate of 45.1%) for the three months ended March 31, 1998. The
higher effective tax rate for the quarter ended March 31, 1999 primarily related
to the increase in non-deductible goodwill amortization that resulted from the
Subsequent Acquisitions.
HISTORICAL THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
The historical financial information represents the information of
Alatec prior to the Initial Acquisitions and the Offering and the consolidated
results of Pentacon subsequent to the Initial Acquisitions and the Offering on
March 10, 1998. The following table sets forth certain selected historical
financial data as a percentage of historical revenues for the periods indicated:
<PAGE>
Historical
Three Month Period Ended
March 31,
----------------------------------
1999 1998
--------------- ---------------
(dollars in thousands)
Revenues ................................. $66,550 100.0% $19,856 100.0%
Cost of sales ............................ 44,648 67.1 12,387 62.4
------- ----- ------- -----
Gross profit ................... 21,902 32.9 7,469 37.6
Operating expenses ....................... 15,012 22.5 7,219 36.3
Goodwill amortization .................... 858 1.3 79 0.4
------- ----- ------- -----
Operating income ............... $ 6,032 9.1% $ 171 0.9%
======= ===== ======= =====
REVENUES
Revenues increased $46.7 million, or 234.7% from $19.9 million for
the three months ended March 31, 1998 to $66.6 million for the three months
ended March 31, 1999. The increase in revenues primarily results from the
Initial Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
COST OF SALES
Cost of sales increased $32.2 million, or 259.7%, from $12.4 million
for the three months ended March 31, 1998 to $44.6 million for the three months
ended March 31, 1999. The increase in cost of sales primarily results from the
Initial Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
OPERATING EXPENSES
Operating expenses increased $7.8 million, or 108.3%, from $7.2
million for the three months ended March 31, 1998 to $15.0 million for the three
months ended March 31, 1999. The increase in operating expenses primarily
results from the Initial Acquisitions and the Offering on March 10, 1998 and the
Subsequent Acquisitions.
OPERATING INCOME
Operating income increased $5.8 million, or 2,900.0%, from $0.2
million for the three months ended March 31, 1998 to $6.0 million for the three
months ended March 31, 1999 due to the factors noted above.
NON OPERATING COSTS AND EXPENSES
The write-off of debt issuance costs during the three months ended
March 31, 1999 resulted from the amendment of the Company's Bank Credit Facility
in connection with the Senior Subordinated Notes Offering. Interest expense for
the three months ended March 31, 1999 totaled $3.2 million compared to $0.3
million for the three months ended March 31, 1998. The increase in interest
expense primarily results from additional debt incurred for the Subsequent
Acquisitions.
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31,
1999 was $0.3 million (an effective rate of 52.9%) compared with an income tax
benefit of $0.05 million (an effective rate of 33.1%) for the three months ended
March 31, 1998. The higher effective tax rate for the quarter ended March 31,
1999 primarily related to the increase in non-deductible goodwill amortization
that resulted from the Subsequent Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $6.9 million of net cash in operating activities
during the three months ended March 31, 1999; this cash was obtained primarily
from increases in working capital. Net cash used in investing activities was
$1.7 million for capital expenditures. Net cash provided by financing activities
was $8.6 million for the three months ended March 31, 1999 and primarily
consisted of $98.5 million repayment of debt offset by $110.1 million of
borrowings on debt. At March 31, 1999, the Company had cash of $0.8 million,
working capital of $117.2 million and total debt of $150.2 million.
In March 1999, the Company sold $100 million of Notes due April 1,
2009. The net proceeds of $94.2 million from the offering were used to repay
indebtedness under the Bank Credit Facility. The Notes accrue interest at 12
1/4% due and payable on April 1 and October 1. The interest rate on the Notes
will increase to 12 3/4% per annum if EBITDA for each of the quarters ended
March 31, 1999 and June 30, 1999 is not at least $7.25 million. The Company's
EBITDA for the quarter ended March 31, 1999 was $7.5 million. Each of the
Company's subsidiaries which are wholly-owned, fully, unconditionally and
jointly and severally guarantees the Notes on a senior subordinated basis. The
Notes are subordinated to all existing and future senior subordinated
obligations and will rank senior to all subordinated indebtedness. The indenture
governing the Notes contains covenants that limit the Company's ability to incur
additional indebtedness, pay dividends, make investments and sell assets. In
addition, the Company is required to comply with a fixed charge ratio. The
Company has registered the Notes so that the noteholders can exchange the
privately-placed Notes for publicly-registered notes with identical terms.
Separate financial statements of the guarantors are not presented because
management has determined that they would not be material to investors.
In connection with the issuance of the Notes in March 1999, the
Company amended its Bank Credit Facility to provide a revolving line of credit
of up to $85 million (subject to a borrowing base limitation) to be used for
general corporate purposes, future acquisitions, capital expenditures and
working capital. The Bank Credit Facility is secured by Company stock and
assets. Advances under the Bank Credit Facility bear interest at the banks'
designated variable rate plus a margin of 25 to 150 basis points. At the
Company's option, the loans may bear interest based on a designated London
interbank offered rate plus a margin of 175 to 325 basis points. Commitment fees
of 25 to 50 basis points per annum are payable on the unused portion of the line
of credit. The Bank Credit Facility contains a provision for standby letters of
credit up to $5.0 million. The Bank Credit Facility prohibits the payment of
dividends by the Company, restricts the Company's incurring or assuming other
indebtedness and requires the Company to comply with certain financial covenants
including a minimum net worth, senior debt leverage ratio, subordinated debt
leverage ratio and minimum fixed charge ratio. At March 31, 1999, the Company
was in compliance with the covenants. The Bank Credit Facility will terminate
and all amounts outstanding thereunder, if any, will be due and payable December
31, 2001. At March 31, 1999, the Company has approximately $31.3 million
available under the Bank Credit Facility. In connection with the amendment of
and reduction in the Bank Credit Facility, the Company recorded a $2.3 million
($.07 impact on earnings per share) noncash charge for the write-off of debt
issuance costs.
<PAGE>
The Company currently operates in a decentralized information systems
environment and uses a variety of software, computer systems and related
technologies for accounting and reporting purposes and for revenue-generating
activities. The Pentacon companies which primarily serve the aerospace industry
are in the process of migrating to a common information system which will
facilitate product ordering, pricing and reporting among the companies. The
total expenditures for these information systems are expected to be
approximately $3.0 million, the majority of which will be capitalized as
computer hardware and software as it is installed and depreciated over the
estimated useful life of the assets. Funding for these expenditures will come
from operating cash flows and the Company's Bank Credit Facility as necessary.
YEAR 2000
The Company is working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by the Company's
computerized information systems and other infrastructure that contains embedded
technology. The Year 2000 problem is the result of computer programs being
written using two digits (rather than four) to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a date
using "00" as the Year 1900 rather than the Year 2000, which could result in
miscalculations or system failures.
The Company believes that substantially all of its computerized
information systems and other infrastructure that contains embedded technology
are Year 2000 compliant or will be modified so as to become Year 2000 compliant
by mid-1999. Costs of addressing potential problems are not currently expected
to have a material adverse impact on the Company's financial position, results
of operations or cash flows. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could have a
significant impact on the Company's ability to conduct its business and result
in a material financial risk.
In addition, the Company is continually attempting to assess the
level of Year 2000 preparedness of its key suppliers, distributors, customers
and service providers. The Company has sent, and will continue to send, letters,
questionnaires and surveys to its significant business partners inquiring about
their Year 2000 efforts. If a significant supplier or customer of the Company
fails to be Year 2000 compliant, the Company could suffer a material loss of
business or incur material expenses.
As of March 31, 1999, the Company has spent $0.2 million in costs
that are directly attributable to addressing Year 2000 issues. Management
currently estimates that the Company will incur $0.2 million in additional costs
during 1999 relating to Year 2000 issues. The Company expects that it will spend
approximately $3.0 million to purchase software and hardware and on
implementation expenses associated with the migration to a common information
technology system in the Pentacon companies which primarily serve the aerospace
industry. The Company believes that these costs are not, for the most part,
directly related to Year 2000 issues, but are required for the implementation of
its new system in the Pentacon companies which primarily serve the aerospace
industry.
The Company is developing and evaluating contingency plans in the
event that the Company has not completed all of its remediation plans in a
timely manner or if third parties who provide goods or services to the Company
fail to address their Year 2000 issues appropriately. These plans include
identification of alternative suppliers and service providers, depletion of
safety stocks of inventory and identification of important areas of record
retention.
<PAGE>
PART II -OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES.
(a) Not applicable
(b) Not applicable
(c) In March 1999, the Company sold $100 million principal amount of 12 1/4%
Senior Subordinated Notes due 2009 (the "Notes") in a 144A private placement to
qualified institutional investors (the "Initial Purchasers") at 97.2% of their
principal amount, less a selling discount to the Initial Purchasers of 3% of the
principal amount.
Exemption from registration requirements is claimed under the
Securities Act of 1933 (the "Securities Act") in reliance on Section 4(2) of the
Securities Act or Rule 506 of Regulation D promulgated thereunder. The Initial
Purchasers had adequate access to information about the Company and represented
to the Company that they were qualified institutional investors within the
meaning of Rule 144A under the Securities Act and that they offered the Notes,
and will offer and sell the Notes, only (i) inside the United States to persons
whom they reasonably believe are "qualified institutional buyers" in accordance
with Rule 144A or (ii) to non-U.S. persons pursuant to offers and sales that
occur outside the United States in accordance with Regulation S under the
Securities Act. Appropriate legends were affixed to the certificates evidencing
the Notes in such transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated March 10, 1999
concerning the commencement by the Company of a private offering of Senior
Subordinated Notes.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENTACON, INC.
Dated: May 14, 1999 By:/S/ BRIAN FONTANA
BRIAN FONTANA
Senior Vice President
& Chief Financial Officer
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