UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
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
(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)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (713) 860-1000
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 October 31, 2000 was 16,763,885.
<PAGE>
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and
December 31, 1999.................................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months
ended September 30, 2000 and 1999.................... 4
Consolidated Statements of Cash Flows
for the Nine Months ended
September 30, 2000 and 1999.......................... 5
Notes to Consolidated Financial Statements.............. 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................................ 8
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K........................ 13
Signature........................................................ 13
2
<PAGE>
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- --------------------
(Unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................................... $ 140 $ 219
Accounts receivable, net ..................................................... 42,991 40,288
Inventories, net ............................................................. 120,985 127,397
Deferred income taxes ........................................................ 9,008 9,251
Other current assets ......................................................... 963 372
-------------------- --------------------
Total current assets ................................................... 174,087 177,527
-------------------- --------------------
Property and equipment, net of accumulated
depreciation ............................................................... 13,747 11,258
Goodwill, net of accumulated amortization .................................... 130,246 132,838
Deferred income taxes ........................................................ 416 416
Other assets ................................................................. 4,626 5,080
-------------------- --------------------
Total assets ........................................................... $ 323,122 $ 327,119
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................................................. 28,075 24,272
Accrued expenses ............................................................. 8,434 10,209
Accrued interest ............................................................. 6,419 3,202
Income taxes payable ......................................................... 1,298 334
Current maturities of long-term debt ......................................... 60,794 71,361
-------------------- --------------------
Total current liabilities .............................................. 105,020 109,378
Long-term debt, net of current maturities .................................... 99,830 100,062
-------------------- --------------------
Total liabilities ...................................................... 204,850 209,440
-------------------- --------------------
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, 16,763,022 and 16,668,129
shares issued and outstanding in 2000 and
1999, respectively ........................................................ 168 167
Additional paid in capital ................................................... 101,064 100,794
Retained earnings ............................................................ 17,038 16,718
Accumulated comprehensive income ............................................. 2 --
-------------------- --------------------
Total stockholders' equity ............................................. 118,272 117,679
-------------------- --------------------
Total liabilities and
stockholders' equity ................................................. $ 323,122 $ 327,119
==================== ====================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenues .................................... $ 67,810 $ 68,406 $ 216,066 $ 206,153
Cost of sales ............................... 47,024 46,834 150,037 140,043
--------- --------- --------- ---------
Gross profit ...................... 20,786 21,572 66,029 66,110
Operating expenses .......................... 15,115 15,157 47,068 45,591
Goodwill amortization ....................... 863 868 2,591 2,591
--------- --------- --------- ---------
Operating income .................. 4,808 5,547 16,370 17,928
Write-off of debt issuance costs ............ -- -- -- 2,308
Other (income) expense, net ................. (13) (10) (70) (60)
Interest expense ............................ 4,654 4,534 14,220 11,992
--------- --------- --------- ---------
Income before taxes ............... 167 1,023 2,220 3,688
Income taxes ................................ 693 595 1,901 2,101
--------- --------- --------- ---------
Net income (loss) ................. $ (526) $ 428 $ 319 $ 1,587
========= ========= ========= =========
Net income (loss) per share:
Basic ............................. $ (0.03) $ 0.03 $ 0.02 $ 0.10
Diluted ........................... $ (0.03) $ 0.03 $ 0.02 $ 0.10
Reconciliation of net income (loss) to
comprehensive income (loss):
Net income (loss) ................. $ (526) $ 428 $ 319 $ 1,587
Currency translation adjustment ... 2 -- 2 --
--------- --------- --------- ---------
Comprehensive income (loss) ....... $ (524) $ 428 $ 321 $ 1,587
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ................................................ $ 319 $ 1,587
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 4,855 4,388
Amortization of discount on notes due 2009 ................ 120 73
Deferred income taxes ..................................... 243 43
Write-off of debt issuance costs .......................... -- 2,308
Changes in operating assets and liabilities:
Accounts receivable ................................ (2,703) (9,423)
Inventories ........................................ 6,412 (9,866)
Other current assets ............................... (589) 123
Accounts payable and accrued expenses .............. 5,331 (3,247)
Income taxes payable ............................... 965 (1,326)
Other assets and liabilities, net .................. 420 (720)
-------- --------
Net cash provided by (used in) operating activities .... 15,373 (16,060)
Cash Flows From Investing Activities:
Capital expenditures ...................................... (4,483) (4,341)
Other ..................................................... 11 --
-------- --------
Net cash used in investing activities .................. (4,472) (4,341)
Cash Flows From Financing Activities:
Repayments of term debt ................................... (385) (230)
Net borrowings (repayments) under credit facility ......... (10,595) 24,013
Debt issuance costs ....................................... -- (3,812)
-------- --------
Net cash provided by (used in) financing activities .... (10,980) 19,971
-------- --------
Decrease in cash and cash equivalents .......................... (79) (430)
Cash and cash equivalents, beginning of period ................. 219 744
-------- --------
Cash and cash equivalents, end of period ....................... $ 140 $ 314
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Pentacon, Inc. (the "Company")
included herein have been prepared without audit 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. There has been no significant
change in the accounting policies of the Company during the periods presented.
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 year ended December 31, 1999.
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform with the current year presentation.
REVENUE RECOGNITION: Revenues are recognized upon shipment of products.
Revenues include freight billed to customers and the related freight costs are
recorded as cost of sales.
2. CREDIT FACILITY AND 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 the
original issue discount and paying underwriter's commissions, from the offering
of the Notes were used to repay indebtedness under the Company's credit
agreement (the "Bank Credit Facility"). The Notes accrue interest at 12.25%
which is payable on April 1 and October 1 of each year. The Notes are publicly
registered and 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. At
September 30, 2000, the Company was in compliance with the covenants. Each of
the Company's subsidiaries, all of which are wholly owned, fully,
unconditionally and jointly and severally guarantees the Notes on a senior
subordinated basis. Separate financial statements of the guarantors are not
presented because management has determined that they would not be material to
investors.
Effective September 30, 1999, the Company amended its Bank Credit Facility
to provide a revolving line of credit of up to $100 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' prime rate. At the Company's option, the loans may
bear interest based on a designated London interbank offered rate plus a margin
of 200 basis points. Commitment fees of 25 to 37.5 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 $20 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 and, under
certain circumstances, a minimum fixed charge ratio. At September 30, 2000, the
Company was in compliance with the covenants. Borrowings under the Bank Credit
Facility are classified as current liabilities in accordance with EITF 95-22
BALANCE SHEET CLASSIFICATION OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT
AGREEMENTS THAT INCLUDE BOTH A SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX
ARRANGEMENT. The Bank Credit Facility will terminate and all amounts outstanding
6
<PAGE>
thereunder, if any, will be due and payable September 30, 2004. At September 30,
2000, the Company had approximately $33.7 million available under the Bank
Credit Facility.
In connection with the amendment of and reduction in the Bank Credit
Facility and issuance of the Notes in March 1999, the Company recorded a $2.3
million ($.07 impact on earnings per share) noncash charge for the write-off of
debt issuance costs.
3. EARNINGS (LOSS) PER SHARE
Basic and diluted net income (loss) per share is computed based on the
following information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
BASIC: (in thousands)
<S> <C> <C> <C> <C>
Net income (loss) ....................... $ (526) $ 428 $ 319 $ 1,587
======== ======== ======== ========
Average common shares ................... 16,760 16,668 16,737 16,668
======== ======== ======== ========
DILUTED:
Net income (loss) ....................... $ (526) $ 428 $ 319 $ 1,587
======== ======== ======== ========
Average common shares ................... 16,760 16,668 16,737 16,668
Common share equivalents:
Warrants ............................ -- -- -- --
-------- -------- -------- --------
Options.............................. -- -- 6 --
-------- -------- -------- --------
Total common share equivalents... -- -- 6 --
Average common shares and
common share equivalents ........... 16,760 16,668 16,743 16,668
======== ======== ======== ========
</TABLE>
4. INCOME TAXES
The provision for income taxes included in the Consolidated Statement of
Operations assumes the application of statutory federal and state income tax
rates and the non-deductibility of goodwill amortization. Interim period income
tax provisions are based upon estimates of annual effective tax rates and events
may occur which will cause such rates to vary. During the September 30, 2000
quarter, the income tax provision was adjusted to reflect a higher expected
effective tax rate attributable to nondeductible goodwill constituting a higher
percentage of income before taxes for the year-to-date period resulting from
lower than expected earnings to date and reduced future earnings for the fourth
quarter.
5. 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.
7
<PAGE>
6. SEGMENT INFORMATION
The Company has two principal operating segments: the Industrial Group and
the Aerospace Group. The Industrial Group serves a broad base of industrial
manufacturers producing items such as diesel engines, locomotives, power
turbines, motorcycles, telecommunications equipment, and refrigeration
equipment. The Aerospace Group serves the aerospace and aeronautics industries.
Financial information by industry segment follows:
REVENUES
-----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
Industrial ......... $ 37,791 $ 37,931 $122,874 $104,020
Aerospace .......... 30,019 30,475 93,192 102,133
-------- -------- -------- --------
$ 67,810 $ 68,406 $216,066 $206,153
======== ======== ======== ========
OPERATING INCOME
-----------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,(1)
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
Industrial ......... $ 3,742 $ 3,750 $12,631 $10,364
Aerospace .......... 2,769 3,288 9,142 12,777
------- ------- ------- -------
6,511 7,038 21,773 23,141
Reconciliation to income
before taxes:
Write-off of debt
issuance costs ...... -- -- -- (2,308)
Other income
(expense), net ..... 13 10 70 60
General corporate
expense ............ (840) (623) (2,812) (2,622)
Goodwill amortization . (863) (868) (2,591) (2,591)
Interest expense ...... (4,654) (4,534) (14,220) (11,992)
------ ------- ------- -------
Income before taxes ... $ 167 $ 1,023 $ 2,220 $ 3,688
====== ======= ======= =======
(1) Goodwill amortization has been excluded from segment operating income. In
the first quarter, goodwill amortization was included in segment operating
income.
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
8
<PAGE>
results of operations related thereto which are included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. 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: (1) estimates of costs or
projected or anticipated changes to cost estimates relating to entering new
markets or expanding in existing markets; (2) changes in economic and industry
conditions; (3) changes in regulatory requirements; (4) changes in interest
rates; (5) levels of borrowings under the Company's Bank Credit Facility; (6)
accumulation of excess inventories by certain customers in the aerospace
industry; and (7) volume or price adjustments with respect to sales to major
customers.
RESULTS OF OPERATIONS
Quarterly results may be materially affected by the timing and magnitude
of assimilation costs, acquisitions, 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 or nine-month period
or for a full year.
THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
The following table sets forth certain selected financial data and the
related amounts as a percentage of revenues for the periods indicated:
Three Month Period Ended
September 30,
------------------------------------------
2000 1999
------------------- -------------------
(dollars in thousands)
Revenues ......................... $ 67,810 100.0% $ 68,406 100.0%
Cost of sales .................... 47,024 69.3 46,834 68.5
-------- -------- -------- --------
Gross profit ....... 20,786 30.7 21,572 31.5
Operating expenses ............... 15,115 22.3 15,157 22.1
Goodwill amortization ............ 863 1.3 868 1.3
-------- -------- -------- --------
Operating income ... $ 4,808 7.1% $ 5,547 8.1%
======== ======== ======== ========
REVENUES
Revenues decreased $0.6 million, or 0.9%, to $67.8 million for the three
months ended September 30, 2000 from $68.4 million for the three months ended
September 30, 1999. The decrease in revenues was attributable to revenue
declines of 0.4% in the Industrial Group and 1.5% in the Aerospace Group. The
Industrial Group experienced significant increases in sales to certain customers
that were offset by declines in sales to customers in other markets. The markets
where the Industrial Group experienced strength were the telecommunications,
office furniture, and motorcycle industries. However, the Industrial Group had
revenue declines in the high-end diesel and locomotive markets. The revenue
decline in the Aerospace Group resulted from continued weakness in the aerospace
market, particularly the commercial airframe portion of the market.
COST OF SALES
Cost of sales increased $0.2 million, or 0.4%, to $47.0 million for the
three months ended September 30, 2000 from $46.8 million for the three months
ended September 30, 1999. As a percentage of revenues, cost of sales increased
from 68.5% for the three months ended September 30, 1999, to 69.3% for the three
months ended September 30, 2000. Both the Industrial and Aerospace Group
experienced gross profit margin declines in the quarter compared to the prior
year quarter. The reduction in gross
9
<PAGE>
profit margin in the Industrial Group is due to reduced pricing on a contract
with a customer in the transportation industry and new system implementations at
lower margins with a telecommunications customer. The Aerospace Group's gross
margin declined due to lower gross margins on certain new international
contracts and a change in sales mix to a higher proportion of contract business.
OPERATING EXPENSES
Operating expenses remained flat at $15.1 million for the three months
ended September 30, 2000 as compared to the prior year period. As a percentage
of revenues, operating expenses increased from 22.1% for the three months ended
September 30, 1999, to 22.3% for the three months ended September 30, 2000. The
benefit of a 13% reduction in workforce from the prior year period was offset by
incremental operating expenses that have been incurred by the Industrial Group
in connection with implementation of a consolidated information system. The
Aerospace Group has incurred additional operating expenses to establish
operations in the U.K. and Canada in support of new business. In addition,
e-commerce and recruiting expenses increased general corporate expense in the
current year period.
OPERATING INCOME
Due to the factors discussed above, operating income decreased $0.7
million to $4.8 million for the three months ended September 30, 2000 from $5.5
million for the three months ended September 30, 1999. As a percentage of
revenues, operating income decreased to 7.1% for the three months ended
September 30, 2000 from 8.1% for the three months ended September 30, 1999.
NON-OPERATING COSTS AND EXPENSES
Interest expense for the three months ended September 30, 2000, totaled
$4.7 million compared to $4.5 million for the three months ended September 30,
1999. The increase in interest expense primarily resulted from higher interest
rates.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended September 30,
2000 was $0.7 million (an effective rate of 415.0%) compared with $0.6 million
(an effective rate of 58.2%) for the three months ended September 30, 1999.
During the September 30, 2000 quarter, the income tax provision was adjusted to
reflect a higher expected effective tax rate attributable to nondeductible
goodwill constituting a higher percentage of income before taxes for the
year-to-date period resulting from lower than expected earnings to date and
reduced future earnings for the fourth quarter.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
The following table sets forth certain selected financial data and the
related amounts as a percentage of revenues for the periods indicated:
Nine Month Period Ended
September 30,
------------------------------------------
2000 1999
------------------- -------------------
(dollars in thousands)
Revenues ......................... $216,066 100.0% $206,153 100.0%
Cost of sales .................... 150,037 69.4 140,043 67.9
-------- -------- -------- --------
Gross profit ........ 66,029 30.6 66,110 32.1
Operating expenses ............... 47,068 21.8 45,591 22.1
Goodwill amortization ............ 2,591 1.2 2,591 1.3
-------- -------- -------- --------
Operating income .... $ 16,370 7.6% $ 17,928 8.7%
======== ======== ======== ========
10
<PAGE>
REVENUES
Revenues increased $9.9 million, or 4.8%, to $216.1 million for the nine
months ended September 30, 2000 from $206.2 million for the nine months ended
September 30, 1999. The increase in revenues was attributable to revenue growth
of 18.2% in the Industrial Group partially offset by an 8.7% decline in
Aerospace Group revenue. The Industrial Group's revenue growth resulted from the
implementation of new business with a major industrial customer, increased
revenues from telecommunications customers and increased demand in all of the
Company's service centers. The revenue decline in the Aerospace Group resulted
from weakness in the aerospace market, particularly in the commercial airframe
portion of the market.
COST OF SALES
Cost of sales increased $10.0 million, or 7.1%, to $150.0 million for the
nine months ended September 30, 2000 from $140.0 million for the nine months
ended September 30, 1999. As a percentage of revenues, cost of sales increased
from 67.9% for the nine months ended September 30, 1999, to 69.4% for the nine
months ended September 30, 2000. The corresponding reduction in gross profit
margin is due to the change in sales mix between the Industrial and Aerospace
Groups and additional new business at lower margins with an existing customer in
the Industrial Group. The Aerospace Group's gross margins as a percentage of
revenues were consistent in each period.
OPERATING EXPENSES
Operating expenses increased $1.5 million, or 3.2%, to $47.1 million for
the nine months ended September 30, 2000 from $45.6 million for the nine months
ended September 30, 1999. As a percentage of revenues, operating expenses
decreased from 22.1% for the nine months ended September 30, 1999, to 21.8% for
the nine months ended September 30, 2000. The percentage decrease in the
Industrial Group was attributable to cost reduction initiatives taken in the
fourth quarter of 1999 and non-recurring implementation costs on new business
with a major customer in the prior year. This decrease was partially offset by a
percentage increase in the Aerospace Group as operating expenses were not
reduced commensurate with the decline in revenues in connection with the
activity associated with the consolidation of warehouses and information
systems. In addition, the Aerospace Group incurred incremental operating
expenses in the second quarter of 2000 to establish operations in the U.K. and
Canada in support of new business.
OPERATING INCOME
Due to the factors discussed above, operating income decreased $1.5
million to $16.4 million for the nine months ended September 30, 2000 from $17.9
million for the nine months ended September 30, 1999. As a percentage of
revenues, operating income decreased to 7.6% for the nine months ended September
30, 2000 from 8.7% for the nine months ended September 30, 1999.
NON-OPERATING COSTS AND EXPENSES
Interest expense for the nine months ended September 30, 2000, totaled
$14.2 million compared to $12.0 million for the nine months ended September 30,
1999. The increase in interest expense primarily resulted from higher debt
levels and, to a lesser extent, the higher rate of interest on the Senior
Subordinated Notes issued in March 1999 and higher interest rates.
PROVISION FOR INCOME TAXES
The provision for income taxes for the nine months ended September 30,
2000 was $1.9 million (an effective rate of 85.6%) compared with $2.1 million
(an effective rate of 57.0%) for the nine months
11
<PAGE>
ended September 30, 1999. The effective income tax rate exceeds the statutory
rate primarily due to nondeductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided $15.4 million of net cash from operating activities
during the nine months ended September 30, 2000; this cash was used for debt
reduction and capital expenditures. Net cash used in investing activities was
$4.4 million for capital expenditures. Net cash used in financing activities was
$11.0 million for the nine months ended September 30, 2000 and consisted of
repayments of debt. At September 30, 2000, the Company had cash of $0.1 million,
working capital of $69.1 million and long-term debt of $99.8 million.
In March 1999, the Company sold $100 million of Senior Subordinated Notes
due April 1, 2009. The net proceeds of $94.2 million, after the original issue
discount and paying underwriter's commissions, from the offering of the Notes
were used to repay indebtedness under the Company's Bank Credit Facility. The
Notes accrue interest at 12.25% which is payable on April 1 and October 1 of
each year. The Notes are publicly registered and 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. At September 30, 2000, the Company
was in compliance with the covenants. Each of the Company's subsidiaries, all of
which are wholly owned, fully, unconditionally and jointly and severally
guarantees the Notes on a senior subordinated basis.
Effective September 30, 1999, the Company amended its Bank Credit Facility
to provide a revolving line of credit of up to $100 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' prime rate. At the Company's option, the loans may
bear interest based on a designated London interbank offered rate plus a margin
of 200 basis points. Commitment fees of 25 to 37.5 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 $20 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, and under
certain circumstances, a minimum fixed charge ratio. At September 30, 2000, the
Company was in compliance with the covenants. Borrowings under the Bank Credit
Facility are classified as current liabilities in accordance with EITF 95-22
BALANCE SHEET CLASSIFICATION OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT
AGREEMENTS THAT INCLUDE BOTH A SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX
ARRANGEMENT. The Bank Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable September 30, 2004. At September 30,
2000, the Company had approximately $33.7 million available under the Bank
Credit Facility.
The Company's Industrial Group has selected the J. D. Edwards' One World
Enterprise Application Solution as its common information system. The total
expenditures for this information system are expected to be approximately $5.5
million during the years 2000 and 2001, 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. The total expenditures for this
system were $3.8 million as of September 30, 2000, the majority of which has
been capitalized as computer hardware and software. Funding for these
expenditures came from operating cash flows.
SEASONALITY AND INFLATION
The Company experiences seasonal declines in the third and fourth quarters
due to declines in its customers' activities in those quarters. The Company's
volume of business may be adversely affected by
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a decline in projects as a result of regional or national downturns in economic
conditions. The timing of acquisitions and the timing and magnitude of
acquisition assimilation costs may also materially affect quarterly results.
Inflation has not had a material impact on the Company's results of operations.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
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: November 13, 2000 By: /S/ JAMES C. JACKSON
JAMES C. JACKSON
Vice President & Controller
(Principal Financial & Accounting
Officer)
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