FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 001-13931
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
(STATE OR OTHER JURISDICTION OF EMPLOYER (I.R.S. IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10375 RICHMOND AVE., SUITE 700 HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-860-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK, PAR
VALUE $.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
AS OF MARCH 14, 2000, THERE WERE 16,681,261 SHARES OF COMMON STOCK OF THE
REGISTRANT OUTSTANDING. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE VOTING
STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES WAS APPROXIMATELY $27,250,000
BASED UPON THE CLOSING PRICE OF $2.8125 PER SHARE ON MARCH 14, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
PENTACON, INC. PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD
ON MAY 10, 2000.
<PAGE>
PENTACON, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I PAGE
----
Items 1
and 2. Business and Properties.................................... 1
Item 3. Legal Proceedings.......................................... 8
Item 4. Submission of Matters to a Vote of Security Holders........ 8
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters....................................... 8
Item 6. Selected Financial Data.................................... 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 16
Item 8. Financial Statements....................................... 17
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant......... 34
Item 11. Executive Compensation..................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 34
Item 13. Certain Relationships and Related Party Transactions....... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. 34
This document 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; (7) costs associated with exiting low margin business segments; and
(8) volume or price adjustments with respect to sales to major customers.
i
<PAGE>
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
The Company is the second largest distributor of fasteners and small parts
to original equipment manufacturers ("OEMs") in the United States. Fasteners and
small parts are incorporated into a wide variety of end use applications across
a broad spectrum of industries and include screws, bolts, nuts, washers, pins,
rings, fittings, springs, electrical connectors and similar small parts, many of
which are specialized or highly engineered for particular applications. The
Company is an industry leader in the provision of advanced inventory management
services for fasteners and small parts including procurement, just-in-time
delivery, quality assurance testing, advisory engineering services, component
kit production, small component assembly and electronic data interchange to
OEMs. The Company offers its customers comprehensive supply chain management
solutions designed to reduce their procurement and management costs and enhance
their overall production efficiencies. The Company believes that the fastener
distribution industry is consolidating. The Company attributes this
consolidation primarily to OEMs focusing on their core competencies,
streamlining their production processes and reducing their overall production
costs by reducing the number of their suppliers and by outsourcing certain
inventory management functions to more efficient providers. The Company's
objective is to differentiate itself from its competitors and to benefit from
the consolidation of the fastener industry by leveraging its nationwide
distribution network, critical mass, breadth of product line and sophisticated
supply chain management capabilities.
The Company has two principal operating groups: the Aerospace Group and
the Industrial Group. The Aerospace Group serves the aerospace and aeronautics
industries and 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 Company's largest customers include The Boeing Company, Cummins Engine
Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes
Aircraft subsidiary of General Motors Corporation, Lockheed Martin Corporation,
and The Trane Company. The Company's relationships with these large customers
have been built over 8 to 31 years.
INDUSTRY OVERVIEW
Companies operating in the fastener distribution business can generally be
characterized by the end users they serve, which are comprised broadly of OEMs,
maintenance and repair operations ("MROs") and construction companies. The
traditional fastener distribution market is similar to most industrial
distribution markets. Fasteners are purchased from both domestic and overseas
manufacturers and sold to both domestic and overseas customers. The majority of
these fasteners are sold to OEM and MRO clients on a purchase order basis. Some
smaller distributors specialize along industry lines because of the uniqueness
of manufacturer requirements. Other smaller distributors provide a wide range of
fasteners used for general assembly. Larger distributors, such as the Company,
generally provide a wide range of fasteners as well as fasteners which meet
certain specialized industry needs.
U.S. sales by fastener manufacturers were estimated to be approximately
$8.0 billion in 1996; the global market for fasteners is estimated to be $25.0
billion. The fastener distribution market can reasonably be expected to be
larger than this because resales by fastener distributors include a markup on
the manufacturer's cost and include additional revenues for related value added
inventory
1
<PAGE>
management services. The OEM market represents approximately 80% of the total
U.S. fastener market, while the MRO market accounts for approximately 13%.
Construction and other markets account for the remaining 7%. There are over
2,000 fastener distributors in the United States, none of which is responsible
for more than 5% of the market's sales.
Many customers are seeking to reduce their operating costs by decreasing
the number of their fastener distributors by often eliminating those suppliers
offering limited ranges of products and services. The Company believes that
these trends have placed some small, owner-operated fastener distributors at a
competitive disadvantage because of their limited product lines and inability to
provide value-added services. In addition, small distributors have limited
access to the capital resources necessary to modernize and expand their
capabilities, automate their inventory processes, offer component kit assembly
and install quality control laboratories. The owners of these businesses often
have not had an exit strategy, leaving them with few attractive liquidity
options.
BUSINESS STRATEGY
The Company's objective is to further its market position as a leading
distributor of fasteners and small parts and enhance shareholder value. Key
elements of the Company's business strategy include:
CONTINUE TO DELIVER SUPERIOR CUSTOMER SERVICE. The Company's customers
choose fastener suppliers based, in significant part, on the quality and
reliability of service. The Company believes that superior customer service
includes (i) meeting just-in-time delivery schedules which are critical to its
customers' production processes and (ii) providing innovative supply chain
management services, which can help its customers improve their operating
efficiencies and reduce their costs. By providing these services, the Company
becomes more integrated into its customers' internal manufacturing and decision
making processes. The Company believes such integration leads to higher customer
sales to existing customers and improves customer retention. In connection with
its strategy to continuously improve customer service, the Company continues to
identify and adopt "best practices" of each of its subsidiaries that can be
successfully implemented throughout the Company. Some of our customers have
recognized our superior customer service. For example, the Company received
General Electric's Supplier Excellence Award in its Power Generation Division.
GROW SALES REVENUE. The Company seeks to grow internally generated
revenues by (i) capturing market share from smaller competitors who cannot match
its product breadth, services or geographic coverage, (ii) pursuing the
expanding opportunities to deliver a wide range of inventory management services
which less sophisticated distributors are unable to provide, (iii) expanding the
number of sites to which it provides services for its existing multi-site
customers and (iv) pursuing new multi-site customers. To leverage its breadth of
products and services and its broad geographic presence, the Company has
developed a national marketing and sales effort to focus on penetrating existing
and new multi-site OEM accounts.
CAPITALIZE ON INTEGRATION OPPORTUNITIES. The Company believes there are
significant opportunities to leverage the capabilities of its subsidiaries to
further increase its revenues and operating efficiencies. The Company is
initiating its revenue enhancement strategy by implementing a cross-selling
program to existing customers. The Company's national footprint is an integral
component of its strategy to sell more integrated inventory management services
and products to multi-site customers nationwide. The Company will seek to expand
operating margins by realizing purchasing economies and exploiting operational
efficiencies. The Company believes that centralizing purchasing activities will
allow it to realize volume discounts. Further, as the Company integrates its
operations it is beginning to realize further efficiencies through (i) the
elimination of redundant facilities, (ii) headcount reductions, (iii) plant
reconfigurations, (iv) the implementation of common information systems, (v)
administrative savings and (vi) reductions in working capital.
2
<PAGE>
PRODUCTS
The Company distributes over 100,000 different types of fasteners and
other small parts.
FASTENERS. Fasteners sold by the Company include screws, bolts, nuts,
washers, rings, pins, rivets and staples. These items come in a variety of
materials, sizes, platings and shapes. The variety and degree of engineering is
driven by the end-use requirement or specification of the fastener, such as
strength, resistance to corrosion, reusability and many other factors. The
Company's sales and purchasing departments have extensive knowledge of the
available products offered by fastener manufacturers and can assist OEMs in
selecting the appropriate fastener for a given application. Some of the more
common variable characteristics of the fasteners sold by the Company include:
o Materials -- The materials used in the manufacture of fasteners
include steel, brass, aluminum, nylon, bronze, stainless steel,
titanium, copper, polypropylene, alloys and other materials. Most of
these materials come in different grades with each having a unique
set of properties.
o Sizes -- The sizes vary by length, outside diameter, depth of the
threads, threads per inch or centimeter and pitch, or angle, of the
threads.
o Platings -- Platings may be applied to enhance the properties of a
given metal, and include zinc, cadmium, chrome, nickel, organic and
other materials.
o Shapes -- The range of shapes is broad, including hex head, U-bolt,
L-bolt, shouldered, eye bolt, external tooth, internal tooth and
many others.
OTHER SMALL PARTS. The Company also distributes other small parts used by
OEMs to assemble their products. These items include standoffs, inserts, clamps,
spacers, springs, brackets, electrical connectors, small molded parts, cable
ties, plugs, hoses, fittings and other small parts. Like fasteners, these parts
come in many shapes, sizes and materials depending upon the designated end use.
OEMs are increasingly requesting that the Company provide these parts because
they are often used during the manufacturing or assembly process in conjunction
with the fasteners supplied by the Company.
SERVICES
In connection with its sale of fasteners and other small parts, the
Company also provides a wide range of value-added supply chain services to OEMs,
designed to reduce their parts procurement and management costs, enhance their
production efficiency and reduce their overall production costs. These
value-added services also benefit the Company by further integrating the Company
into its customers' manufacturing, planning and decision-making processes. The
Company's services include:
INVENTORY PROCUREMENT AND MANAGEMENT SYSTEMS. Increasingly, manufacturers
are outsourcing their inventory management needs to distributors. These services
range from installing a simple inventory bin card system to developing a
complete turn-key inventory management system with full-time staff, which may be
located on the customer's site. These inventory systems are designed to meet the
specific needs of the Company's customers. They range in sophistication from
helping the OEM set appropriate order quantities and frequencies to delivering
the correct fastener or small part to the assembly floor on a just-in-time
basis. In some cases, the Company utilizes computer systems deployed at the
OEM's sites to facilitate the management of its fastener and parts inventories.
Inventory replenishment services and product consolidation services decrease the
number of invoices which the customer has to process, decrease the number of
vendors with whom the customer has to process transactions, lower the customer's
inventory carrying cost and allow customers to focus on their core manufacturing
business.
3
<PAGE>
KIT AND SUB-ASSEMBLY SERVICES. OEMs often request that the Company package
several fasteners or parts into a package or "kit." A common use of this service
is to supply fastener kits included with products the consumer is required to
assemble such as lawn mowers, bicycles and furniture. The use of kits has also
expanded into the manufacturing environment. Manufacturers frequently desire to
have several related fasteners or components arrive at the assembly line in a
single package; this ensures that all of the parts arrive at the same time and
that no part will be missed in the installation process. The kit process aids
the manufacturer by decreasing the number of distributors needed and improves
productivity by having the fasteners delivered to the assembly line with the
other related parts. Kit services improve the efficiency and effectiveness of
the manufacturing line and decrease the number of "stock outs" and subsequent
manufacturing line stoppages.
Customers may request that two or more parts in a kit be pre-assembled
into a single unit prior to being placed in the kit. These services are closely
related to the kit services offered by the Company. Similar to kits,
sub-assembly services performed by the Company improve the productivity of the
OEM's manufacturing line.
QUALITY ASSURANCE TESTING. These services involve the testing of fasteners
to ensure they meet the specifications stated by the manufacturer. Although
fasteners are not a significant part of the cost of a product, they are often
critical components whose failure can cause the entire product to fail. As a
result, many OEMs require strict quality control with respect to the fasteners.
The Company has installed specialized equipment and laboratories and hired
trained technicians to perform quality control tests on some of their fastener
products. Quality assurance services lower the warranty costs of the OEMs. The
Company operates four laboratories to test fasteners. The laboratories can test
metallurgy, size consistency, corrosion and strength as well as other
properties. Additionally, two of its subsidiaries' locations are ISO-9002
certified.
PRODUCT ENHANCEMENT SERVICES. In order to meet the exacting requirements
of customers, the Company maintains relationships with suppliers that provide
plating, galvanizing and coating services. These services are used to enhance
in-stock fasteners in order to meet the specific requirements of OEMs. The
ability of the Company to manage the process and quickly respond to small orders
enhances the Company's relationship with its customers.
ENGINEERING SERVICES. The Company may provide advice regarding the types
of fasteners to use in a product. These services are often used by customers
during early product development or re-engineering to decrease the production
cost, improve the assembly process or enhance the product quality. The Company
works with its customers' engineering departments to select the appropriate
fasteners and components based upon the customer's specifications. These
services often lower the customers' cost by reducing the number of fasteners
required to assemble the product, replacing expensive special fasteners with
less expensive standard fasteners, reducing cycle times for new product
development, or identifying different coatings to improve quality.
ELECTRONIC DATA INTERCHANGE ("EDI") SERVICES. The Company offers a wide
range of EDI services to its customers. In addition to offering invoice and
payment options, the Company can also offer its customers direct access to its
current inventory, images of fasteners with related specifications and the
ability to enter an order directly into the Company's system.
CUSTOMERS
The Company's subsidiaries have been in business for an average of 26
years and have developed a significant number of strong customer relationships.
The Company serves approximately 7,500 customers which manufacture a wide
variety of products including diesel engines, locomotives, power turbines,
motorcycles, telecommunications equipment, refrigeration equipment and aerospace
equipment. The Company's largest customers include The Boeing Company, Cummins
Engine Company, General
4
<PAGE>
Electric Corporation, Harley-Davidson, Inc., the Hughes Aircraft subsidiary of
General Motors Corporation, Lockheed Martin Corporation and The Trane Company.
Revenues for the year ended December 31, 1999 from The Boeing Company and
Cummins Engine Company, our two largest customers, represented 8% and 14% of
total revenues, respectively. The Company's relationships with The Boeing
Company and Cummins Engine Company have been built over the last 30 and 8 years,
respectively. On December 1, 1998, The Boeing Company announced that it would
reduce its production rates of certain commercial aircraft. This reduction, in
conjunction with a buildup of fastener inventory at The Boeing Company, has led
to reduced demand by The Boeing Company for the Company's products.
Several of Pentacon's customers have international operations and some
have requested that the Company provide products and services to them in their
foreign locations. Approximately 14% of the Company's revenues during the year
ended December 31, 1999 were to customer locations outside of the United States.
Prior to the formation of Pentacon, resource constraints had limited the
Company's subsidiaries' ability to expand internationally. In the future, the
Company intends to selectively pursue these opportunities.
CUSTOMER CONTRACTS
The Company often enters into contracts with its customers which identify
the package of products and services to be provided by the Company to its
customers. Although the contracts generally are written to establish a
relationship for a period of several years, the agreements usually may be
canceled by either party without cause upon 30 to 90 days' notice. In certain
instances where limited use or unique fasteners are required to serve a customer
account, the agreement will include a provision that obligates the customer to
acquire the Company's accumulated inventory of fasteners if the contract is
terminated prematurely.
BACKLOG
The Company does not have any significant backlog of orders.
SALES AND MARKETING
The Company's sales efforts are focused on developing new business with
mid-size and large-size OEMs which are likely to benefit from cost savings and
operating efficiencies from the products and services offered by the Company, as
well as expanding business with existing customers by serving additional sites
and/or expanding the breadth of products and services provided to that customer.
Prior to the formation of Pentacon, the Company's marketing efforts were
primarily directed at customers on a site-by-site basis. To capitalize on the
Company's national presence and the trend by OEMs to decrease their number of
suppliers, the Company recently developed a national sales, marketing and
service effort targeted at multi-site customers. This national sales effort is
focused on developing a coordinated marketing effort to maximize customer
penetration and provide multi-site OEMs with company-wide procurement and
inventory management solutions which maximize cost savings and operating
efficiencies.
An important element in the Company's overall marketing strategy is to
provide superior customer service. The Company believes superior customer
service includes providing breadth of products, advanced services, innovative
supply chain management solutions and timely delivery of products. To implement
this strategy, customer accounts are typically serviced by a Pentacon team,
which, depending on the size of the account, will be comprised of the direct
sales representative and certain specialists in operations, procurement and
advanced services such as quality assurance testing. A critical component of the
Company's strategy is continuously monitoring the quality of customer service
through both qualitative and quantitative methods. For larger customers, such
monitoring typically
5
<PAGE>
includes providing on-site customer service representatives and tracking of
just-in-time deliveries, production efficiencies and quality of fasteners and
parts.
DELIVERY
The Company utilizes several forms of transportation to deliver its
products to its customers depending upon the urgency and frequency of delivery,
the customer's preference and cost. The Company utilizes common carriers,
Company-owned trucks, and overnight delivery services to deliver products to its
customers. The cost of transportation is borne by the customer or the Company,
depending upon the governing terms and conditions. The Company does not believe
that it is materially dependent on any single transportation service or carrier
and that it currently maintains good relationships with all of its common
carriers.
SUPPLIERS AND OPERATIONS
The Company purchases fasteners and small parts directly from the
manufacturers and, to a lesser degree, from authorized distributors. The
Company's decision to purchase from a specific supplier is based on product
specifications, quality, reliability of delivery, production lead times and
price. Management believes that because of the Company's size, national presence
and top tier customers it will continue to attract premier supplier
relationships. The Company believes it can realize further synergies by
consolidating some of its purchasing activities in order to achieve price
concessions for large volume orders.
The Company maintains 38 distribution and sales facilities in the United
States, along with sales offices in Europe and Australia. The Company has
ongoing facilities rationalization initiatives to close or combine redundant
facilities. To date, the Company has identified three of five distribution
centers in the Aerospace Group and one in the Industrial Group to be closed.
Pentacon will continue to evaluate existing and future facilities to determine
whether further reductions can be made.
Pentacon's materials management and distribution operations begin when
suppliers deliver products to the Company. Once delivered, the products are
taken into inventory and receive various service additions depending on customer
requests. Service additions may include product enhancement (such as plating,
galvanizing or coating), quality assurance testing, kitting and sub-assembly.
Once an order is received from the customer, products are picked from inventory,
counted, packaged and shipped by the Company. Depending on the customer's
service program, the products may receive further handling by the Company at the
customer location. For a just-in-time customer, the Company typically has an
employee at the customer's location to receive the inventory, deliver the
products to the work areas, and reorder and replenish products as needed.
COMPETITION
The Company is engaged in a highly fragmented and competitive industry.
Competition is based primarily on breadth of products, quality and breadth of
services, price and geographic proximity. The Company competes with a large
number of fastener distributors on a regional and local basis. Some of the
Company's competitors have greater financial resources than the Company and/or
established customer relationships with certain customers for whose business we
compete. The Company may also face competition for acquisition candidates from
these companies.
6
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
Each of the companies operates a management and information system ("MIS")
that is used to purchase, monitor and allocate inventory throughout its
facilities. All of these systems include computerized order entry, sales
analysis, inventory status, invoicing and payment, and all but one include
bar-code tracking. These systems are designed to improve productivity for both
the Company and its customers. Most of the subsidiaries use EDI, through which
they offer their customers a paperless electronic process for order entry,
shipment tracking, customer billing, remittance processing and other routine
matters.
The Company is integrating the MIS systems of its subsidiaries. The
Aerospace Group has migrated to an information system developed by DYMAX
Products, Inc., during 1999. This system facilitates product ordering, pricing
and reporting among the companies in the Aerospace Group. The Company is also in
the process of integrating MIS systems within the Industrial Group. The Company
has selected a J.D. Edwards operating system for the Industrial Group, and has
begun implementation of the system which will enable the Industrial Group to
obtain certain operating and reporting efficiencies.
GOVERNMENT REGULATION
The Fastener Quality Act (the "Fastener Act") was enacted on November 16,
1990 and was subsequently amended most recently in June 1999. The Fastener Act
is intended to protect the public safety by deterring the introduction of
non-conforming fasteners into commerce and by improving the traceability of
fasteners. Generally, the Fastener Act covers certain fasteners including
screws, nuts, bolts or studs having nominal diameters of one quarter inch and
certain direct tension indicating washers. Significantly, fasteners are exempt
from the Fastener Act if they are manufactured in a facility using a quality
management system, such as QS9000.
The Company currently operates four quality control laboratories at its
facilities and does not anticipate any significant investment to comply with the
Fastener Act. One of the Company's laboratories has been accredited under the
Fastener Act.
The Company's operations are subject to various federal, state and local
laws and regulations, including those relating to worker safety and protection
of the environment. The Company is a distributor and does not generally engage
in manufacturing. As a result, environmental laws generally have a minimal
effect on its operations. The Company believes it is in substantial compliance
with all applicable regulatory requirements.
EMPLOYEES
At December 31, 1999, the Company had approximately 820 employees. The
Company believes that its relationship with its employees is good.
PROPERTIES
The Company maintains 38 distribution and sales facilities in the United
States. The Company also maintains offices in Europe and Australia to service
its aerospace customers. These facilities range in size from 1,000 square feet
to 74,000 square feet, and generally consist of warehouse space with a small
amount of associated office space. Four of the facilities include laboratory
space for quality testing. All of the facilities are leased. The Company's
leases expire between 2000 and 2012. The Company believes that suitable
replacement space will be available as required. The Company believes that its
current facilities are adequate for its expected needs over the next several
years. However, the Company may add new facilities as a result of acquisitions
or due to a customer's request for an on-site or local facility.
7
<PAGE>
The Company's corporate headquarters are located at 10375 Richmond Avenue,
Suite 700, Houston, Texas 77042, telephone number: 713-860-1000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business that
management believes would not have a material adverse effect on its business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's authorized common stock consists of 51,000,000 shares of
common stock, par value $.01 per share.
The Company's common stock has been publicly traded on the New York Stock
Exchange under the symbol JIT since the Company's initial public offering on
March 10, 1998. The following table sets forth the quarterly high and low sales
prices for the indicated quarter:
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 1999............................... $ 3.4375 $ 2.0625
September 30, 1999.............................. 4.8750 3.2500
June 30, 1999................................... 6.1875 3.6875
March 31, 1999.................................. 4.9375 3.2500
December 31, 1998............................... $ 7.0000 $ 3.1250
September 30, 1998.............................. 12.7500 5.5000
June 30, 1998................................... 14.6875 10.3750
March 31, 1998 (partial quarter commencing March
10, 1998)..................................... 14.0000 11.0000
There were approximately 171 shareholders of record (including brokerage
firms and other nominees) of the Company's common stock as of March 14, 2000.
The number of record holders does not bear any relationship to the number of
beneficial owners of common stock.
The Company has never paid any cash dividends and does not anticipate
paying cash dividends on its common stock in the foreseeable future. The Company
currently intends to retain earnings to support operations and finance
expansion. In addition, the Company's existing Bank Credit Facility prohibits
the payment of dividends.
ORGANIZATION OF THE COMPANY / UNREGISTERED SALES OF SECURITIES
Simultaneously with the closing of its initial public offering, the
Company acquired by merger all of the issued and outstanding capital stock of
five businesses in separate transactions (the "Initial Acquisitions"): Alatec
Products, Inc. (Alatec), AXS Solutions, Capitol Bolt & Supply, Inc., Maumee
Industries, Inc., and Sales Systems Limited (collectively referred to as the
"Founding Companies"), at
8
<PAGE>
which time each Founding Company became a wholly owned subsidiary of the
Company. The aggregate consideration paid by the Company to acquire the Founding
Companies consisted of (i) approximately $28.7 million in cash and (ii)
6,720,000 shares of common stock. In addition, certain indebtedness of the
Founding Companies, which was personally guaranteed by Founding Company
stockholders, was paid down in connection with the acquisitions.
On November 18, 1997, and in connection with the initial formation of the
Company, the Company sold 200,000, 125,000 and 125,000 shares of common stock of
the Company to Messrs. Baldwin, Taten and Fontana, respectively, for $0.01 per
share. As a result, the Company recorded non-recurring, non-cash compensation
charges of $4.7 million in the fourth quarter of 1997, representing the
difference between the amount paid for the shares and the estimated initial
public offering price, net of a 20% marketability discount. In February 1997,
the Company also granted two consultants warrants to purchase an aggregate of
50,000 shares of common stock at $6.00 per share. In the first four months of
1997, the consultants provided business and legal consulting services for the
Company in connection with its formation.
All of the above sales of common stock were private offerings exempt from
registration under Section 4(2) of the Securities Act of 1933.
In March 1999, the Company sold $100 million of Senior Subordinated Notes
due April 1, 2009, pursuant to Rule 144A.
ITEM 6. SELECTED FINANCIAL DATA
Pentacon, Inc. was incorporated in March 1997. Simultaneously with the
closing of the initial public offering of its common stock, on March 10, 1998,
Pentacon acquired the Founding Companies. For financial reporting purposes,
Alatec has been identified as the accounting acquiror. Accordingly, the
historical financial statements of Alatec have become the historical financial
statements of the Company. Since March 10, 1998, Pentacon has acquired in
separate transactions (the "Subsequent Acquisitions" and, together with the
Initial Acquisitions, the "Acquisitions") four additional businesses: Pace
Products,
9
<PAGE>
Inc., D-Bolt Company, Inc., Texas International Aviation, Inc. and ASI Aerospace
Group, Inc. The Companies acquired in the Acquisitions are referred to as the
"Acquired Businesses."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 272,898 $ 193,296 $ 56,798 $ 44,726 $ 41,204
Cost of sales ................................. 186,473 127,492 33,668 26,707 26,196
--------- --------- --------- --------- ---------
Gross profit ............................ 86,425 65,804 23,130 18,019 15,008
Operating expenses ............................. 60,979 45,702 17,081 12,818 11,285
Nonrecurring charge ............................ 632 -- -- -- --
Goodwill amortization .......................... 3,468 1,944 -- -- --
--------- --------- --------- --------- ---------
Operating income ........................ 21,346 18,158 6,049 5,201 3,723
Write-off of debt issuance costs ............... 2,308 -- -- -- --
Other (income) expense, net .................... (119) (85) (38) (56) 69
Interest expense ............................... 16,535 5,255 1,310 1,118 1,235
--------- --------- --------- --------- ---------
Income before taxes ..................... 2,622 12,988 4,777 4,139 2,419
Income taxes ................................... 1,846 6,815 1,963 1,628 995
--------- --------- --------- --------- ---------
Net income .............................. $ 776 $ 6,173 $ 2,814 $ 2,511 $ 1,424
========= ========= ========= ========= =========
Earnings per share -
Basic and diluted ....................... $ 0.05 $ 0.45 $ 0.95 $ 0.85 $ 0.48
BALANCE SHEET DATA:
Working capital ................................ $ 68,149 $ 78,746 $ 20,479 $ 17,130 $ 13,308
Total assets ................................... 327,119 301,353 36,855 28,519 23,226
Long-term debt (including current maturities) .. 171,423 138,589 14,298 11,588 10,698
Stockholders' equity ........................... 117,679 116,610 8,529 7,630 5,119
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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; (7) costs associated with exiting low margin business; and (8) volume
or price adjustments with respect to sales to major customers.
10
<PAGE>
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table sets forth certain selected financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................................ $272,898 100.0% $193,296 100.0% $ 56,798 100.0%
Cost of sales ........................................... 186,473 68.3 127,492 66.0 33,668 59.3
-------- ------ -------- ------ -------- ------
Gross profit .................................. 86,425 31.7 65,804 34.0 23,130 40.7
Operating expenses and non-
recurring charge ..................................... 61,611 22.6 45,702 23.6 17,081 30.0
Goodwill amortization ................................... 3,468 1.3 1,944 1.0 -- --
-------- ------ -------- ------ -------- ------
Operating income .............................. $ 21,346 7.8% $ 18,158 9.4% $ 6,049 10.7%
======== ====== ======== ====== ======== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues increased $79.6 million, or 41.2%, to $272.9 million for the year
ended December 31, 1999 from $193.3 million for the year ended December 31,
1998. The increase in revenues was attributable primarily to the Acquisitions.
Assuming all the Acquisitions had occurred on January 1, 1998, revenues for the
year ended December 31, 1999 decreased 4.3% as compared to the year ended
December 31, 1998. The decline in revenues results from a decline in aerospace
segment revenues of 19.7% offset by an increase in industrial segment revenues
of 16.2%. The aerospace group continues to operate in a soft market. The
industrial group's increase in revenues results primarily from increased
revenues with existing customers.
COST OF SALES
Cost of sales increased $59.0 million, or 46.3%, to $186.5 million for the
year ended December 31, 1999 from $127.5 million for the year ended December 31,
1998. The increase in cost of sales primarily resulted from the Acquisitions. As
a percentage of revenues, cost of sales increased from 66.0% for the year ended
December 31, 1998 to 68.3% for the year ended December 31, 1999. The increase in
cost of sales as a percentage of revenues was primarily a result of lower
margins on new business with an existing customer in the industrial segment.
OPERATING EXPENSES AND NONRECURRING CHARGE
Operating expenses, including a nonrecurring charge, increased $15.9
million, or 34.8%, to $61.6 million for the year ended December 31, 1999 from
$45.7 million for the year ended December 31, 1998. The increase in operating
expenses primarily resulted from the Acquisitions. As a percentage of revenues,
operating expenses, including the nonrecurring charge, decreased to 22.6% for
the year ended December 31, 1999 from 23.6% for the year ended December 31,
1998. The nonrecurring charge of $0.6 million in the fourth quarter of 1999
related to a workforce reduction in one of the Company's distribution centers.
The decrease in operating expenses as a percentage of revenues was primarily
attributable to lower operating expenses as a percentage of revenues
historically attained by the Subsequent Acquisitions and the reduced number of
employees in the Company's aerospace business partially offset by additional
costs associated with additional sales to an existing customer in the industrial
business.
11
<PAGE>
OPERATING INCOME
Operating income increased $3.1 million, or 17.0%, to $21.3 million for
the year ended December 31, 1999 from $18.2 million for the year ended December
31, 1998 due to the factors noted above. As a percentage of revenues, operating
income decreased to 7.8% for the year ended December 31, 1999 from 9.4% for the
year ended December 31, 1998.
NON-OPERATING COSTS AND EXPENSES
The write-off of debt issuance costs during the year ended December 31,
1999 resulted from the amendment of the Company's Bank Credit Facility in
connection with the Senior Subordinated Notes issued in March 1999. Interest
expense for the year ended December 31, 1999 totaled $16.5 million compared with
$5.3 million for the year ended December 31, 1998. The increase in interest
expense primarily resulted from additional debt incurred for the Subsequent
Acquisitions and, to a lesser extent, the higher rate of interest on the Senior
Subordinated Notes issued in March 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 1999 was
$1.8 million (an effective tax rate of 70.4%) compared with $6.8 million (an
effective tax rate of 52.5%) for the year ended December 31, 1998. The higher
effective tax rate in 1999 primarily related to the increase in non-deductible
goodwill amortization that resulted from the Subsequent Acquisitions.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues increased $136.5 million, or 240.3%, to $193.3 million for the
year ended December 31, 1998 from $56.8 million for the year ended December 31,
1997. The increase in revenues primarily results from the Acquisitions during
the year ended December 31, 1998. (See Note 2 to the Financial Statements).
COST OF SALES
Cost of sales increased $93.8 million, or 278.3%, to $127.5 million for
the year ended December 31, 1998 from $33.7 million for the year ended December
31, 1997. The increase in cost of sales primarily results from the Acquisitions
during the year ended December 31, 1998. (See Note 2 to the Financial
Statements). As a percentage of revenues, cost of sales increased from 59.3% for
the year ended December 31, 1997 to 66.0% for the year ended December 31, 1998.
The increase in cost of sales as a percentage of revenues was a result of lower
margins historically attained by the Acquisitions as compared to Alatec.
OPERATING EXPENSES
Operating expenses increased $28.6 million, or 167.3%, to $45.7 million
for the year ended December 31, 1998 from $17.1 million for the year ended
December 31, 1997. The increase in operating expenses primarily results from the
Acquisitions during the year ended December 31, 1998. (See Note 2 to the
Financial Statements). As a percentage of revenues, operating expenses decreased
from 30.0% for the year ended December 31, 1997 to 23.6% for the year ended
December 31, 1998. This percentage decrease was a result of the lower operating
expenses historically experienced by the Acquisitions as compared to Alatec.
12
<PAGE>
OPERATING INCOME
Due to the factors discussed above, operating income increased $12.2
million, or 203.3%, from $6.0 million for the year ended December 31, 1997 to
$18.2 million for the year ended December 31, 1998.
NON-OPERATING COSTS AND EXPENSES
Interest expense for the year ended December 31, 1998 totaled $5.3 million
compared to $1.3 million for the year ended December 31, 1997. The increase in
interest expense primarily resulted from additional debt incurred for the
Acquisitions during the year ended December 31, 1998. (See Note 2 to the
Financial Statements).
PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 1998 was
$6.8 million (an effective tax rate of 52.5%), compared with $2.0 million (an
effective tax rate of 41.1%) for the year ended December 31, 1997. The higher
effective tax rate for the year ended December 31, 1998 primarily related to the
increase in nondeductible stock-based compensation and goodwill amortization
that resulted from the Acquisitions.
PRO FORMA FINANCIAL INFORMATION
The Company includes pro forma financial information in its earnings
releases. The pro forma financial information for the years ended December 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
period. The pro forma financial information includes the effects of (i) the
Initial Acquisitions (ii) the Company's initial public 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 financial
information only for those periods subsequent to the dates of acquisition and,
as a result, 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.
13
<PAGE>
The following table sets forth certain pro forma financial data and the
related amounts as a percentage of pro forma revenues:
PRO FORMA
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998
---------------- ----------------
(DOLLARS IN THOUSANDS)
Revenues ............................... $272,898 100.0% $214,737 100.0%
Cost of sales .......................... 186,473 68.3 142,275 66.3
-------- ----- -------- -----
Gross profit ...................... 86,425 31.7 72,462 33.7
Operating expenses ..................... 61,611 22.6 48,300 22.5
Goodwill amortization .................. 3,468 1.3 2,212 1.0
-------- ----- -------- -----
Operating income ................. $ 21,346 7.8% $ 21,950 10.2%
======== ===== ======== =====
The pro forma results of operations for the year ended December 31, 1999
were the same as the historical results of operations discussed previously. As a
percentage of pro forma revenues, operating expenses for the year ended December
31, 1998 were 22.5% compared to 23.6% in the historical results of operations.
The decrease is primarily due to lower operating expenses as a percentage of pro
forma revenues attained by the Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $22.5 million of net cash from operating activities
during the year ended December 31, 1999, primarily for working capital
requirements. Net cash used in investing activities was $6.0 million. Net cash
provided by financing activities was $28.0 million for the year ended December
31, 1999 and primarily consisted of $512.0 million of borrowings on long-term
debt partially offset by $479.2 million repayment of long-term debt. At December
31, 1999, the Company had cash of $0.2 million, working capital of $68.1 million
and total debt of $171.4 million.
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 December 31, 1999, the Company was in compliance with the
covenants. Each of the Company's subsidiaries 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
14
<PAGE>
indebtedness and requires the Company to comply with certain financial covenants
including a minimum net worth and minimum fixed charge ratio. At December 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 September 30, 2004. 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. At
December 31, 1999, the Company had approximately $22.7 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.
On March 10, 1998, the Company completed its initial public offering,
which involved the sale by the Company of 5,980,000 shares of common stock at a
price to the public of $10.00 per share, including 780,000 shares pursuant to an
over-allotment option granted by the Company to the underwriters in connection
with the Offering. The net proceeds to the Company from the Offering (after
deducting underwriting discounts, commissions and offering expenses) were
approximately $50.8 million. Of this amount, $21.9 million (net of cash
acquired) was used to pay the cash portion of the purchase price relating to the
Initial Acquisitions, with the remainder being used to pay certain indebtedness
of the Founding Companies, make capital expenditures and fund working capital
requirements. On April 20, 1998, the Company's registration statement covering
3,350,000 additional shares of common stock for use in connection with future
acquisitions was declared effective. During the year ended December 31, 1998, an
additional 1,134,010 shares of common stock were issued in connection with the
Subsequent Acquisitions (See Note 2 to the Financial Statements).
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
have migrated to a common information system which facilitates product ordering,
pricing and reporting among the companies. The total expenditures were $3.4
million for these information systems, the majority of which have been
capitalized as computer hardware and software and are depreciated over the
estimated useful life of the assets. Funding for these expenditures came from
operating cash flows and the Company's Bank Credit Facility. The Pentacon
companies which primarily serve industrial companies have selected the J.D.
Edwards' One World Enterprise Application Solution to integrate operations. 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. Funding for these expenditures
will come from operating cash flows and the Company's Bank Credit Facility.
The Company believes that its cash flows from operations and its existing
Bank Credit Facility will be sufficient to meet its near-term requirements.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company experiences seasonal declines in the fourth calendar quarter
due to declines in its customers' activities in that quarter. The Company's
volume of business may be adversely affected by a decline in projects as a
result of regional or national downturns in economic conditions. Quarterly
results may also be materially affected by the timing of acquisitions and the
timing and magnitude of acquisition assimilation costs. Accordingly, the
operating results for any three-month period are not necessarily indicative of
the results that may be achieved for any subsequent quarter or for a full year.
15
<PAGE>
YEAR 2000
In prior periods, the Company discussed the nature and progress of its
plans to become Year 2000 ready. During 1999, the Company completed its testing
of systems. As a result, the Company experienced insignificant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
As of December 31, 1999, the Company had spent $0.4 million in costs that
were directly attributable to addressing Year 2000 issues. The Company spent
$3.4 million to purchase software and hardware and on implementation expenses
associated with the migration to a common information technology system in
Pentacon's companies which primarily serve the aerospace industry. The Company
believes that these costs were not, for the most part, directly related to the
Year 2000 issue, but were required for the implementation of its new system in
the Pentacon companies which primarily serve the aerospace industry. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk exposure related to changes in
interest rates. The adverse effects of potential changes in these market risks
are discussed below. The sensitivity analyses presented do not consider the
effects that such adverse changes may have on overall economic activity, nor do
they consider additional actions management may take to mitigate the Company's
exposure to such changes. Actual results may differ. See the Notes to the
Consolidated Financial Statements for a description of the Company's accounting
policies and other information related to these financial instruments.
VARIABLE-RATE DEBT
As of December 31, 1999, the Company had approximately $70.9 million
outstanding under its Bank Credit Facility. The interest rates are based on
either the prime interest rate or upon a spread above the London Interbank
Overnight Rate (LIBOR); the rates used are determined at the Company's option.
The amount outstanding under this Bank Credit Facility will fluctuate throughout
the year based upon working capital requirements. Based upon the $70.9 million
outstanding under the Bank Credit Facility at December 31, 1999, a 1.0% change
in the interest rate (from the December 31, 1999 rate) would have caused a
change in interest expense of approximately $709,000 on an annual basis. The
Company's objective in maintaining these variable rate borrowings is the
flexibility obtained regarding early repayment without penalties and lower
overall cost as compared with fixed-rate borrowings.
FIXED-RATE DEBT
As of December 31, 1999, the Company had $100.0 million of 12.25% Senior
Subordinated Notes, long-term debt, outstanding, with an estimated fair value of
approximately $90.0 million based upon their publicly traded value at that date.
Market risk, estimated as the potential increase in fair value resulting from a
hypothetical 1.0% decrease in interest rates, was approximately $4.9 million as
of December 31, 1999.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders:
We have audited the accompanying consolidated balance sheets of Pentacon,
Inc. as of December 31, 1999 and 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pentacon, Inc.
at December 31, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
Houston, Texas
February 2, 2000
17
<PAGE>
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................................... $ 219 $ 744
Accounts receivable ................................................................. 40,288 34,610
Inventories ......................................................................... 127,397 116,390
Deferred income taxes ............................................................... 9,251 4,216
Other current assets ................................................................ 372 897
-------- --------
Total current assets ............................................ 177,527 156,857
-------- --------
Property and equipment, net of accumulated depreciation ............................. 11,258 7,404
Goodwill, net of accumulated amortization ........................................... 132,838 134,528
Deferred income taxes ............................................................... 416 672
Other assets ........................................................................ 5,080 1,892
-------- --------
Total assets .................................................... $327,119 $301,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .................................................................... $ 24,272 $ 33,895
Accrued expenses .................................................................... 10,209 6,553
Accrued interest .................................................................... 3,202 2,322
Income taxes payable ................................................................ 334 3,384
Current maturities of long-term debt ................................................ 71,361 31,957
-------- --------
Total current liabilities ....................................... 109,378 78,111
Long-term debt, net of current maturities ........................................... 100,062 106,632
-------- --------
Total liabilities ............................................... 209,440 184,743
-------- --------
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,
16,681,261 and 16,668,129 shares issued and outstanding in
1999 and 1998, respectively .................................................... 167 167
Additional paid in capital .......................................................... 100,794 100,501
Retained earnings ................................................................... 16,718 15,942
-------- --------
Total stockholders' equity ........................................ 117,679 116,610
-------- --------
Total liabilities and
stockholders' equity .......................................... $327,119 $301,353
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues ................................................... $ 272,898 $ 193,296 $ 56,798
Cost of sales .............................................. 186,473 127,492 33,668
--------- --------- ---------
Gross profit ..................................... 86,425 65,804 23,130
Operating expenses ......................................... 60,979 45,702 17,081
Nonrecurring charge ........................................ 632 -- --
Goodwill amortization ...................................... 3,468 1,944 --
--------- --------- ---------
Operating income ................................. 21,346 18,158 6,049
Write-off of debt issuance costs ........................... 2,308 -- --
Other (income) expense, net ................................ (119) (85) (38)
Interest expense ........................................... 16,535 5,255 1,310
--------- --------- ---------
Income before taxes .............................. 2,622 12,988 4,777
Income taxes ............................................... 1,846 6,815 1,963
--------- --------- ---------
Net income ....................................... $ 776 $ 6,173 $ 2,814
========= ========= =========
Net income per share:
Basic ............................................ $ 0.05 $ 0.45 $ 0.95
Diluted .......................................... $ 0.05 $ 0.45 $ 0.95
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income .......................................................... $ 776 $ 6,173 $ 2,814
Adjustments to reconcile net income to net cash used in
operating activities: (1)
Depreciation and amortization ....................................... 6,072 3,240 174
Deferred income taxes ............................................... (566) 154 5
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 .................................. (5,949) 4,949 (3,303)
Inventories .......................................... (13,498) (18,160) (5,188)
Other current assets ................................. 232 (240) --
Accounts payable and accrued expenses ................ (8,600) (4,369) 4,674
Income taxes payable ................................. (3,135) (2,076) 53
Other assets and liabilities, net .................... (157) 2,612 --
--------- --------- ---------
Net cash used in operating activities .......................... (22,517) (5,917) (771)
Cash Flows From Investing Activities:
Capital expenditures ................................................ (6,038) (3,807) (223)
Cash paid for acquisitions, net of cash acquired .................... -- (77,031) --
Cash paid for Founding Companies, net of cash acquired .............. -- (21,948) --
Other ............................................................... 12 20 (57)
--------- --------- ---------
Net cash used in investing activities .......................... (6,026) (102,766) (280)
Cash Flows From Financing Activities:
Repayments of debt .................................................. (479,233) (118,982) (192)
Proceeds from issuance of debt ...................................... 512,028 179,100 1,000
Proceeds from issuance of common stock, net of offering costs ....... -- 50,815 --
Debt issuance costs ................................................. (4,777) (1,506) --
Other ............................................................... -- -- (13)
--------- --------- ---------
Net cash provided by financing activities ...................... 28,018 109,427 795
(Decrease)/Increase in cash and cash equivalents ............................. (525) 744 (256)
Cash and cash equivalents, beginning of period ............................... 744 -- 256
--------- --------- ---------
Cash and cash equivalents, end of period ..................................... $ 219 $ 744 $ --
========= ========= =========
</TABLE>
(1) Net of the effects of acquisitions.
The accompanying notes are an integral part of these statements.
20
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
---------------------- ------------------ PAID IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ------- ------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December, 31, 1996 .... 100 $ 1 -- $ -- $ 24 $ 7,605 $ 7,630
Shares issued and shares
repurchased ............. 45 -- (51) (2,690) 776 -- (1,914)
Stock-split (1,000 to 1) ... 144,855 1,449 (51,239) -- (800) (650) (1)
Net income ................. -- -- -- -- -- 2,814 2,814
----------- ------- ------- ------- ---------- -------- -------------
Balance, December 31, 1997 ..... 145,000 1,450 (51,290) (2,690) -- 9,769 8,529
Elimination of Alatec shares (145,000) (1,450) 51,290 2,690 -- -- 1,240
Issuance of common stock
for Alatec common stock . 2,969,493 30 -- -- 23,726 -- 23,756
Initial public offering .... 5,980,000 60 -- -- 50,755 -- 50,815
Issuance of common stock for
acquisitions of Founding
Companies ............... 6,580,507 66 -- -- 14,293 -- 14,359
Issuance of common stock
for acquisitions ........ 1,134,010 11 -- -- 11,485 -- 11,496
Issuance of restricted stock
grants .................. 4,119 -- -- -- -- -- --
Amortization of deferred
compensation ............ -- -- -- -- 242 -- 242
Net income ................. -- -- -- -- -- 6,173 6,173
----------- ------- ------- ------- ---------- -------- -------------
Balance, December 31, 1998 ..... 16,668,129 167 -- -- 100,501 15,942 116,610
Issuance of common stock ... 13,132 -- -- -- 32 -- 32
Amortization of deferred
compensation ............ -- -- -- -- 261 -- 261
Net income ................. -- -- -- -- -- 776 776
----------- ------- ------- ------- ---------- -------- -------------
Balance, December 31, 1999 ..... 16,681,261 $ 167 -- $ -- $ 100,794 $ 16,718 $ 117,679
=========== ======= ======= ======= ========== ======== =============
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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., Capitol Bolt & Supply, Inc., Maumee Industries, Inc., and
Sales Systems Limited, 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 common stock following the Offering and
the Initial Acquisitions, and (ii) the stockholders of Alatec received the
greatest number of shares of Pentacon, Inc. 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 Company. 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. The accompanying financial statements have been restated to conform
to a December 31 year end.
Pentacon distributes fasteners and other small parts and provides related
inventory management services primarily to customers in the United States.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Pentacon, Inc. and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION: Revenues are recognized upon shipment of products.
CASH EQUIVALENTS: Short-term investments purchased with original
maturities of three months or less are considered cash equivalents.
INVENTORIES: Inventories consist of products held for resale and are
stated at the lower of cost, determined using the first-in, first-out method, or
market.
INCOME TAXES: The Company recognizes deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the differences between the financial statements carrying
amounts and the tax basis of assets and liabilities using enacted tax rates and
laws in effect in the years in which the differences are expected to reverse.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.
Depreciation is provided over the estimated useful lives of the related assets
using primarily the straight-line method. The amortization expense on assets
acquired under capital leases is included with depreciation expense on owned
assets.
22
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL: Goodwill is amortized over a period of 40 years. The carrying
value of goodwill is reviewed if there are indications that the goodwill may be
impaired. If this review indicates that the goodwill will not be recoverable, as
determined based on undiscounted cash flows over the remaining amortization
periods, the carrying value of the goodwill will be reduced by the estimated
shortfall in discounted cash flow.
NONRECURRING CHARGE: During the year ended December 31, 1999, the Company
incurred a non-recurring charge of $0.6 million related to a workforce reduction
in one of the Company's industrial segment distribution centers.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK: The Company performs credit evaluations of
its customers and generally does not require collateral. The Company maintains
an allowance for doubtful accounts based upon the expected collectibility of all
accounts receivable. The allowance for doubtful accounts and related activity
were not material at and for the years ended December 31, 1999, 1998 and 1997.
One customer of the industrial segment accounted for approximately 14% and 13%
of revenues for the years ended December 31, 1999 and 1998, respectively.
Accounts receivable balances related to this customer represented approximately
20% of total accounts receivable at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of accounts
receivable, prepaid expenses and accounts payable approximate fair values due to
the short-term maturities of these instruments. The Company's publicly-traded
Senior Subordinated Notes had a fair value of $90 million at December 31, 1999.
The carrying value of the Company's remaining debt facilities and capital lease
obligations approximate fair value since the rates on such facilities are
variable, based on current market or are at fixed rates currently available to
the Company.
COMMON STOCK BASED COMPENSATION: The Company follows the intrinsic value
method of accounting for stock options and performance-based stock awards as
prescribed by Accounting Principles Board Opinion No. 25 (APB 25), ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 133, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
("SFAS No. 133"). SFAS No. 133 requires that all derivatives be recognized as
assets and liabilities and measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the derivative and
the resulting designation. SFAS No. 133, as amended, is effective for fiscal
years beginning after June 15, 2000 and early adoption is permitted. Because of
the Company's minimal use of derivatives, management does not anticipate that
the adoption of SFAS No. 133 will have a significant effect on net income or the
financial position of the Company.
2. 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,
23
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
consisted of an aggregate of 1,134,010 shares of common stock and approximately
$77 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' and Subsequent Acquisitions' assets acquired and liabilities
assumed was assigned and recorded based on fair market values.
If all acquisitions, including the Founding Companies, were effective
January 1, 1998, the Company would have reported revenues, net income and net
income per share of $285,169,000, $11,491,000 and $0.69, respectively, for the
year ended December 31, 1998.
3. PROPERTY AND EQUIPMENT AND GOODWILL
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIVES IN ---------------------------------
YEARS 1999 1998
------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Buildings................................ 10-40 $ 2,568 $ 2,476
Leasehold improvements................... 6-20 2,991 1,189
Equipment................................ 3-8 7,475 4,289
Furniture and fixtures................... 5-7 1,145 1,534
Construction in progress................. - 748 752
------------ ---------
14,927 10,240
Less accumulated depreciation and
amortization......................... (3,669) (2,836)
------------ ---------
$ 11,258 $ 7,404
============ =========
DECEMBER 31,
-----------------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill...................................................... $ 138,190 $ 136,412
Less accumulated amortization................................. (5,352) (1,884)
------------ ------------
$ 132,838 $ 134,528
============ ============
</TABLE>
24
<PAGE>
4. CREDIT FACILITY, LONG-TERM DEBT AND LEASES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior Subordinated Notes with interest payable semi-annually at 12.25% (an
effective rate of 12.75%), maturing March 2009 ................................ $ 97,327 $ --
Borrowings under Bank Credit Facility:
Revolving credit loan with interest payable quarterly at LIBOR + 2%
(8.2% at December 31, 1999), maturing September 2004 ...................... 60,000 92,800
Revolving credit loan with interest payable monthly at prime
(8.5% at December 31, 1999), maturing September 2004 ...................... 10,883 --
Revolver term loan with interest payable quarterly at LIBOR + 2 1/8% and
principal and interest payable quarterly commencing September 30, 1999,
maturing September 2003 ................................................... -- 40,000
Line of credit borrowing with interest payable monthly at a variable rate
(7.8% at December 31, 1998), maturing September 2003 ...................... -- 2,300
Capital leases ................................................................... 2,607 2,724
Other notes payable (See Note 13) ................................................ 606 765
-------- --------
171,423 138,589
Less current maturities .......................................................... 71,361 31,957
-------- --------
Long-term debt, net of current maturities ........................................ $100,062 $106,632
======== ========
</TABLE>
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 December 31, 1999, the Company was in compliance with the
covenants. Each of the Company's subsidiaries 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
25
<PAGE>
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 minimum fixed charge
ratio. At December 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 September 30, 2004. 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. At December 31, 1999, the Company had approximately $22.7
million available under the Bank Credit Facility. The weighted-average interest
rate on short-term borrowings outstanding was 7.56% and 7.75% at December 31,
1999 and 1998, respectively.
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.
Maturities of long-term debt (excluding capital leases) for the five years
subsequent to December 31, 1999 are $71,057,000, $191,000, $95,000, $94,000 and
$51,000, respectively.
The Company leases a portion of its buildings and equipment under
noncancelable capital and operating leases. Future minimum lease payments under
the capital and operating leases, together with the present value of the net
minimum lease payments, as of December 31, 1999 are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES TOTAL
-------------------------- ------- --------- -------
(IN THOUSANDS)
2000 ............................................ $ 569 $ 3,187 $ 3,756
2001 ............................................ 518 2,833 3,351
2002 ............................................ 425 2,310 2,735
2003 ............................................ 392 1,844 2,236
2004 ............................................ 382 1,420 1,802
Thereafter ...................................... 1,915 5,188 7,103
------ --------- -------
Total minimum lease payments .................... 4,201 16,782 20,983
Less amount representing interest ............... 1,594
------
Present value of net minimum
lease payments ............................... 2,607
Current maturities .............................. 304
------
Long-term portion ............................... $2,303
======
Total rental expense under operating leases for the years ended December
31, 1999, 1998 and 1997 was approximately $3,435,000, $1,966,000, and $732,000,
respectively, including amounts to related parties of $952,000, $916,000, and
$624,000, respectively. Total minimum lease payments include payments due to
stockholders of $3,784,000 for capital leases and $7,536,000 for operating
leases.
26
<PAGE>
5. INCOME TAXES
The Company files a consolidated federal income tax return which includes
the operations of the Founding Companies for periods after the Initial
Acquisitions and the operations of the Subsequent Acquisitions for periods after
the Subsequent Acquisitions.
Deferred income taxes reflect the activity of the accounting acquiror for
all periods and the remaining Founding Companies are included for all periods
subsequent to March 10, 1998, the date of the Initial Acquisitions. Also
reflected in deferred income taxes on the December 31, 1999 financial statements
are the deferred income taxes acquired through the Subsequent Acquisitions
during the year ended December 31, 1998 which were unrelated to the Initial
Acquisitions.
If it is more likely than not that some portion or all of the deferred tax
assets will not be realized, a valuation allowance to reduce the deferred tax
assets reported is required based on the weight of evidence. After consideration
of all the evidence, both positive and negative, no valuation allowance is
necessary to reduce the deferred tax assets at December 31, 1999 as the Company
believes it will realize the deferred tax assets principally through future
earnings.
Components of income tax expense are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Currently paid or payable:
Federal .......................... $ 1,549 $5,585 $1,578
State ............................ 863 1,076 380
------- ------ ------
2,412 6,661 1,958
Deferred:
Federal .......................... (461) 126 4
State ............................ (105) 28 1
------- ------ ------
(566) 154 5
------- ------ ------
$ 1,846 $6,815 $1,963
======= ====== ======
The net deferred tax assets (liabilities) consist of the following:
DECEMBER 31,
-----------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Receivables allowance ..................... $ 471 $ 297
Inventory allowance ....................... 5,519 2,154
Accrued expenses .......................... 1,776 997
Uniform cost capitalization ............... 1,429 966
Property and equipment .................... 416 672
Other ..................................... 152 140
------- -------
9,763 5,226
------- -------
Deferred tax liabilities, other ................ (96) (338)
------- -------
$ 9,667 $ 4,888
======= =======
27
<PAGE>
Net deferred taxes consist of the following:
Current assets............................. $ 9,251 $ 4,216
Noncurrent assets.......................... 416 672
------- -------
$ 9,667 $ 4,888
======= =======
The Company's effective tax rate varied from the federal statutory tax
rate as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
Expected income tax rate ...................... 34.0% 34.0% 34.0%
International export sales partially
exempt from federal income taxes
(FSC benefit) .............................. (14.1) (1.3) (2.6)
State taxes, net of federal benefit ........... 4.0 9.5 7.2
Nondeductible compensation .................... -- 4.9 --
Nondeductible goodwill ........................ 44.2 5.0 --
Other nondeductible expenses .................. 2.3 0.4 2.5
------ ------ ------
Effective tax rate ............................ 70.4% 52.5% 41.1%
====== ====== ======
6. COMMON STOCK
On April 20, 1998, the Company's registration statement covering 3,350,000
additional shares of common stock for use in connection with future acquisitions
was declared effective. During the year ended December 31, 1998, 1,134,010
shares of common stock were issued in connection with acquisitions (See Note 2).
On March 10, 1998, the Company completed the Offering, which involved the
sale by the Company of 5,980,000 shares of common stock at a price to the public
of $10.00 per share, including 780,000 shares pursuant to an over-allotment
option granted by the Company to the underwriters in connection with the
Offering. The net proceeds to the Company from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$50.8 million. Of this amount, $23.3 million was used to pay the cash portion of
the purchase price relating to the Acquisitions of the Founding Companies with
the remainder being used to pay certain indebtedness of the Founding Companies,
make capital expenditures and fund working capital requirements.
In May 1997, Alatec's Board of Directors (the "Board") authorized an
increase in the authorized shares of common stock from 2,500 shares to 2,500,000
shares. Concurrently, the Board approved a 1,000 for 1 stock-split.
In March 1997, the Company granted stock purchase warrants that entitled
certain venture capital investors to purchase 50,000 shares of the Company's
common stock at a price of $6.00 per share through March 13, 2002. All of the
warrant shares were vested at issuance.
7. EARNINGS PER SHARE
The year ended December 31, 1997 represents the results of operations of
Alatec under its historical capital and income tax structure. Accordingly, the
shares of common stock attributable to Alatec are presented to calculate
earnings per share for that year. The computation of net income per share for
the year ended December 31, 1998 is based on the weighted average shares of
common stock of Alatec prior to the Offering and the weighted average shares of
the Company's common stock
28
<PAGE>
outstanding subsequent to the Offering. The computation of net income per share
for the year ended December 31, 1999 is based on the weighted average shares of
common stock outstanding during the year ended December 31, 1999.
Basic and diluted net income per share is computed based on the following
information:
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
------- ------- ------
BASIC: (IN THOUSANDS)
Net income ............................ $ 776 $ 6,173 $2,814
======= ======= ======
Average common shares ................. 16,670 13,788 2,969
======= ======= ======
DILUTED:
Net income ............................ $ 776 $ 6,173 $2,814
======= ======= ======
Average common shares ................. 16,670 13,788 2,969
Common share equivalents:
Warrants ......................... -- 13 --
Options .......................... 1 3 --
------- ------- ------
Total common share
equivalents ................... 1 16 --
------- ------- ------
Average common shares and
common share equivalents ............ 16,671 13,804 2,969
======= ======= ======
8. STOCK OPTION PLAN
The Board of Directors has adopted, and the stockholders of the Company
have approved, the Pentacon, Inc. 1998 Stock Plan (the "1998 Stock Plan"). The
aggregate amount of common stock with respect to which options or other awards
may be granted may not exceed 1,700,000 shares. As of December 31, 1999, the
Company had granted options and other awards for a total of 1,217,344 shares
under the 1998 Stock Plan.
The 1998 Stock Plan is administered by the Compensation Committee, which
is composed of non-employee directors (the "Committee"). Subject to the terms of
the 1998 Stock Plan, the Committee generally determines to whom awards will be
granted and the terms and conditions of these awards. Awards granted under the
1998 Stock Plan may be non-qualified stock options, or may qualify as incentive
stock options ("ISOs"), restricted stock grants or other awards. In the case of
ISOs, the aggregate fair market value (determined at the time the ISO is
granted) of the common stock with respect to which ISOs are exercisable for the
first time by any employee during any calendar year under all plans of the
Company and any parent or subsidiary corporation shall not exceed $100,000. No
employee or consultant may receive an option in any year to purchase more than
250,000 shares of common stock. The Committee determines the period over which
options become exercisable, provided that all options become immediately
exercisable upon death of the grantee or upon a change-in-control of the
Company.
29
<PAGE>
The 1998 Stock Plan also provides for automatic option grants to directors
who are not otherwise employed by the Company or its subsidiaries. Upon
commencement of service, a non-employee director will receive a non-qualified
option to purchase 15,000 shares of common stock, and continuing non-employee
directors annually will receive options to purchase 5,000 shares of common
stock. Options granted to non-employee directors are immediately exercisable in
full and have a term of ten years.
Upon exercise of a non-qualified option, the optionee generally will
recognize ordinary income in the amount of the "option spread" (the difference
between the market value of the option shares at the time of exercise and the
exercise price), and the Company is generally entitled to a corresponding tax
deduction (subject to certain withholding requirements). When an optionee sells
shares issued upon the exercise of a non-qualified stock option, the optionee
realizes a short-term or long-term gain or loss, depending on the length of the
holding period, but the Company is not entitled to any tax deduction in
connection with such sale.
The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro forma
information regarding net income and earnings per common share is required by
FAS 123 as if the Company had accounted for its employee stock options under the
fair value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
("Black-Scholes") model with the following weighted average assumptions for 1999
and 1998, respectively: (i) risk-free interest rate of 6.34% and 6.50%, (ii) a
dividend yield of 0.00%, (iii) volatility factors of the historical market price
of the Company's common stock of 75.7% and 49.8% and (iv) a weighted average
expected life of 10 years.
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period of the stock options.
Had compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the method of FAS 123, the Company's net income and earnings per common
share would have been adjusted to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Net income
As reported ................................. $ 776 $ 6,173
========= =========
Pro forma ................................... $ (1,987) $ 4,082
========= =========
Income per share
As reported ................................. $ 0.05 $ 0.45
========= =========
Pro forma ................................... $ (0.12) $ 0.30
========= =========
30
<PAGE>
A summary of the status and activity of the Company's fixed stock option
plans for officers and employees is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICES
---------- ----------
Stock options outstanding at December 31, 1997 ..... -- $ --
Options granted ................................. 1,120,180 10.24
Options cancelled ............................... (16,450) 10.00
----------
Stock options outstanding at December 31, 1998 ..... 1,103,730 $ 10.24
Options granted ................................. 165,900 5.58
Options cancelled ............................... (56,405) 9.92
----------
Stock options outstanding at December 31, 1999 ..... 1,213,225 $ 9.62
==========
Common shares authorized under the 1998 Stock Plan.. 1,700,000
Outstanding options ............................. (1,213,225)
Outstanding stock grants ........................ (4,119)
----------
Options available for grant at December 31, 1999 ... 482,656
==========
Shares exercisable at December 31, 1999 ............ 295,669 $ 9.56
Exercise prices range from $2.25 - $12.438 per share of which 907,725 have
an exercise price of $10.00. The weighted average remaining contractual life of
options is 8.4 years.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------- ------- ------
(IN THOUSANDS)
Interest paid ................... $14,971 $ 2,576 $1,006
Income taxes paid ............... $ 4,865 $11,217 $ 979
FOUNDING SUBSEQUENT
COMPANIES ACQUISITIONS
--------- ------------
Details of 1998 acquisitions:
Fair value of assets .............................. $ 139,392 $ 152,708
Liabilities ....................................... 62,354 63,692
--------- ------------
Total consideration ............................... 77,038 89,016
Less stock consideration .......................... 53,760 11,496
Less cash acquired ................................ 1,330 489
--------- ------------
Net cash paid ..................................... $ 21,948 $ 77,031
========= ============
31
<PAGE>
10. EMPLOYEE BENEFIT PLANS
The Company has a number of defined contribution plans which cover
substantially all of the Company's full-time employees. Under certain plans, the
Company may make discretionary contributions, match various percentages of
participants' contributions or both. The Company contributed $639,000, $575,000
and $109,000 in matching contributions to the plans for the years ended December
31, 1999, 1998 and 1997, respectively. Additionally, the Company made
discretionary contributions to certain plans of $93,000, $117,000 and $300,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
11. UNAUDITED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenue ........................... $ 66,550 $ 71,197 $ 68,406 $ 66,745
Gross profit ...................... 21,902 22,636 21,572 20,315
Operating income .................. 6,032 6,349 5,547 3,418
Write-off of debt issuance costs .. 2,308 -- -- --
Interest expense .................. 3,192 4,266 4,534 4,543
Net income (loss).................. 259 900 428 (811)
Basic earnings (loss) per share .. 0.02 0.05 0.03 (0.05)
Diluted earnings (loss) per share . 0.02 0.05 0.03 (0.05)
YEAR ENDED DECEMBER 31, 1998
Revenue ........................... $ 19,856 $ 46,428 $ 60,292 $ 66,720
Gross profit ...................... 7,469 16,048 20,588 21,699
Operating income .................. 171 4,727 6,989 6,271
Interest expense .................. 312 369 1,472 3,102
Net income (loss) ................. (91) 2,121 2,512 1,631
Basic earnings (loss) per share ... (0.02) 0.13 0.15 0.10
Diluted earnings (loss) per share . (0.02) 0.13 0.15 0.10
</TABLE>
12. 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.
13. RELATED PARTY TRANSACTIONS
The Company purchased approximately $1,243,000, $1,805,000 and $1,486,000,
in the years ended December 31, 1999, 1998 and 1997, respectively, from a
supplier which is 50% owned by a shareholder. Other related party transactions
are discussed in Note 4.
32
<PAGE>
14. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
INDUSTRY SEGMENTS
Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, was effective for the company
on January 1, 1999. The Company has two principal operating segments: the
Aerospace Group and the Industrial Group. The Aerospace Group serves the
aerospace and aeronautics industries and 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 performance of businesses is evaluated at the segment level and
resources are allocated between the segments. The Pentacon executive responsible
for each segment further allocates resources among the various operating units
that compose the segment. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies in Note 1.
Pentacon, Inc. manages cash, debt and income taxes centrally. Accordingly, the
Company evaluates performance of its segments and operating units based on the
operating earnings exclusive of financing activities and income taxes. The
segments are managed separately since each segment distributes to industries
requiring different asset allocation characteristics. Intersegment sales and
related receivables for each of the years presented were insignificant.
Financial information by industry segment follows:
<TABLE>
<CAPTION>
REVENUES OPERATING INCOME TOTAL ASSETS
------------------------------ --------------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ --------------------------------- -----------------------------
1999 1998(1) 1997(2) 1999 1998(1) 1997(2) 1999 1998 1997(2)
-------- -------- -------- -------- -------- --------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aerospace .................... $130,981 $ 98,603 $ 56,798 $ 13,824 $ 13,129 $ 6,049 $197,216 $194,717 $36,855
Industrial ................... 141,917 94,693 -- 11,825 9,290 -- 96,551 85,022 --
-------- -------- -------- -------- -------- --------- -------- -------- -------
$272,898 $193,296 $ 56,798 25,649 22,419 6,049 293,767 279,739 36,855
======== ======== ========
Write-off of debt issuance
costs....................... (2,308) -- --
Other income ................. 119 85 38
General corporate ............ (3,797) (3,860) -- 33,352 21,614 --
Goodwill amortization ........ (506) (401) --
Interest expense ............. (16,535) (5,255) (1,310)
-------- -------- ---------
Income before taxes ......... $ 2,622 $ 12,988 $ 4,777
======== ======== ========= -------- -------- -------
Consolidated assets .......... $327,119 $301,353 $36,855
======== ======== =======
</TABLE>
(1) Represents the financial information of Alatec prior to the Initial
Acquisitions and the initial public offering and the consolidated results
of Pentacon subsequent to the Initial Acquisitions and the initial public
offering on March 10, 1998.
(2) Represents the financial information of Alatec prior to the Initial
Acquisitions and the initial public offering.
Capital expenditures by segment were as follows:
YEAR ENDED DECEMBER 31, AEROSPACE INDUSTRIAL CORPORATE TOTAL
- ----------------------- --------- ---------- --------- -------
(IN THOUSANDS)
1999 $ 3,776 $ 2,174 $ 88 $ 6,038
1998 2,136 1,424 247 3,807
1997 223 -- -- 223
33
<PAGE>
GEOGRAPHIC INFORMATION
The Company recorded export sales of $39,274,000, $26,320,000, and
$12,164,000 in the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has export sales through its foreign sales corporation to Europe,
Canada, the Far East, Mexico, Australia and South America, of which no country
or region is individually significant.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the Pentacon, Inc. Proxy Statement for the
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Pentacon, Inc. Proxy Statement for the
Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Pentacon, Inc. Proxy Statement for the
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Incorporated by reference to the Pentacon, Inc. Proxy Statement for the
Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
34
<PAGE>
Consolidated Statements of Changes in Stockholders Equity for the Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are not included in this Form 10-K Annual
Report because they are not applicable or the required information is shown in
the financial statements or notes thereto.
(A)(3) EXHIBITS
3.1 Second Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.1 of Registration
Statement No. 333-41383).
3.2 Bylaws (incorporated herein by reference to Exhibit 3.2 of
Registration Statement No. 333-41383).
4.1 Amended and Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1 of Amendment No. 5 of the
Company's Form S-1 (No. 333-41383)).
4.2 Pentacon, Inc. 1998 Stock Plan (incorporated by reference to Exhibit
10.10 of Amendment No. 1 of the Company's Form S-1 (No. 333-41383)).
4.3 Pentacon, Inc. 401(k) Plan (incorporated herein by reference to
Exhibit 99.1 of the Company's Form S-8 (No. 333-86703)).
4.4 Indenture Dated as of March 30, 1999 (incorporated herein by
reference to Exhibit 4.1 of Registration Statement No. 333-77081).
10.1 Employment Agreement with Mark Baldwin (incorporated herein by
reference to Exhibit 10.6 of Registration Statement No. 333-41383).
10.2 Employment Agreement with Bruce Taten (incorporated herein by
reference to Exhibit 10.7 of Registration Statement No. 333-41383).
10.3 Employment Agreement with Brian Fontana (incorporated herein by
reference to Exhibit 10.8 of Registration Statement No. 333-41383).
10.4 Form of Officer and Director Indemnification Agreement (incorporated
herein by reference to Exhibit 10.9 of Registration Statement No.
333-41383).
10.5 Second Amended and Restated Loan and Security Agreement
(incorporated herein by reference to the Company's Quarterly Report
on Form 10-Q for the period ended September 30, 1999 filed on
November 15, 1999).
21.1* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
27.1* Financial Data Schedule
*Filed herewith.
(B) REPORTS ON FORM 8-K
None.
35
<PAGE>
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: March 29, 2000 By: /S/ MARK E. BALDWIN
Chairman of the Board
& Chief Executive Officer
The undersigned directors and officers of Pentacon, Inc. hereby constitute
and appoint Brian Fontana and Bruce M. Taten, and each of them, with full power
to act without the other and with full power of substitution and resubstitution,
our true and lawful attorneys-in-fact and agents, for him and in his name,
place, and stead, in any and all capacities, to sign on his behalf any and all
amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Commission
granting unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises as fully as to all intents and purposes as
he or she might or could do in person, and hereby ratify and confirm that all
such attorneys-in-fact or agents, or any of them, or their substitutes shall
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
NAME CAPACITY DATE
/s/ MARK E. BALDWIN Chairman of the Board and March 29, 2000
- ---------------------------- Chief Executive Officer
/s/ ROBERT M. CHISTE Director March 29, 2000
- ----------------------------
/s/ JACK L. FATICA Director March 29, 2000
- ----------------------------
/s/ BRIAN FONTANA Vice President and Chief March 29, 2000
- ---------------------------- Financial Officer (Principal
Financial and Accounting
Officer)
/s/ CARY M. GROSSMAN Director March 29, 2000
- ----------------------------
/s/ DONALD B. LIST Director March 29, 2000
- ----------------------------
/s/ MARY E. McCLURE Director March 29, 2000
- ----------------------------
/s/ BENJAMIN E. SPENCE, JR. Director March 29, 2000
- ----------------------------
/s/ NISHAN TESHOIAN Director March 29, 2000
- ----------------------------
/s/ CLAYTON K. TRIER Director March 29, 2000
- ----------------------------
36
EXHIBIT 21.1
SUBSIDIARIES OF PENTACON, INC. JURISDICTION OF INCORPORATION
- ----------------------------------------- -----------------------------------
Alatec Products, Inc. California
AXS Solutions, Inc. Delaware
Capitol Bolt & Supply, Inc. Texas
Maumee Industries, Inc. Indiana
Pace Products, Inc. Texas
Sales Systems Limited Pennsylvania
Texas International Aviation, Inc. Texas
Pentacon International Sales, Inc. Virgin Islands
West Coast Aero Products Holdings Corp. Delaware
ASI Aerospace Group, Inc. Delaware
Pollard Acquisition Corp. Delaware
Pentacon Aerospace Group, Inc. Nevada
JIT Holdings, Inc. Texas
Pentacon Delaware, Inc. Delaware
Pentacon Industrial Group, Inc. Nevada
LIMITED PARTNERSHIPS
- -----------------------------------------
Pentacon Properties, L.P. (TX L.P.)
Pentacon USA, L.P. (TX L.P.)
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-48913) pertaining to the Pentacon, Inc. 1998
Stock Option Plan and in the Registration Statement (Form S-8 No.
333-86703) pertaining to the Pentacon, Inc. 401(k) Plan of our report
dated February 2, 2000, with respect to the consolidated financial
statements of Pentacon, Inc. included in the Annual Report on Form 10-K
for the year ended December 31, 1999.
ERNST & YOUNG LLP
Houston, Texas
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PENTACON, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 219
<SECURITIES> 0
<RECEIVABLES> 40,288
<ALLOWANCES> 0
<INVENTORY> 127,397
<CURRENT-ASSETS> 177,527
<PP&E> 14,927
<DEPRECIATION> (3,669)
<TOTAL-ASSETS> 327,119
<CURRENT-LIABILITIES> 109,378
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 117,512
<TOTAL-LIABILITY-AND-EQUITY> 327,119
<SALES> 272,898
<TOTAL-REVENUES> 272,898
<CGS> 186,473
<TOTAL-COSTS> 251,552
<OTHER-EXPENSES> 2,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,535
<INCOME-PRETAX> 2,622
<INCOME-TAX> 1,846
<INCOME-CONTINUING> 776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 776
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
