-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HFMGTB01Np+teRJluOFAR1KRp7YJvn1E/ToOzW06a14/gRmrkKs5dvgDu8Hw2AaB QeXv9iDlMruRT5q1WKUGWw== /in/edgar/work/0000890566-00-001578/0000890566-00-001578.txt : 20001115 0000890566-00-001578.hdr.sgml : 20001115 ACCESSION NUMBER: 0000890566-00-001578 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTACON INC CENTRAL INDEX KEY: 0001050504 STANDARD INDUSTRIAL CLASSIFICATION: [5080 ] IRS NUMBER: 760531585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13931 FILM NUMBER: 762672 BUSINESS ADDRESS: STREET 1: 10375 RICHMOND AVENUE STREET 2: SUITE 700 CITY: HOUSTON STATE: TX ZIP: 77042 BUSINESS PHONE: 7138601000 MAIL ADDRESS: STREET 1: 10375 RICHMOND AVENUE STREET 2: SUITE 700 CITY: HOUSTON STATE: TX ZIP: 77042 10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______________ COMMISSION FILE NUMBER: 001-13931 PENTACON, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0531585 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10375 RICHMOND AVENUE, SUITE 700 HOUSTON, TEXAS 77042 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (713) 860-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock of the Registrant, par value $.01 per share, outstanding at October 31, 2000 was 16,763,885. PENTACON, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 INDEX Part I - Financial Information Item 1 - Financial Statements Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999.................................... 3 Consolidated Statements of Operations for the Three Months and Nine Months ended September 30, 2000 and 1999.................... 4 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2000 and 1999.......................... 5 Notes to Consolidated Financial Statements.............. 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 8 Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K........................ 13 Signature........................................................ 13 2 PENTACON, INC. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PENTACON, INC. CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31, 1999 -------------------- -------------------- (Unaudited) (in thousands, except share data) ASSETS Cash and cash equivalents .................................................... $ 140 $ 219 Accounts receivable, net ..................................................... 42,991 40,288 Inventories, net ............................................................. 120,985 127,397 Deferred income taxes ........................................................ 9,008 9,251 Other current assets ......................................................... 963 372 -------------------- -------------------- Total current assets ................................................... 174,087 177,527 -------------------- -------------------- Property and equipment, net of accumulated depreciation ............................................................... 13,747 11,258 Goodwill, net of accumulated amortization .................................... 130,246 132,838 Deferred income taxes ........................................................ 416 416 Other assets ................................................................. 4,626 5,080 -------------------- -------------------- Total assets ........................................................... $ 323,122 $ 327,119 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ............................................................. 28,075 24,272 Accrued expenses ............................................................. 8,434 10,209 Accrued interest ............................................................. 6,419 3,202 Income taxes payable ......................................................... 1,298 334 Current maturities of long-term debt ......................................... 60,794 71,361 -------------------- -------------------- Total current liabilities .............................................. 105,020 109,378 Long-term debt, net of current maturities .................................... 99,830 100,062 -------------------- -------------------- Total liabilities ...................................................... 204,850 209,440 -------------------- -------------------- Commitments and contingencies Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued and outstanding ............................................................... -- -- Common stock, $.01 par value, 51,000,000 shares authorized, 16,763,022 and 16,668,129 shares issued and outstanding in 2000 and 1999, respectively ........................................................ 168 167 Additional paid in capital ................................................... 101,064 100,794 Retained earnings ............................................................ 17,038 16,718 Accumulated comprehensive income ............................................. 2 -- -------------------- -------------------- Total stockholders' equity ............................................. 118,272 117,679 -------------------- -------------------- Total liabilities and stockholders' equity ................................................. $ 323,122 $ 327,119 ==================== ====================
The accompanying notes are an integral part of these statements. 3 PENTACON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands, except share data) Revenues .................................... $ 67,810 $ 68,406 $ 216,066 $ 206,153 Cost of sales ............................... 47,024 46,834 150,037 140,043 --------- --------- --------- --------- Gross profit ...................... 20,786 21,572 66,029 66,110 Operating expenses .......................... 15,115 15,157 47,068 45,591 Goodwill amortization ....................... 863 868 2,591 2,591 --------- --------- --------- --------- Operating income .................. 4,808 5,547 16,370 17,928 Write-off of debt issuance costs ............ -- -- -- 2,308 Other (income) expense, net ................. (13) (10) (70) (60) Interest expense ............................ 4,654 4,534 14,220 11,992 --------- --------- --------- --------- Income before taxes ............... 167 1,023 2,220 3,688 Income taxes ................................ 693 595 1,901 2,101 --------- --------- --------- --------- Net income (loss) ................. $ (526) $ 428 $ 319 $ 1,587 ========= ========= ========= ========= Net income (loss) per share: Basic ............................. $ (0.03) $ 0.03 $ 0.02 $ 0.10 Diluted ........................... $ (0.03) $ 0.03 $ 0.02 $ 0.10 Reconciliation of net income (loss) to comprehensive income (loss): Net income (loss) ................. $ (526) $ 428 $ 319 $ 1,587 Currency translation adjustment ... 2 -- 2 -- --------- --------- --------- --------- Comprehensive income (loss) ....... $ (524) $ 428 $ 321 $ 1,587 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 4 PENTACON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2000 1999 -------- -------- (in thousands) Cash Flows From Operating Activities: Net income ................................................ $ 319 $ 1,587 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................. 4,855 4,388 Amortization of discount on notes due 2009 ................ 120 73 Deferred income taxes ..................................... 243 43 Write-off of debt issuance costs .......................... -- 2,308 Changes in operating assets and liabilities: Accounts receivable ................................ (2,703) (9,423) Inventories ........................................ 6,412 (9,866) Other current assets ............................... (589) 123 Accounts payable and accrued expenses .............. 5,331 (3,247) Income taxes payable ............................... 965 (1,326) Other assets and liabilities, net .................. 420 (720) -------- -------- Net cash provided by (used in) operating activities .... 15,373 (16,060) Cash Flows From Investing Activities: Capital expenditures ...................................... (4,483) (4,341) Other ..................................................... 11 -- -------- -------- Net cash used in investing activities .................. (4,472) (4,341) Cash Flows From Financing Activities: Repayments of term debt ................................... (385) (230) Net borrowings (repayments) under credit facility ......... (10,595) 24,013 Debt issuance costs ....................................... -- (3,812) -------- -------- Net cash provided by (used in) financing activities .... (10,980) 19,971 -------- -------- Decrease in cash and cash equivalents .......................... (79) (430) Cash and cash equivalents, beginning of period ................. 219 744 -------- -------- Cash and cash equivalents, end of period ....................... $ 140 $ 314 ======== ========
The accompanying notes are an integral part of these statements. 5 PENTACON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements of Pentacon, Inc. (the "Company") included herein have been prepared without audit pursuant to the Rules and Regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The Company believes all adjustments necessary for a fair presentation of these statements have been included and are of a normal and recurring nature. There has been no significant change in the accounting policies of the Company during the periods presented. The statements should be read in conjunction with the financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made to the prior years' consolidated financial statements to conform with the current year presentation. REVENUE RECOGNITION: Revenues are recognized upon shipment of products. Revenues include freight billed to customers and the related freight costs are recorded as cost of sales. 2. CREDIT FACILITY AND LONG-TERM DEBT In March 1999, the Company sold $100 million of Senior Subordinated Notes (the "Notes") due April 1, 2009. The net proceeds of $94.2 million, after the original issue discount and paying underwriter's commissions, from the offering of the Notes were used to repay indebtedness under the Company's credit agreement (the "Bank Credit Facility"). The Notes accrue interest at 12.25% which is payable on April 1 and October 1 of each year. The Notes are publicly registered and subordinated to all existing and future senior subordinated obligations and will rank senior to all subordinated indebtedness. The indenture governing the Notes contains covenants that limit the Company's ability to incur additional indebtedness, pay dividends, make investments and sell assets. At September 30, 2000, the Company was in compliance with the covenants. Each of the Company's subsidiaries, all of which are wholly owned, fully, unconditionally and jointly and severally guarantees the Notes on a senior subordinated basis. Separate financial statements of the guarantors are not presented because management has determined that they would not be material to investors. Effective September 30, 1999, the Company amended its Bank Credit Facility to provide a revolving line of credit of up to $100 million (subject to a borrowing base limitation) to be used for general corporate purposes, future acquisitions, capital expenditures and working capital. The Bank Credit Facility is secured by Company stock and assets. Advances under the Bank Credit Facility bear interest at the banks' prime rate. At the Company's option, the loans may bear interest based on a designated London interbank offered rate plus a margin of 200 basis points. Commitment fees of 25 to 37.5 basis points per annum are payable on the unused portion of the line of credit. The Bank Credit Facility contains a provision for standby letters of credit up to $20 million. The Bank Credit Facility prohibits the payment of dividends by the Company, restricts the Company's incurring or assuming other indebtedness and requires the Company to comply with certain financial covenants including a minimum net worth and, under certain circumstances, a minimum fixed charge ratio. At September 30, 2000, the Company was in compliance with the covenants. Borrowings under the Bank Credit Facility are classified as current liabilities in accordance with EITF 95-22 BALANCE SHEET CLASSIFICATION OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT AGREEMENTS THAT INCLUDE BOTH A SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX ARRANGEMENT. The Bank Credit Facility will terminate and all amounts outstanding 6 thereunder, if any, will be due and payable September 30, 2004. At September 30, 2000, the Company had approximately $33.7 million available under the Bank Credit Facility. In connection with the amendment of and reduction in the Bank Credit Facility and issuance of the Notes in March 1999, the Company recorded a $2.3 million ($.07 impact on earnings per share) noncash charge for the write-off of debt issuance costs. 3. EARNINGS (LOSS) PER SHARE Basic and diluted net income (loss) per share is computed based on the following information:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- BASIC: (in thousands) Net income (loss) ....................... $ (526) $ 428 $ 319 $ 1,587 ======== ======== ======== ======== Average common shares ................... 16,760 16,668 16,737 16,668 ======== ======== ======== ======== DILUTED: Net income (loss) ....................... $ (526) $ 428 $ 319 $ 1,587 ======== ======== ======== ======== Average common shares ................... 16,760 16,668 16,737 16,668 Common share equivalents: Warrants ............................ -- -- -- -- -------- -------- -------- -------- Options.............................. -- -- 6 -- -------- -------- -------- -------- Total common share equivalents... -- -- 6 -- Average common shares and common share equivalents ........... 16,760 16,668 16,743 16,668 ======== ======== ======== ========
4. INCOME TAXES The provision for income taxes included in the Consolidated Statement of Operations assumes the application of statutory federal and state income tax rates and the non-deductibility of goodwill amortization. Interim period income tax provisions are based upon estimates of annual effective tax rates and events may occur which will cause such rates to vary. During the September 30, 2000 quarter, the income tax provision was adjusted to reflect a higher expected effective tax rate attributable to nondeductible goodwill constituting a higher percentage of income before taxes for the year-to-date period resulting from lower than expected earnings to date and reduced future earnings for the fourth quarter. 5. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings that have arisen in the ordinary course of business. While it is not possible to predict the outcome of such proceedings with certainty, in the opinion of the Company, all such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability which would have a material adverse effect on the financial position, liquidity or results of operations of the Company. 7 6. SEGMENT INFORMATION The Company has two principal operating segments: the Industrial Group and the Aerospace Group. The Industrial Group serves a broad base of industrial manufacturers producing items such as diesel engines, locomotives, power turbines, motorcycles, telecommunications equipment, and refrigeration equipment. The Aerospace Group serves the aerospace and aeronautics industries. Financial information by industry segment follows: REVENUES ----------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) Industrial ......... $ 37,791 $ 37,931 $122,874 $104,020 Aerospace .......... 30,019 30,475 93,192 102,133 -------- -------- -------- -------- $ 67,810 $ 68,406 $216,066 $206,153 ======== ======== ======== ======== OPERATING INCOME ----------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,(1) ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) Industrial ......... $ 3,742 $ 3,750 $12,631 $10,364 Aerospace .......... 2,769 3,288 9,142 12,777 ------- ------- ------- ------- 6,511 7,038 21,773 23,141 Reconciliation to income before taxes: Write-off of debt issuance costs ...... -- -- -- (2,308) Other income (expense), net ..... 13 10 70 60 General corporate expense ............ (840) (623) (2,812) (2,622) Goodwill amortization . (863) (868) (2,591) (2,591) Interest expense ...... (4,654) (4,534) (14,220) (11,992) ------ ------- ------- ------- Income before taxes ... $ 167 $ 1,023 $ 2,220 $ 3,688 ====== ======= ======= ======= (1) Goodwill amortization has been excluded from segment operating income. In the first quarter, goodwill amortization was included in segment operating income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with the financial statements of the Company and related notes thereto and management's discussion and analysis of financial condition and 8 results of operations related thereto which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. This discussion contains forward-looking statements that are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Key factors that could cause actual results to differ materially from expectations include, but are not limited to: (1) estimates of costs or projected or anticipated changes to cost estimates relating to entering new markets or expanding in existing markets; (2) changes in economic and industry conditions; (3) changes in regulatory requirements; (4) changes in interest rates; (5) levels of borrowings under the Company's Bank Credit Facility; (6) accumulation of excess inventories by certain customers in the aerospace industry; and (7) volume or price adjustments with respect to sales to major customers. RESULTS OF OPERATIONS Quarterly results may be materially affected by the timing and magnitude of assimilation costs, acquisitions, costs of opening new facilities, gain or loss of a material customer and variation in product mix. Accordingly, the operating results for any three-month period are not necessarily indicative of the results that may be achieved for any subsequent three or nine-month period or for a full year. THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999 The following table sets forth certain selected financial data and the related amounts as a percentage of revenues for the periods indicated: Three Month Period Ended September 30, ------------------------------------------ 2000 1999 ------------------- ------------------- (dollars in thousands) Revenues ......................... $ 67,810 100.0% $ 68,406 100.0% Cost of sales .................... 47,024 69.3 46,834 68.5 -------- -------- -------- -------- Gross profit ....... 20,786 30.7 21,572 31.5 Operating expenses ............... 15,115 22.3 15,157 22.1 Goodwill amortization ............ 863 1.3 868 1.3 -------- -------- -------- -------- Operating income ... $ 4,808 7.1% $ 5,547 8.1% ======== ======== ======== ======== REVENUES Revenues decreased $0.6 million, or 0.9%, to $67.8 million for the three months ended September 30, 2000 from $68.4 million for the three months ended September 30, 1999. The decrease in revenues was attributable to revenue declines of 0.4% in the Industrial Group and 1.5% in the Aerospace Group. The Industrial Group experienced significant increases in sales to certain customers that were offset by declines in sales to customers in other markets. The markets where the Industrial Group experienced strength were the telecommunications, office furniture, and motorcycle industries. However, the Industrial Group had revenue declines in the high-end diesel and locomotive markets. The revenue decline in the Aerospace Group resulted from continued weakness in the aerospace market, particularly the commercial airframe portion of the market. COST OF SALES Cost of sales increased $0.2 million, or 0.4%, to $47.0 million for the three months ended September 30, 2000 from $46.8 million for the three months ended September 30, 1999. As a percentage of revenues, cost of sales increased from 68.5% for the three months ended September 30, 1999, to 69.3% for the three months ended September 30, 2000. Both the Industrial and Aerospace Group experienced gross profit margin declines in the quarter compared to the prior year quarter. The reduction in gross 9 profit margin in the Industrial Group is due to reduced pricing on a contract with a customer in the transportation industry and new system implementations at lower margins with a telecommunications customer. The Aerospace Group's gross margin declined due to lower gross margins on certain new international contracts and a change in sales mix to a higher proportion of contract business. OPERATING EXPENSES Operating expenses remained flat at $15.1 million for the three months ended September 30, 2000 as compared to the prior year period. As a percentage of revenues, operating expenses increased from 22.1% for the three months ended September 30, 1999, to 22.3% for the three months ended September 30, 2000. The benefit of a 13% reduction in workforce from the prior year period was offset by incremental operating expenses that have been incurred by the Industrial Group in connection with implementation of a consolidated information system. The Aerospace Group has incurred additional operating expenses to establish operations in the U.K. and Canada in support of new business. In addition, e-commerce and recruiting expenses increased general corporate expense in the current year period. OPERATING INCOME Due to the factors discussed above, operating income decreased $0.7 million to $4.8 million for the three months ended September 30, 2000 from $5.5 million for the three months ended September 30, 1999. As a percentage of revenues, operating income decreased to 7.1% for the three months ended September 30, 2000 from 8.1% for the three months ended September 30, 1999. NON-OPERATING COSTS AND EXPENSES Interest expense for the three months ended September 30, 2000, totaled $4.7 million compared to $4.5 million for the three months ended September 30, 1999. The increase in interest expense primarily resulted from higher interest rates. PROVISION FOR INCOME TAXES The provision for income taxes for the three months ended September 30, 2000 was $0.7 million (an effective rate of 415.0%) compared with $0.6 million (an effective rate of 58.2%) for the three months ended September 30, 1999. During the September 30, 2000 quarter, the income tax provision was adjusted to reflect a higher expected effective tax rate attributable to nondeductible goodwill constituting a higher percentage of income before taxes for the year-to-date period resulting from lower than expected earnings to date and reduced future earnings for the fourth quarter. NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999 The following table sets forth certain selected financial data and the related amounts as a percentage of revenues for the periods indicated: Nine Month Period Ended September 30, ------------------------------------------ 2000 1999 ------------------- ------------------- (dollars in thousands) Revenues ......................... $216,066 100.0% $206,153 100.0% Cost of sales .................... 150,037 69.4 140,043 67.9 -------- -------- -------- -------- Gross profit ........ 66,029 30.6 66,110 32.1 Operating expenses ............... 47,068 21.8 45,591 22.1 Goodwill amortization ............ 2,591 1.2 2,591 1.3 -------- -------- -------- -------- Operating income .... $ 16,370 7.6% $ 17,928 8.7% ======== ======== ======== ======== 10 REVENUES Revenues increased $9.9 million, or 4.8%, to $216.1 million for the nine months ended September 30, 2000 from $206.2 million for the nine months ended September 30, 1999. The increase in revenues was attributable to revenue growth of 18.2% in the Industrial Group partially offset by an 8.7% decline in Aerospace Group revenue. The Industrial Group's revenue growth resulted from the implementation of new business with a major industrial customer, increased revenues from telecommunications customers and increased demand in all of the Company's service centers. The revenue decline in the Aerospace Group resulted from weakness in the aerospace market, particularly in the commercial airframe portion of the market. COST OF SALES Cost of sales increased $10.0 million, or 7.1%, to $150.0 million for the nine months ended September 30, 2000 from $140.0 million for the nine months ended September 30, 1999. As a percentage of revenues, cost of sales increased from 67.9% for the nine months ended September 30, 1999, to 69.4% for the nine months ended September 30, 2000. The corresponding reduction in gross profit margin is due to the change in sales mix between the Industrial and Aerospace Groups and additional new business at lower margins with an existing customer in the Industrial Group. The Aerospace Group's gross margins as a percentage of revenues were consistent in each period. OPERATING EXPENSES Operating expenses increased $1.5 million, or 3.2%, to $47.1 million for the nine months ended September 30, 2000 from $45.6 million for the nine months ended September 30, 1999. As a percentage of revenues, operating expenses decreased from 22.1% for the nine months ended September 30, 1999, to 21.8% for the nine months ended September 30, 2000. The percentage decrease in the Industrial Group was attributable to cost reduction initiatives taken in the fourth quarter of 1999 and non-recurring implementation costs on new business with a major customer in the prior year. This decrease was partially offset by a percentage increase in the Aerospace Group as operating expenses were not reduced commensurate with the decline in revenues in connection with the activity associated with the consolidation of warehouses and information systems. In addition, the Aerospace Group incurred incremental operating expenses in the second quarter of 2000 to establish operations in the U.K. and Canada in support of new business. OPERATING INCOME Due to the factors discussed above, operating income decreased $1.5 million to $16.4 million for the nine months ended September 30, 2000 from $17.9 million for the nine months ended September 30, 1999. As a percentage of revenues, operating income decreased to 7.6% for the nine months ended September 30, 2000 from 8.7% for the nine months ended September 30, 1999. NON-OPERATING COSTS AND EXPENSES Interest expense for the nine months ended September 30, 2000, totaled $14.2 million compared to $12.0 million for the nine months ended September 30, 1999. The increase in interest expense primarily resulted from higher debt levels and, to a lesser extent, the higher rate of interest on the Senior Subordinated Notes issued in March 1999 and higher interest rates. PROVISION FOR INCOME TAXES The provision for income taxes for the nine months ended September 30, 2000 was $1.9 million (an effective rate of 85.6%) compared with $2.1 million (an effective rate of 57.0%) for the nine months 11 ended September 30, 1999. The effective income tax rate exceeds the statutory rate primarily due to nondeductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES The Company provided $15.4 million of net cash from operating activities during the nine months ended September 30, 2000; this cash was used for debt reduction and capital expenditures. Net cash used in investing activities was $4.4 million for capital expenditures. Net cash used in financing activities was $11.0 million for the nine months ended September 30, 2000 and consisted of repayments of debt. At September 30, 2000, the Company had cash of $0.1 million, working capital of $69.1 million and long-term debt of $99.8 million. In March 1999, the Company sold $100 million of Senior Subordinated Notes due April 1, 2009. The net proceeds of $94.2 million, after the original issue discount and paying underwriter's commissions, from the offering of the Notes were used to repay indebtedness under the Company's Bank Credit Facility. The Notes accrue interest at 12.25% which is payable on April 1 and October 1 of each year. The Notes are publicly registered and subordinated to all existing and future senior subordinated obligations and will rank senior to all subordinated indebtedness. The indenture governing the Notes contains covenants that limit the Company's ability to incur additional indebtedness, pay dividends, make investments and sell assets. At September 30, 2000, the Company was in compliance with the covenants. Each of the Company's subsidiaries, all of which are wholly owned, fully, unconditionally and jointly and severally guarantees the Notes on a senior subordinated basis. Effective September 30, 1999, the Company amended its Bank Credit Facility to provide a revolving line of credit of up to $100 million (subject to a borrowing base limitation) to be used for general corporate purposes, future acquisitions, capital expenditures and working capital. The Bank Credit Facility is secured by Company stock and assets. Advances under the Bank Credit Facility bear interest at the banks' prime rate. At the Company's option, the loans may bear interest based on a designated London interbank offered rate plus a margin of 200 basis points. Commitment fees of 25 to 37.5 basis points per annum are payable on the unused portion of the line of credit. The Bank Credit Facility contains a provision for standby letters of credit up to $20 million. The Bank Credit Facility prohibits the payment of dividends by the Company, restricts the Company's incurring or assuming other indebtedness and requires the Company to comply with certain financial covenants including a minimum net worth, and under certain circumstances, a minimum fixed charge ratio. At September 30, 2000, the Company was in compliance with the covenants. Borrowings under the Bank Credit Facility are classified as current liabilities in accordance with EITF 95-22 BALANCE SHEET CLASSIFICATION OF BORROWINGS OUTSTANDING UNDER REVOLVING CREDIT AGREEMENTS THAT INCLUDE BOTH A SUBJECTIVE ACCELERATION CLAUSE AND A LOCK-BOX ARRANGEMENT. The Bank Credit Facility will terminate and all amounts outstanding thereunder, if any, will be due and payable September 30, 2004. At September 30, 2000, the Company had approximately $33.7 million available under the Bank Credit Facility. The Company's Industrial Group has selected the J. D. Edwards' One World Enterprise Application Solution as its common information system. The total expenditures for this information system are expected to be approximately $5.5 million during the years 2000 and 2001, the majority of which will be capitalized as computer hardware and software as it is installed and depreciated over the estimated useful life of the assets. The total expenditures for this system were $3.8 million as of September 30, 2000, the majority of which has been capitalized as computer hardware and software. Funding for these expenditures came from operating cash flows. SEASONALITY AND INFLATION The Company experiences seasonal declines in the third and fourth quarters due to declines in its customers' activities in those quarters. The Company's volume of business may be adversely affected by 12 a decline in projects as a result of regional or national downturns in economic conditions. The timing of acquisitions and the timing and magnitude of acquisition assimilation costs may also materially affect quarterly results. Inflation has not had a material impact on the Company's results of operations. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 27 Financial Data Schedule (b) REPORTS ON FORM 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENTACON, INC. Dated: November 13, 2000 By: /S/ JAMES C. JACKSON JAMES C. JACKSON Vice President & Controller (Principal Financial & Accounting Officer) 13 EX-27 2 0002.txt
5 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. 9-MOS DEC-31-2000 SEP-30-2000 140 0 42,991 0 120,985 174,087 19,431 (5,684) 323,122 105,020 0 0 0 168 118,104 323,122 216,066 216,066 150,037 199,696 (70) 0 14,220 2,220 1,901 319 0 0 0 319 .02 .02
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