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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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
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.
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,
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."
ITEM 7.
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.
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:
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.
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.
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.
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
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.
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.
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.
ITEM 8.
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
PENTACON, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
PENTACON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these statements.
PENTACON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(1) Net of the effects of acquisitions.
The accompanying notes are an integral part of these statements.
PENTACON, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these statements.
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.
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,
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
4. CREDIT FACILITY, LONG-TERM DEBT AND LEASES
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
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.
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 ======= =======
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
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.
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 ========= =========
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 ========= ============
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
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.
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:
(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
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Pentacon, Inc. Proxy Statement for the Annual Meeting of Stockholders.
ITEM 12.
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.
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.
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
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.
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 - ----------------------------