SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
September 20, 2002
Date of Report (Date of earliest event reported)
Commission File Number: 1-5989
ANIXTER INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1658138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4711 Golf Road
Skokie, Illinois 60076
(847) 677-2600
(Address and telephone number of principal executive offices)
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
Pentacon, Inc.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements Consolidated Balance Sheets
as of June 30, 2002 and December 31, 2001
Consolidated Statements of Operations for the Three Months and the Six
Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
Anixter International Inc.
Pro Forma Consolidated Statement of Operations for the Year Ended
December 28, 2001
Pro Forma Consolidated Statement of Operations for the 39 weeks Ended
September 27, 2002
Notes to Pro Forma Consolidated Financial Statements
(c) Exhibit
23 Consent of Ernst and Young LLP
1
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, 2001 and 2000, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared
assuming that Pentacon, Inc. will continue as a going concern. As more fully
described in Note 3, the Company has incurred an operating loss and its
revolving credit facility matures on April 30, 2002. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
ERNST & YOUNG LLP
Houston, Texas
February 1, 2002,
except for Note 3, as to which the date is March 28, 2002
2
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2001 2000
------------ ------------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents...................................... $ 49 $ 158
Accounts receivable............................................ 30,767 41,433
Inventories.................................................... 77,871 124,530
Deferred income taxes.......................................... - 9,865
Refundable income taxes........................................ 2,129 -
Other current assets........................................... 1,679 1,044
------------ ------------
Total current assets....................... 112,495 177,030
------------ ------------
Property and equipment, net.................................... 12,780 14,319
Goodwill, net.................................................. 125,927 129,383
Deferred income taxes.......................................... - 516
Other assets................................................... 4,172 4,532
------------ ------------
Total assets............................... $ 255,374 $ 325,780
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................... $ 18,191 $ 28,303
Accrued expenses............................................... 9,776 7,564
Accrued interest............................................... 3,085 4,154
Income taxes payable........................................... - 1,387
Current maturities of long-term debt........................... 60,341 67,501
------------ ------------
Total current liabilities.................. 91,393 108,909
Long-term debt, net of current maturities...................... 99,120 99,745
------------ ------------
Total liabilities.......................... 190,513 208,654
------------ ------------
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,
16,960,139 and 16,769,251 shares issued and
outstanding in 2001 and 2000, respectively 170 168
Additional paid in capital..................................... 101,322 101,122
Retained earnings (deficit).................................... (36,643) 15,833
Accumulated comprehensive income............................... 12 3
------------ ------------
Total stockholders' equity................. 64,861 117,126
------------ ------------
Total liabilities and
stockholders' equity..................... $ 255,374 $ 325,780
============ ============
The accompanying notes are an integral part of these statements.
3
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues....................................... $ 259,351 $ 283,671 $ 272,898
Cost of sales.................................. 220,602 197,899 186,473
------------ ------------ ------------
Gross profit.............................. 38,749 85,772 86,425
Operating expenses............................. 58,626 62,972 60,979
Restructuring and other charges................ 3,932 - 632
Goodwill amortization.......................... 3,456 3,455 3,468
------------ ------------ ------------
Operating income (loss)................... (27,265) 19,345 21,346
Write-off of debt issuance costs............... 633 - 2,308
Other (income) expense, net.................... (34) (91) (119)
Interest expense............................... 17,959 18,959 16,535
------------ ------------ ------------
Income (loss) before taxes................ (45,823) 477 2,622
Income taxes................................... 6,653 1,362 1,846
------------ ------------ ------------
Net income (loss)......................... $ (52,476) $ (885) $ 776
============ ============ ============
Net income (loss) per share:
Basic..................................... $ (3.10) $ (0.05) $ 0.05
Diluted................................... $ (3.10) $ (0.05) $ 0.05
The accompanying notes are an integral part of these statements.
4
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2000 1999
------------- ------------- -------------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income (loss)....................................... $ (52,476) $ (885) $ 776
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization........................... 6,999 6,624 6,072
Amortization of discount on notes....................... 196 165 111
Deferred income taxes................................... 10,381 (714) (566)
Inventory write-off..................................... 39,053 - -
Write-off of debt issuance costs........................ 633 - 2,308
Changes in operating assets and liabilities:
Accounts receivable................................ 10,666 (1,145) (5,949)
Inventories........................................ 7,606 2,867 (13,498)
Refundable income taxes............................ (2,129) - -
Other current assets............................... (55) (672) 232
Other assets....................................... (249) 502 (157)
Accounts payable and accrued expenses.............. (8,969) 2,338 (8,600)
Income taxes payable............................... (1,387) 1,053 (3,135)
------------- ------------- -------------
Net cash provided by (used in) operating activities 10,269 10,133 (22,406)
Cash Flows From Investing Activities:
Capital expenditures.................................... (2,588) (5,873) (6,038)
Other................................................... 137 21 12
------------- ------------- -------------
Net cash used in investing activities................. (2,451) (5,852) (6,026)
Cash Flows From Financing Activities:
Repayments of term debt................................. (470) (454) (341)
Net borrowings (repayments) under credit facility....... (6,877) (3,888) 33,025
Debt issuance costs..................................... (580) - (4,777)
------------- ------------- -------------
Net cash provided by (used in) financing activities (7,927) (4,342) 27,907
Decrease in cash and cash equivalents........................ (109) (61) (525)
Cash and cash equivalents, beginning of period............... 158 219 744
------------- ------------- -------------
Cash and cash equivalents, end of period..................... $ 49 $ 158 $ 219
============= ============= =============
The accompanying notes are an integral part of these statements.
5
PENTACON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL RETAINED ACCUMULATED TOTAL
PAID IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) INCOME EQUITY
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1998....... 16,668,129 $ 167 $ 100,501 $ 15,942 $ - $ 116,610
Issuance of common stock ...... 13,132 - 32 - - 32
Amortization of deferred
compensation................. - - 261 - - 261
Net income..................... - - - 776 - 776
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999....... 16,681,261 167 100,794 16,718 - 117,679
Issuance of common stock ...... 87,990 1 85 - - 86
Amortization of deferred
compensation................. - - 243 - - 243
Net loss....................... - - - (885) - (885)
Foreign currency translation. - - - - 3 3
-------------
Comprehensive loss............. - - - - - (882)
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2000....... 16,769,251 168 101,122 15,833 3 117,126
Issuance of common stock ...... 190,888 2 108 - - 110
Amortization of deferred
compensation................. - - 92 - - 92
Net loss....................... - - - (52,476) - (52,476)
Foreign currency translation... - - - - 9 9
-------------
Comprehensive loss............. - - - - - (52,467)
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2001....... 16,960,139 $ 170 $ 101,322 $ (36,643) $ 12 $ 64,861
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these statements.
6
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
was identified as the accounting acquiror. The acquisitions of the remaining
Founding Companies were accounted for using the purchase method of accounting.
Unless the context otherwise requires, all references herein to the Company
include Pentacon, the Founding Companies and acquisitions subsequent to the
Offering ("Subsequent Acquisitions").
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.
CASH EQUIVALENTS: Cash equivalents include highly liquid, temporary cash
investments having original maturity dates of three months or less. For
reporting purposes, cash equivalents are stated at cost plus accrued interest,
which approximates fair value.
INVENTORIES: Inventories are stated at the lower of cost or market value,
cost being determined on a first-in, first-out basis.
REVENUE RECOGNITION: Revenues are recognized upon shipment of products or,
in the case of inventory management contracts, when the product is delivered to
the customer's production line. Revenues include freight billed to customers and
the related freight costs are recorded as cost of sales.
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
7
using primarily the straight-line method. The amortization expense on assets
acquired under capital leases is included with depreciation expense on owned
assets. Repairs and maintenance are charged to earnings as they are incurred.
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. At the time goodwill is evaluated for
impairment, enterprise goodwill is also evaluated utilizing undiscounted cash
flows of the enterprise over the remaining life of the asset.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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, 2001, 2000 and 1999.
One customer of the industrial segment accounted for approximately 12%, 16% and
14% of consolidated revenues for the years ended December 31, 2001, 2000 and
1999, respectively. Accounts receivable balances related to this customer
represented approximately 9% and 10% of total accounts receivable at December
31, 2001 and 2000, respectively.
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 $21.0 million at December 31,
2001. 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.
RISKS AND UNCERTAINTIES: Certain types of specialized fasteners are
available from only a limited number of sources. If those sources become
unavailable, the Company would not be able to continue to sell such fasteners
unless the Company could locate an alternative supplier. The Company's inability
to supply certain types of fasteners may adversely affect the Company's sales
and its relationship with the customers requiring such fasteners.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial
Accounting Standards Board (FASB) 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. The Company adopted this standard in
the quarter ended March 31, 2001. The adoption had no impact on net income
because of the Company's minimal use of derivatives.
In June 2001, the FASB issues SFAS No. 141, "Business Combinations". SFAS
No. 141 establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combination initiated after June 30, 2001. SFAS No. 141
also requires that acquired intangible assets be recognized as assets apart from
8
goodwill if they meet one of two specified criteria. Additionally, the statement
adds certain disclosure requirements to those required by APB 16, including
disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. This statement is required to be applied
to all business combinations initiated after June 30, 2001 and to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. Use of the pooling-of-interests method is
prohibited. The adoption of SFAS No. 141 did not have an impact on the Company's
financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142, which must be applied to fiscal years beginning after
December 15, 2001, modifies the accounting and reporting of goodwill and
intangible assets. The pronouncement requires entities to discontinue the
amortization of goodwill, reallocate all existing goodwill among its reporting
segments based on criteria set by SFAS No. 142 and perform initial impairment
tests by applying a fair-value-based analysis on the goodwill in each reporting
segment. Any impairment at the initial adoption date shall be recognized as the
effect of a change in accounting principle. Subsequent to the initial adoption,
goodwill shall be tested for impairment annually or more frequently if
circumstances indicate a possible impairment.
Under SFAS No. 142, entities are required to determine the useful life of
other intangible assets and amortize the value over the useful life. If the
useful life is determined to be indefinite, no amortization will be recorded.
For intangible assets recognized prior to the adoption of SFAS No. 142, the
useful life should be reassessed. Other intangible assets are required to be
tested for impairment in a manner similar to goodwill. At December 31, 2001, the
Company's net goodwill was approximately $125.9 million, and annual amortization
of such goodwill was approximately $3.5 million. The Company expects to adopt
SFAS No. 142 during its first quarter of 2002. The Company believes the
impairment charge upon adoption will be material, and based on current market
capitalization could equate to a substantial amount of its recorded goodwill.
The Company does not believe this adoption will impact its free cash flows or
its operating income.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured as the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company is in the process of assessing the impact that the
adoption of this standard will have on its financial position and results of
operations.
2. RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 2001, the Company initiated a plan to restructure
its business operations. In addition, the Company conducted an assessment of its
business in the aerospace and telecommunication industries in view of the impact
of recent events, most notably the September 11th events in New York and
Washington, D.C. and the financial difficulties in the telecommunications
industry. The Company expects decreases in revenues in the aerospace industry
and continued softness in the telecommunications sector. As a result, the
Company recorded restructuring and other charges of $47,650,000 in the fourth
quarter of 2001.
9
Below is an analysis and discussion of the restructuring and other charges
recognized during the fourth quarter and year-ended December 31, 2001 (amounts
in thousands):
Second Fourth
Income Statement Description of Charges Quarter Quarter Noncash Cash Balance at
Classification Accrual Accrual Activity Activity December 31, 2001
-------------------------------------------------------------------------------------------------------------------------
Cost of sales Write-off of excess
inventory $ 5,623 $ 33,430 $ (2,987) $ - $ 36,066
Restructuring and Termination Benefits
other charges Cost 817 1,386 (3) (808) 1,392
Restructuring and Facility Costs 495 1,234 - (107) 1,622
other charges
Operating expenses Professional fees
related to restructuring - 966 - (581) 385
Write-off of debt Write-off of debt
issuance costs issuance costs - 633 (633) - -
Income taxes Valuation allowance
on deferred tax assets - 10,001 (10,001) - -
Included in restructuring and other charges are charges totaling
$39,053,000 for the write-off of inventory. Of that total, $33,430,000 related
to noncash write-offs of excess aerospace and telecommunications inventory in
the fourth quarter based upon a review of the anticipated reduced future demand
for the inventory resulting from decreased usage levels in the quarter. A
$5,623,000 noncash charge was recognized in the second quarter of 2001 as a
result of offering $9,762,000 of slower moving inventory at substantially
reduced prices in order to take advantage of the cashflows and tax benefits.
As announced in November 2001, the Company implemented a restructuring plan
to reduce annual operating expenses. The Company is closing five distribution
facilities and has reduced its workforce by 86 employees, the majority of which
were terminated prior to December 31, 2001. These employees encompass all levels
of the organization from executives to warehouse employees. The Company
recognized a $2,620,000 charge in the fourth quarter relating to implementation
of the plan. In the second quarter of 2001, the Company recorded a $967,000
charge for the relocation of its corporate office from Houston, Texas to
Chatsworth, California and a $345,000 charge for cost initiatives in the
Industrial Group.
The Company has engaged advisors to assist in restructuring efforts and has
incurred costs with respect to professionals engaged by potential lenders and
investors in connection with due diligence. The Company recognized $966,000 for
those fees in the fourth quarter of 2001.
In connection with the amendment of the Company's bank credit facility in
October 2001, unamortized debt issuance costs of $633,000 relating to the
previous facility were written-off.
As a result of the charges recorded in the fourth quarter, the realization
of recorded deferred tax assets is not assured. The Company recorded a
$10,001,000 valuation allowance related to deferred tax assets in the fourth
quarter of 2001.
During the year ended December 31, 1999, the Company incurred a
non-recurring charge of $632,000 related to a workforce reduction in one of the
Company's industrial segment distribution centers.
10
3. MANAGEMENT'S PLAN
The Company's consolidated financial statements for the year ended December
31, 2001 have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred a net loss of $52,476,000 for the year
ended December 31, 2001 and the Company's credit facility (the "Bank Credit
Facility") matures on April 30, 2002. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that may result from the
outcome of this uncertainty.
A substantial portion of the Company's business involves sales to the
aerospace industry. Primarily as a result of the September 11th events in New
York and Washington, D.C., aerospace manufacturers have substantially reduced
their business, resulting in decreased business for the Company.
The Company is highly leveraged and has outstanding $100 million of Senior
Subordinated Notes due 2009 (the "Notes") and approximately $60 million of
senior secured indebtedness under the Company's Bank Credit Facility. The
downturn in the Company's business since September 11th has made it unlikely
that it will be able to repay this indebtedness in accordance with its terms.
The Company has taken a number of steps during the year ended December 31,
2001 to reduce costs. On April 25, 2001, the Company hired a new Chief Executive
Officer and subsequently replaced four of its executive officers. The Company
reduced its workforce by 14% and closed five facilities which are estimated to
result in future cost savings of $10 million in 2002. In addition, the Company
restructured the manner in which it purchases its inventory in an effort to
increase its annual inventory turns. The Company also evaluated its inventory
for excess inventory, primarily in the aerospace group, taking into
consideration the downturn in business resulting from the events of September
11th and the number of older aircraft that have been taken out of use, resulting
in an aerospace inventory write-down of $ 31.7 million in the fourth quarter of
2001.
While the steps taken by the Company will improve its 2002 operating
results, the Company's level of indebtedness combined with restrictions imposed
on the use of the Company's credit facility have resulted in debt service in
excess of that which can be serviced by the Company's current operations. The
Company has entered into negotiations with its lenders, holders of its Notes and
other sources of capital to restructure its indebtedness. Although no binding
agreements or commitments have been received, the Company anticipates that a
restructuring will involve a reduction in the amount of indebtedness owed to
holders of the Notes in exchange for common stock (or a security convertible
into common stock). The Company is also negotiating with its senior lenders
under its Bank Credit Facility to extend the maturity of its Bank Credit
Facility. In addition, the Company is in discussions regarding other alternative
transactions, including a sale of the Company's business. It is likely that any
restructuring or other alternative will result in substantial dilution to
current holders of our common stock and a change in control of the Company.
The Company believes that its improved ongoing operating performance will
enable it to successfully restructure its indebtedness, without materially
impacting its operations, to a level that can be adequately serviced by its
current and anticipated future operations. However, these negotiations involve
numerous parties with different interests. Additionally, the events of September
11th continue to affect the aerospace industry making it difficult to project
future results, and therefore more difficult to attract equity capital. No
assurances can be given that one or more of these factors will prevent the
Company from successfully restructuring its indebtedness and continuing as a
going concern.
The Company's lenders under its Bank Credit Facility have notified the
Company that the Company is in default under certain covenants under the Bank
Credit Facility that would give the lenders the right to accelerate the
indebtedness under the Bank Credit Facility and declare it immediately due and
payable. The Company and the senior lenders have entered into a forbearance
agreement in which the senior lenders agree not to exercise their remedies under
the Bank Credit Facility and to continue lending to the Company under the
facility until April 26, 2002. In addition, the scheduled interest payment date
for the Company's Notes is April 1, 2002. The Company does not expect to make
the interest payment on that date. The indenture for the Notes provides a 30-day
grace period. If the failure to pay interest continues for 30 days, the Notes
will be in default, and the holders of the Notes may, subject to the terms of
the indenture, declare all interest and principal immediately due and payable. A
default under the Notes will also be a default under the Company's Bank Credit
Facility. If the Company is unable to successfully restructure its indebtedness,
it may be required to seek protection under the bankruptcy laws.
11
4. PROPERTY AND EQUIPMENT AND GOODWILL
USEFUL DECEMBER 31,
LIVES IN --------------------------------
YEARS 2001 2000
----------- ------------ ------------
(IN THOUSANDS)
Buildings.............................................. 10-40 $ 1,772 $ 2,816
Leasehold improvements................................. 6-20 3,768 3,420
Equipment.............................................. 3-8 12,439 8,333
Furniture and fixtures................................. 5-7 2,728 2,758
Construction in progress............................... - 57 3,491
------------ ------------
20,764 20,818
Less accumulated depreciation and
Amortization......................................... - (7,984) (6,499)
------------ ------------
$ 12,780 $ 14,319
============ ============
DECEMBER 31,
--------------------------------
2001 2000
------------ ------------
(IN THOUSANDS)
Goodwill........................................................ $ 138,190 $ 138,190
Less accumulated amortization................................... (12,263) (8,807)
------------ ------------
$ 125,927 $ 129,383
============ ============
5. CREDIT FACILITY, LONG-TERM DEBT AND LEASES
DECEMBER 31,
--------------------------------
2001 2000
------------ ------------
(IN THOUSANDS)
Senior Subordinated Notes with interest payable semi-
annually at 12.25% (an effective rate of 12.75%),
maturing March 2009............................................ $ 97,678 $ 97,492
Borrowings under Bank Credit Facility:
Revolving credit loan with interest payable quarterly at
LIBOR + 2% - 61,000
Revolving credit loan with interest payable monthly at prime
(5.75% at December 31, 2001), maturing April 2002 60,135 6,012
Capital leases................................................... 1,395 2,311
Other notes payable ............................................. 253 431
------------ ------------
159,461 167,246
Less current maturities.......................................... 60,341 67,501
------------ ------------
Long-term debt, net of current maturities........................ $ 99,120 $ 99,745
============ ============
In March 1999, the Company sold $100 million of 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
12
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, 2001 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 October 30, 2001, the Company amended its $100 million Bank
Credit Facility. The Bank Credit Facility is subject to a borrowing base
limitation and secured by Company stock and assets. Advances under the Bank
Credit Facility bear interest at the banks' prime rate plus 100 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. The financial covenants include: (1) minimum monthly
availability requirements, beginning at $6.5 million on October 31, 2001 and
increasing periodically thereafter up to $9.5 million on March 1, 2002; (2)
monthly EBITDA minimums through February 28, 2002; (3) maximum gross inventory
that the Company may have at the end of each calendar month through February 28,
2002; and (4) a tangible net worth requirement. In addition, the Company is
required to complete an inventory appraisal by January 15, 2002. At December 31,
2001, the Company had approximately $9.9 million of availability ($6.5 million
of availability is required) under the facility. 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 weighted-average interest rate on short-term
borrowings outstanding was 6.59% and 8.10% at December 31, 2001 and 2000,
respectively. In March 2002, the Company amended its Bank Credit Facility to
reduce the facility to $65 million and change the term to April 30, 2002. In
addition, the Company entered into a forbearance agreement with respect to the
default on the tangible net worth covenant of the facility caused by the
restructuring and other charges described in Note 2.
In connection with the amendment of the Company's Bank Credit Facility in
October 2001, unamortized debt issuance costs of $633,000 related to the
previous facility were written-off. 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 $2,308,000 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, 2001 are $60,242,000, $94,000, $51,000, $0 and $0,
respectively.
The Company leases a portion of its buildings and equipment under
non-cancelable 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, 2001 are as follows:
13
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES TOTAL
-------------------------------------- ---------- ---------- ---------
(IN THOUSANDS)
2002................................... $ 299 $ 3,493 $ 3,792
2003................................... 274 3,179 3,453
2004................................... 235 2,524 2,759
2005................................... 220 2,035 2,255
2006................................... 220 1,592 1,812
Thereafter............................. 766 4,318 5,084
---------- ---------- ---------
Total minimum lease payments........... 2,014 17,141 19,155
Less amount representing
Interest............................. 619
----------
Present value of net minimum
lease payments....................... 1,395
Current maturities..................... 107
----------
Long-term portion...................... $ 1,288
==========
Total rental expense under operating leases for the years ended December
31, 2001, 2000 and 1999 was approximately $4,758,000, $4,210,000 and $3,435,000,
respectively, including amounts to related parties of $1,024,000, $1,217,000 and
$952,000, respectively. Total minimum lease payments include payments due to
stockholders of $1,864,000 for capital leases and $6,999,000 for operating
leases.
6. INCOME TAXES
Deferred tax liabilities and assets at the end of each period are
determined based on the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, using the tax rate expected to be in
effect when the taxes are actually paid or recovered. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance. For the
year ended December 31, 2001, the Company recorded a valuation allowance
relating to its net deferred tax assets.
Components of income tax expense (benefit) are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
---------- ---------- ---------
(IN THOUSANDS)
Current expense (benefit):
Federal............................... $ (3,115) $ 1,572 $ 1,549
State................................. (613) 504 863
---------- ---------- ---------
(3,728) 2,076 2,412
Deferred expense (benefit):
Federal............................... 8,465 (582) (461)
State................................. 1,916 (132) (105)
---------- ---------- ---------
10,381 (714) (566)
---------- ---------- ---------
$ 6,653 $ 1,362 $ 1,846
========== ========== =========
14
The net deferred tax assets (liabilities) consist of the following:
DECEMBER 31,
---------------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Deferred tax assets:
Receivables allowance........................................ $ 366 $ 793
Inventory allowance.......................................... 17,487 6,380
Accrued expenses............................................. 1,278 1,526
Uniform cost capitalization.................................. 1,591 1,144
Property and equipment....................................... - 516
Net operating loss carryforward.............................. 2,079 -
Other........................................................ 116 138
---------- ----------
Total deferred tax assets.................................. 22,917 10,497
---------- ----------
Deferred tax liabilities:
Property and equipment....................................... (570) -
Other........................................................ (144) (116)
---------- ---------
Total deferred tax liabilities............................. (714) (116)
---------- ----------
Valuation allowance.......................................... (22,203) -
---------- ----------
Net deferred taxes......................................... $ - $ 10,381
========== ==========
Net deferred taxes consist of the following:
Current assets............................................... $ - $ 9,865
Noncurrent assets............................................ - 516
---------- ----------
$ - $ 10,381
========== ==========
Due to the uncertainty surrounding the realization of the deferred tax
assets, the Company has recorded a full valuation allowance against these
amounts for the year ended December 31, 2001. The Company has approximately
$5,696,000 of tax operating loss carryforward at December 31, 2001 that will
expire in 2021.
The Company's effective tax rate varied from the federal statutory tax rate
as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------ ---------- -----------
Expected income tax rate........................... (34.0)% 34.0% 34.0%
International export sales partially
exempt from federal income taxes
(FSC/ETI benefit)............................... (0.8) (41.9) (14.1)
State taxes, net of federal benefit................ (0.7) 34.2 4.0
Nondeductible compensation......................... - 17.3 -
Nondeductible goodwill............................. 2.6 246.2 44.2
Valuation allowance................................ 48.5 - -
Other nondeductible expenses....................... (1.1) (4.3) 2.3
--------- ---------- --------
Effective tax rate................................. 14.5% 285.5% 70.4%
========= ========== ========
15
7. EARNINGS (LOSS) PER SHARE
The computation of net income (loss) per share for the years ended December
31, 2001, 2000 and 1999 is based on the weighted average shares of common stock
outstanding during the years ended December 31, 2001, 2000 and 1999,
respectively.
Basic and diluted net income (loss) per share is computed based on the
following information:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001 2000 1999
---------- ------------ ----------
(IN THOUSANDS)
BASIC:
Net income (loss).................... $ (52,476) $ (885) $ 776
========== =========== ==========
Average common shares................ 16,904 16,744 16,670
========== =========== ==========
DILUTED:
Net income (loss).................... $ (52,476) $ (885) $ 776
========== =========== ==========
Average common shares................ 16,904 16,744 16,670
Common share equivalents:
Warrants.......................... - - -
Options........................... 1 14 1
---------- ----------- ----------
Total common share
equivalents.................. 1 14 1
---------- ----------- ----------
Average common shares and
common share equivalents....... 16,905 16,758 16,671
========== =========== ==========
Options and warrants to purchase 1,220,218, 976,228 and 1,192,225 shares of
common stock were not included in the diluted net income per share calculation
for the years ended December 31, 2001, 2000 and 1999, respectively, because the
exercise price was greater that the average market price.
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 2,550,000 shares. As of December 31, 2001, the
Company had granted options and other awards for a total of 1,227,468 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.
16
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
Statements of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS No. 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 2001, 2000 and 1999 respectively: (i) risk-free interest rate of 5.03%,
5.03% and 6.34%, (ii) a dividend yield of 0.00%, (iii) volatility factors of the
historical market price of the Company's common stock of 141.4%, 84.6%, and
75.7%, respectively 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 SFAS 123, the Company's net income (loss) and earnings (loss)
per common share would have been adjusted to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net income (loss)
As reported..................... $ (52,476) $ (885) $ 776
Pro forma....................... $ (53,182) $ (1,662) $ (1,987)
Income (loss) per share
As reported..................... $ (3.10) $ (0.05) $ 0.05
Pro forma....................... $ (3.15) $ (0.10) $ (0.12)
17
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, 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
Options granted .................................. 426,071 1.83
Options cancelled................................. (333,318) 9.57
----------
Stock options outstanding at December 31, 2000....... 1,305,978 $ 7.09
Options granted................................... 316,290 1.01
Options cancelled................................. (344,800) 8.91
----------
Stock options outstanding at December 31, 2001....... 1,277,468 $ 5.10
==========
Common shares authorized under the 1998 Stock Plan... 2,550,000
Outstanding options............................... (1,277,468)
Outstanding stock grants.......................... (263,267)
----------
Options available for grant at December 31, 2001..... 1,009,265
==========
Shares exercisable at December 31, 2001.............. 780,574 $ 7.47
The weighted average fair value of options granted in the years ended
December 31, 2001, 2000 and 1999 was $0.98, $1.57 and $4.65, respectively. The
following summarizes information related to stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------------------
Weighted Weighted
Remaining Average Remaining Average
Shares Life Exercise Shares Life Exercise
Range of Exercise Prices (in thousands) (Years) Price (in thousands) (Years) Price
------------------------------------------------------------------------------------------------------------
$ 0.88 to $ 3.00 701 9.0 $ 1.45 206 8.7 $ 1.70
$ 3.00 to $10.00 93 7.0 6.19 92 7.0 6.21
$10.00 427 6.2 10.00 427 6.2 10.00
$10.00 to $12.44 56 6.6 11.57 56 6.6 11.57
------------------------------------------------------------------------------------------------------------
Total 1,277 7.8 $ 5.10 781 7.0 $ 7.47
------------------------------------------------------------------------------------------------------------
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001 2000 1999
------------ ----------- -------------
(IN THOUSANDS)
Interest paid.................................. $ 18,143 $ 17,297 $ 14,971
Income taxes paid.............................. $ 712 $ 1,023 $ 4,865
18
10. EMPLOYEE BENEFIT PLANS
The Company has 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 $524,000, $529,000 and $639,000
in matching contributions to the plans for the years ended December 31, 2001,
2000 and 1999, respectively. Additionally, the Company made discretionary
contributions to certain plans of $93,000 for the year ended December 31, 1999.
11. UNAUDITED QUARTERLY OPERATING RESULTS
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31, 2001
Revenue.................................. $71,311 $70,230 $ 64,541 $ 53,269
Gross profit............................. 21,319 15,444 19,750 (17,764)
Operating income......................... 4,703 (1,568) 4,786 (35,186)
Interest expense......................... 4,599 4,559 4,291 4,510
Net income (loss) ....................... 82 (4,939) 826 (48,445)
Basic earnings (loss) per share.......... 0.00 (0.29) 0.05 (2.86)
Diluted earnings (loss) per share........ 0.00 (0.29) 0.05 (2.86)
YEAR ENDED DECEMBER 31, 2000
Revenue.................................. $74,365 $73,891 $ 67,810 $ 67,605
Gross profit............................. 22,728 22,515 20,786 19,743
Operating income......................... 5,691 5,871 4,808 2,975
Interest expense......................... 4,820 4,746 4,654 4,739
Net income (loss) ....................... 405 440 (526) (1,204)
Basic earnings (loss) per share.......... 0.02 0.03 (0.03) (0.07)
Diluted earnings (loss) per share........ 0.02 0.03 (0.03) (0.07)
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 $2,050,000, $1,415,000 and $1,243,000, of products
for the years ended December 31, 2001, 2000 and 1999, respectively, from a
supplier which is 50% owned by a shareholder The Company had sales of $75,000,
$3,841,000 and $5,387,000, of products for the years ended December 31, 2001,
2000 and 1999, respectively, to a company which has a board member who is also a
member of the Company's board. The Company has notes or accounts receivable of
$1,364,000, $2,463,000 and $1,579,000 relating to such sales at December 31,
2001, 2000 and 1999, respectively. Other related party transactions are
discussed in Note 5.
14. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
INDUSTRY SEGMENTS
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.
19
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:
REVENUES OPERATING INCOME (LOSS)
--------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- -------------------------------
2001 2000 1999 2001(1) 2000(2) 1999
--------- --------- --------- --------- -------- --------
(IN THOUSANDS)
Aerospace............................... $ 129,637 $ 123,435 $ 130,981 $ (24,979) $ 9,732 $ 15,588
Industrial.............................. 129,714 160,236 141,917 6,956 16,692 13,023
--------- --------- --------- --------- -------- --------
$ 259,351 $ 283,671 $ 272,898 (18,023) 26,424 28,611
========= ========= =========
Write-off of debt issuance costs......... (633) - (2,308)
Other income............................. 34 91 119
General corporate........................ (5,787) (3,624) (3,797)
Goodwill amortization.................... (3,455) (3,455) (3,468)
Interest expense......................... (17,959) (18,959) (16,535)
--------- -------- --------
Income (loss) before taxes............... $ (45,823) $ 477 $ 2,622
========= ======== ========
TOTAL ASSETS
------------------------------------
DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
Aerospace............................... $ 77,513 $ 127,634 $ 128,649
Industrial.............................. 46,332 54,762 52,005
---------- ---------- ----------
123,845 182,396 180,654
General corporate........................ 131,529 143,384 146,465
---------- ---------- ----------
Consolidated assets...................... $ 255,374 $ 325,780 $ 327,119
========== ========== ==========
(1) Aerospace operating income for the year ended December 31, 2001 includes
nonrecurring and other charges of $38,686. Industrial operating income for
the year ended December 31, 2001 includes restructuring and other charges
of $3,270. General corporate expense for the year-ended December 31, 2001
includes restructuring and other charges of $1,995.
(2) Aerospace operating income for the year ended December 31, 2000 includes
a charge of $2,003 primarily related to exiting certain non-core and
under-performing operations.
20
Capital expenditures by segment were as follows:
YEAR ENDED DECEMBER 31, AEROSPACE INDUSTRIAL CORPORATE TOTAL
----------------------- --------- ---------- --------- -------
(IN THOUSANDS)
2001 $ 863 $ 1,709 $ 16 $ 2,588
2000 1,593 4,126 154 5,873
1999 3,776 2,174 88 6,038
GEOGRAPHIC INFORMATION
The Company recorded export sales of $45,828,000, $38,216,000 and
$39,274,000 in the years ended December 31, 2001, 2000 and 1999, 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.
15. SUBSEQUENT EVENT (UNAUDITED)
The Job Creation and Workers Act of 2002 ("the Act") was enacted in March
2002. The Act provided that net operating loss carryback claims for the years
ended December 31, 2001 and 2002 are extended from two years to five years. As a
result, the Company will be able to carryback its $5,696,000 tax loss and
realize approximately $1,659,000 of additional income tax refunds. The related
benefit will be recorded in the first quarter of 2002.
21
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
----------- ------------
(Unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents...................................... $ 225 $ 49
Accounts receivable............................................ 29,038 30,767
Inventories.................................................... 71,674 77,871
Refundable income taxes........................................ 3,789 2,129
Other current assets........................................... 4,470 1,679
---------- ------------
Total current assets.................................... 109,196 112,495
---------- ------------
Property and equipment, net.................................... 11,382 12,780
Goodwill, net ................................................. 37,123 125,927
Other assets................................................... 3,827 4,172
---------- ------------
Total assets............................................ $ 161,528 $ 255,374
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
Accounts payable............................................... $ 5,007 $ 18,191
Accrued expenses............................................... 1,626 9,776
Accrued interest............................................... - 3,085
Current maturities of long-term debt........................... 50,417 60,341
---------- -----------
Total current liabilities............................... 57,050 91,393
Long-term debt, net of current maturities...................... - 99,120
---------- -----------
Total liabilities not subject to compromise............. 57,050 190,513
---------- -----------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable............................................... 16,374 -
Accrued expenses............................................... 6,686 -
Accrued interest............................................... 7,950 -
Current maturities of long-term debt........................... 97,974 -
Long-term debt, net of current maturities...................... 1,366 -
---------- -----------
Total liabilities subject to compromise................. 130,350 -
---------- -----------
Total liabilities.................................. 187,400 190,513
---------- -----------
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, 16,918,613 and 16,960,139 shares issued
and outstanding in 2002 and 2001, respectively............ 169 170
Additional paid in capital..................................... 101,354 101,322
Retained deficit............................................... (127,390) (36,643)
Accumulated comprehensive income (loss)........................ (5) 12
---------- -----------
Total stockholders' equity (deficit).................... (25,872) 64,861
---------- -----------
Total liabilities and stockholders' equity (deficit).... $ 161,528 $ 255,374
========== ===========
The accompanying notes are an integral part of these statements.
22
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- --------- ---------
(in thousands, except share data)
Revenues............................................... $ 52,277 $ 70,230 $ 108,082 $ 141,541
Cost of sales.......................................... 36,981 54,786 76,549 104,778
---------- ---------- --------- ---------
Gross profit.................................... 15,296 15,444 31,533 36,763
Operating expenses..................................... 13,951 16,148 27,673 31,900
Goodwill amortization.................................. - 864 - 1,728
---------- ---------- --------- ---------
Operating income (loss)......................... 1,345 (1,568) 3,860 3,135
Other (income) expense, net............................ (35) (7) (71) (5)
Interest expense....................................... 2,985 4,559 7,534 9,158
---------- ---------- --------- ---------
Income (loss) before taxes...................... (1,605) (6,120) (3,603) (6,018)
Income taxes........................................... - (1,181) (1,659) (1,161)
---------- ---------- --------- ---------
Income (loss) before cumulative effect
of change in accounting principle................ (1,605) (4,939) (1,944) (4,857)
Cumulative effect of change in
accounting principle, net of tax................. - - (88,804) -
---------- ---------- --------- ---------
Net income (loss)............................... $ (1,605) $ (4,939) $ (90,748) $ (4,857)
========== ========== ========== ==========
Net income (loss) per share:
Basic..............................................
Before cumulative effect of change
in accounting principle........................ $ (0.09) $ (0.29) $ (0.11) $ (0.29)
Cumulative effect of change in
accounting principle, net of tax............... - - $ (5.24) -
---------- ---------- --------- ----------
Net income (loss)............................... $ (0.09) $ (0.29) $ (5.35) $ (0.29)
Diluted............................................
Before cumulative effect of change
in accounting principle........................ $ (0.09) $ (0.29) $ (0.11) $ (0.29)
Cumulative effect of change in
accounting principle, net of tax............... - - $ (5.24) -
---------- ---------- --------- ----------
Net income (loss).............. $ (0.09) $ (0.29) $ (5.35) $ (0.29)
Reconciliation of net income (loss) to
comprehensive income (loss):
Net income (loss)................................ $ (1,605) $ (4,939) $ (90,748) $ (4,857)
Currency translation adjustment.................. (16) (7) (17) (2)
---------- ---------- --------- ----------
Comprehensive income (loss)...................... $ (1,621) $ (4,946) $ (90,765) $ (4,859)
========== ========== ========= ==========
The accompanying notes are an integral part of these statements.
23
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
-----------------------------
June 30,
-----------------------------
2002 2001
----------- -----------
(in thousands)
Cash Flows From Operating Activities:
Net income (loss)........................................ $ (90,748) $ (4,857)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................. 1,707 3,444
Amortization of discount on notes............................. 102 90
Deferred income taxes......................................... - (641)
Inventory write down.......................................... - 5,623
Write-off of goodwill......................................... 88,804 -
Changes in operating assets and liabilities:
Accounts receivable.................................... 1,729 (5,406)
Inventories............................................ 6,197 3,150
Refundable income taxes................................ (1,659) -
Other current assets................................... (2,791) 236
Other assets........................................... 349 552
Accounts payable and accrued expenses.................. 6,581 (2,548)
Income taxes payable................................... - (805)
----------- -----------
Net cash provided by (used in) operating activities........ 10,271 (1,162)
Cash Flows From Investing Activities:
Capital expenditures.......................................... (456) (1,981)
Other......................................................... 166 67
----------- ----------
Net cash used in investing activities..................... (290) (1,914)
Cash Flows From Financing Activities:
Repayments of term debt....................................... (87) (244)
Net borrowings (repayments) under credit facility............. (9,718) 3,284
------------ ----------
Net cash provided by (used in) financing activities........ (9,805) 3,040
Increase (decrease) in cash and cash equivalents.................. 176 (36)
Cash and cash equivalents, beginning of period.................... 49 158
----------- ----------
Cash and cash equivalents, end of period.......................... $ 225 $ 122
=========== ============
The accompanying notes are an integral part of these statements.
24
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(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,
with the exception of the adoption of the provisions of bankruptcy accounting
described below and the new accounting pronouncement on accounting for goodwill
described in Note 2. 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, 2001.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
On May 23, 2002, the Company and certain of its subsidiaries filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code with the United States Bankruptcy Court for the Southern District of Texas.
A substantial portion of the Company's business involves sales to the aerospace
industry. Primarily as a result of the September 11th events in New York and
Washington D.C., aerospace manufacturers substantially reduced their business,
resulting in decreased business for the Company. In addition, the Company's
senior lenders had imposed restrictions on the Company's credit availability.
The downturn in the Company's business since September 11th combined with the
decrease in credit availability resulted in the Company being unable to repay
its debts in accordance with stated terms. Therefore, the Company sought
protection under Chapter 11 of the Bankruptcy Code. Also on May 23, 2002, the
Company entered into an agreement to sell substantially all of its assets to
Anixter International, Inc. ("Anixter"). Under the agreement, Anixter has agreed
to assume all pre and post petition trade accounts payable. The sale to Anixter
and the Company's Plan of Reorganization have the support of the holders of a
majority of the Company's 12.25% Senior Subordinated Notes (the "Notes") due
April 1, 2009 and the committee of its unsecured creditors. In addition, as of
May 23, 2002, the Company entered into a $60.5 million debtor-in-possession
credit facility (the "Credit Facility") with its existing bank group (see Note
4).
Prior to the bankruptcy filing, the Company did not make the $6.1 million
interest payment due April 1, 2002 under the terms of the Company's Notes. As of
May 23, 2002, the Company discontinued accruing interest on the Notes.
Contractual interest on the Notes for the quarter ended June 30, 2002 was $3.1
million, which is $1.4 million in excess of recorded interest expense included
in the accompanying financial statements.
The Company is in possession of its properties and assets and continues to
manage its business as a debtor-in-possession subject to the supervision of the
Bankruptcy Court. Pursuant to the provisions of the Bankruptcy Code, all actions
to collect upon any of the Company's liabilities as of the petition date or to
enforce pre-petition date contractual obligations, including the Notes, were
automatically stayed. Absent approval from the Bankruptcy Court, the Company is
prohibited from paying pre-petition obligations. However, the Bankruptcy Court
has approved payment of certain pre-petition liabilities such as employee wages
and benefits and certain other pre-petition obligations. Additionally, the
Bankruptcy Court has approved the retention of legal and financial
professionals. As a debtor-in-possession, the Company has the right, subject to
Bankruptcy Court approval and certain other conditions, to assume or reject any
pre-petition executory contracts and unexpired leases. Parties affected by such
rejections may file claims with the Bankruptcy Court in accordance with
bankruptcy procedures.
25
Although the Chapter 11 Bankruptcy filing raises substantial doubt about
the Company's ability to continue as a going concern, the accompanying financial
statements have been prepared on a going concern basis. This basis contemplates
the continuity of operations, realization of assets, and discharge of
liabilities in the ordinary course of business. The statements also present the
assets of the Company at historical cost and the current intention that they
will be realized as a going concern and in the normal course of business. The
Plan of Reorganization could materially change the amounts currently disclosed
in the financial statements.
The accompanying financial statements do not present the amount which may
ultimately be paid to settle liabilities and contingencies which may be allowed
in the Chapter 11 Bankruptcy cases. Under Chapter 11 Bankruptcy, the right of,
and ultimate payment by the Company to pre-petition creditors may be
substantially altered. This could result in claims being paid in the Chapter 11
Bankruptcy proceedings at less (and possibly substantially less) than 100
percent of their face value. At this time, because of material uncertainties,
pre-petition claims are carried at face value in the accompanying financial
statements. Under the Bankruptcy Code, the Company may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition contracts, subject to Bankruptcy
Court review. The Company cannot presently determine or reasonably estimate the
ultimate liability that may result from claims filed as a result of rejecting
leases and contracts, and no provisions have been made for these items.
Moreover, the interests of existing shareholders could, among other things, be
very substantially diluted or even eliminated. Further information about the
financial impact of the Chapter 11 Bankruptcy filing is set forth in item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
On September 9, 2002 the United States Bankruptcy Court for the Southern
District of Texas issued an order confirming the Company's Plan of
Reorganization which included the sale of substantially all of its assets to
Anixter. On September 20, 2002 substantially all of the Company's assets were
sold to Anixter for $108.2 million. Additionally, Anixter assumed pre-bankruptcy
liabilities totaling $16.5 million, and Anixter hired the existing employees of
the Company and assumed the lease obligations of certain operating facilities.
Bankruptcy Accounting: Since the Chapter 11 Bankruptcy filings, the Company
has applied the provisions in Statement of Position ("SOP") 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code." SOP 97-1
does not change the application of generally accepted accounting principles in
the preparation of financial statements. However, it does require that the
financial statements for periods including and subsequent to filing the Chapter
11 petition distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the business. The
financial statements include reclassifications made to reflect the liabilities
which have been deferred under the Chapter 11 proceedings as "Liabilities
Subject to Compromise".
Recently Issued Accounting Standards: In August 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale and requires that those long-lived assets be measured at the lower of
carrying amount or fair value less cost to sell. The Company adopted this
standard in the quarter ended March 31, 2002. The adoption had no impact on the
Company's financial position or results of operations.
26
2. GOODWILL
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective January 1, 2002. Goodwill amortization
for the quarter and six months ended June 30, 2002 would have otherwise been
$864,000 and $1,728,000, respectively. Recorded goodwill attributable to each of
the Company's reporting units were tested for impairment by comparing the fair
value of each reporting unit with its carrying value. Fair value was determined
using discounted cash flows, market multiples and market capitalization. These
impairment tests are required to be performed upon adoption of SFAS No. 142 and
at least annually thereafter.
Significant estimates used in the impairment tests include estimates of
future cash flows, future short-term and long-term growth rates, weighted
average cost of capital and estimates of market multiples for each of the
reportable units. On an ongoing basis (absent any impairment indicators), the
Company expects to perform its impairment tests during the fourth quarter.
Based on its initial impairment tests, the Company recognized a charge of
$88,804,000 ($5.24 per share) in the first quarter of 2002 to reduce the
carrying value of goodwill of each of its reporting units to the implied fair
value. This impairment is a result of adopting a fair value approach, under SFAS
No. 142, to testing impairment of goodwill as compared to the previous method
utilized in which evaluations of goodwill impairment were made using the
estimated future undiscounted cash flows compared to the assets' carrying
amount. Under SFAS No. 142, the impairment adjustment recognized at adoption of
the new rules was reflected as a cumulative effect of change in accounting
principle in the first quarter 2002 statement of operations. Impairment
adjustments recognized after adoption, if any, generally are required to be
recognized as operating expenses.
The carrying amount of goodwill attributable to each reportable operating
unit with goodwill balances and changes therein follows:
January 1, Impairment June 30,
2002 Adjustment 2002
----------- ----------- -----------
(in thousands)
Aerospace $ 74,675 $ (70,944) $ 3,731
Industrial 51,252 (17,860) 33,392
------------ ----------- -----------
$ 125,927 $ (88,804) $ 37,123
============ =========== ===========
3. RESTRUCTURING AND OTHER CHARGES
In November 2001, the Company implemented a restructuring plan to reduce
annual operating expenses. The Company closed five distribution facilities and
implemented workforce reductions. The Company recognized a $2,620,000
restructuring charge in the fourth quarter relating to implementation of the
plan. In the second quarter of 2001, the Company recorded a $967,000
restructuring charge for the relocation of its corporate office from Houston,
Texas to Chatsworth, California and a $345,000 restructuring charge for cost
reduction initiatives in the industrial group.
27
Below is the activity related to the restructuring charges recognized
during the six months ended June 30, 2002 (amounts in thousands):
Unpaid Balance
Income Statement Description of at December 31, Noncash Cash Unpaid Balance at
Classification Charges 2001 Activity (1) Activity June 30, 2002
------------------ ------------------- ---------------- -------------- ----------- -----------------
Restructuring and Termination benefit
other charges costs $ 1,392 $ - $ (828) $ 564
Restructuring and
other charges Facility costs 1,622 (179) (213) 1,230
(1) The noncash activity relates to the write-off of leasehold improvements.
The Company recognized charges totaling $39,053,000 for the write-off of
excess inventory during the year ended December 31, 2001. The noncash write-offs
of excess aerospace and telecommunications inventory were recorded based upon a
review of the anticipated reduced future demand for the inventory resulting from
decreased usage levels. In addition, certain aerospace inventory was disposed of
during the year ended December 31, 2001 in order to take advantage of cash flows
and tax benefits. At December 31, 2001, the remaining allowance for this excess
inventory was $36,066,000. During the six months ended June 30, 2002, the
Company recognized $300,000 as a result of disposing of the inventory to which
the allowance related.
4. DEBT
In March 1999, the Company sold $100 million of Notes due April 1, 2009.
The net proceeds of $94.2 million, after the original issue discount and paying
underwriter's commissions, were used to repay indebtedness under the Company's
Credit Facility. The Notes accrue interest at 12.25% per annum 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. Each of the
Company's subsidiaries, which are wholly owned, fully, unconditionally and
jointly and severally guarantees the Notes on a senior subordinated basis.
The Company did not make the interest payment on the Notes due April 1,
2002 and, as a result, was not in compliance with the covenants. On May 23,
2002, the Company amended the Restructuring Agreement with certain holders of a
majority of the Notes whereby the noteholders agreed to support the sale of
substantially all the Company's assets to Anixter and the Company's Plan of
Reorganization in lieu of finalizing the transaction wherein the Company had
agreed with the holders to effect a recapitalization of the Company.
As of May 23, 2002, the Company entered into a debtor-in-possession Credit
Facility. The $60.5 million Credit Facility is subject to a borrowing base
limitation and secured by Company stock and assets. Advances under the Bank
Credit Facility bear interest at the banks' prime rate plus 175 basis points.
The Credit Facility contains a provision for standby letters of credit up to
$2.5 million. The 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. At June 30,
2002, the Company was in compliance with the covenants and had approximately
$9.9 million of availability under the facility.
28
5. EARNINGS (LOSS) PER SHARE
Basic and diluted net income (loss) per share is computed based on the
following information:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands)
BASIC:
Net income (loss)......................... $ (1,605) $ (4,939) $ (90,749) $ (4,857)
========= ========= ========= =========
Average common shares..................... 16,943 16,906 16,951 16,847
========= ========= ========= =========
DILUTED:
Net income (loss)......................... $ (1,605) $ (4,939) $ (90,749) $ (4,857)
========= ========= ========= =========
Average common shares..................... 16,943 16,906 16,951 16,847
Common share equivalents:
Warrants............................. - - - -
Options.............................. - 8 - 11
--------- --------- --------- ---------
Total common share equivalents... - 8 - 11
--------- --------- --------- ---------
Average common shares and
Common share equivalents............ 16,943 16,914 16,951 16,858
========= ========= ========= =========
Options to purchase 1,018,396, 1,195,218, and 1,175,218 shares of common
stock were not included in the diluted net income per share calculation for the
three and six months ended June 30, 2002, three months ended June 30, 2001 and
six months ended June 30, 2001, respectively, because the exercise prices were
greater than the average market price.
6. INCOME TAXES
The Job Creation and Workers Act, which was enacted in March 2002, provides
that net operating loss carryback claims for the years ended December 31, 2001
and 2002 are extended from two years to five years. As a result, the Company can
carryback its $5,696,000 tax loss carryover as of December 31, 2001 and realize
$1,659,000 of additional income tax refunds. The related benefit was recorded in
the quarter ended March 31, 2002. The Company recorded a valuation allowance
against the tax benefit which results from the loss in the six months ended June
30, 2002 since realization of the benefit is not assured.
For the six months ended June 30, 2001, the provision for income taxes
included in the Consolidated Statements 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.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
29
8. 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 Six Months Ended
June 30, June 30,
-------------------- ----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
(in thousands)
Industrial................................ $ 31,383 $ 33,893 $ 61,619 $ 70,241
Aerospace................................. 20,894 36,337 46,463 71,300
-------- -------- --------- ---------
$ 52,277 $ 70,230 $ 108,082 $ 141,541
======== ======== ========= =========
Operating Income
-------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
(in thousands)
Industrial (1)............................ $ 3,047 $ 2,838 $ 5,519 $ 6,009
Aerospace (2)............................. 1,414 (1,693) 3,969 1,729
-------- -------- --------- ---------
4,461 1,145 9,488 7,738
Reconciliation to income (loss) before taxes:
Other income (expense), net............... 35 7 71 5
General corporate expense (3)............. (3,116) (1,849) (5,628) (2,875)
Goodwill amortization..................... - (864) - (1,728)
Interest expense.......................... (2,985) (4,559) (7,534) (9,158)
-------- -------- --------- ---------
Income (loss) before taxes................ $ (1,605) $ (6,120) $ (3,603) $ (6,018)
======== ======== ========= =========
(1) Industrial operating income for the three and six months ended June 30,
2002 includes costs of $26 and $61, respectively, related to the Company's
Chapter 11 filing. Industrial operating income for the three and six
months ended June 30, 2001 includes $345 of costs related to cost
reduction initiatives.
(2) Aerospace operating income for the three and six months ended June 30,
2001 includes a $5,623 charge related to the write down of inventory.
(3) General corporate expense for the three and six months ended June 30,
2002 includes $2,318 and $3,878, respectively, of costs related to
professional fees incurred in connection with the Company's restructuring,
Chapter 11 filing and workforce reductions. General corporate expense for
the three and six months ended June 30, 2001 includes $967 of costs
related to the relocation of the corporate office from Houston, Texas to
Chatsworth, California.
30
ANIXTER INTERNATIONAL INC.
Pro Forma Consolidated Statements of Operations Introduction
The following unaudited pro forma consolidated financial statements have
been prepared from the historical consolidated financial statements of Anixter
International Inc. (the "Company"). The Pentacon, Inc. ("Pentacon") column in
the following unaudited pro forma consolidated financial statements reflects the
historical financial statements of Pentacon for the year ended December 31, 2001
and for the 38 week period ended September 19, 2002.
The unaudited pro forma consolidated statements of operations have been
adjusted to reflect the Pentacon acquisition as described under Item 2 in the
Company's 8-K dated September 20, 2002. The unaudited pro forma consolidated
statements of operations assume that the Pentacon acquisition occurred as of
December 30, 2000. The Pentacon acquisition is reflected in the Company's
consolidated balance sheet at September 27, 2002, the most recent period for
which a consolidated balance sheet was required. Accordingly, a pro forma
balance sheet is not required and is not included herein. In the opinion of
management, all adjustments to present fairly the unaudited pro forma
consolidated statements of operations have been made.
The unaudited pro forma statements of operations should be read in
conjunction with the Company's historical consolidated financial statements
including the notes thereto, set forth in the Company's Annual Report on Form
10-K for the year ended December 28, 2001; the Company's historical consolidated
financial statements including the notes thereto, set forth in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2002
and Pentacon's historical consolidated financial statements and notes thereto
included elsewhere in this report. Anixter acquired the operations and assets of
Pentacon as part of a pre negotiated plan of reorganization by Pentacon under
Chapter 11 of the U. S. Bankruptcy Code. The historical results of Pentacon used
in the preparation of these pro forma statements reflect certain costs and
expenses that are not a part of the acquired assets. The unaudited pro forma
consolidated statements of operations are not necessarily indicative of the
results that would have occurred had the purchase been made at the beginning of
the period presented, nor do they purport to indicate the results of the future
operations of the Company.
31
ANIXTER INTERNATIONAL INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 28, 2001
(Unaudited)
(In millions, except per share amounts)
Anixter Anixter
International Inc. Pro Forma International Inc.
As Reported Pentacon, Inc. Adjustments Pro Forma
---------------- --------------- ---------------- ---------------
Net sales $ 3,144.2 $ 259.4 $ - $ 3,403.6
Cost of goods sold 2,407.3 220.6 - 2,627.9
---------------- --------------- ---------------- ---------------
Gross profit 736.9 38.8 - 775.7
Operating expenses 594.2 58.6 (2.2)(a) 650.6
Amortization expense 9.0 3.5 (1.9)(b) 10.6
Restructuring and other charges 31.7 3.9 - 35.6
---------------- --------------- ---------------- ---------------
Operating income (loss) 102.0 (27.2) 4.1 78.9
Interest expense (30.1) (18.0) 12.8 (c) (35.3)
Other, net (13.7) (0.6) - (14.3)
---------------- --------------- ---------------- ---------------
Income (loss) before income taxes
and extraordinary loss 58.2 (45.8) 16.9 29.3
Income tax expense (benefit) 24.6 6.7 (18.9)(d) 12.4
---------------- --------------- ---------------- ---------------
Income (loss) before extraordinary loss $ 33.6 $ (52.5) $ 35.8 $ 16.9
================ =============== ================ ===============
Basic income per share before extraordinary loss $ 0.46
Diluted income per share before extraordinary loss $ 0.45
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.
32
ANIXTER INTERNATIONAL INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the 39 Weeks Ended September 27, 2002
(Unaudited)
(In millions, except per share amounts)
Anixter Anixter
International Inc. Pro Forma International Inc.
As Reported Pentacon, Inc. Adjustments Pro Forma
---------------- --------------- --------------- ---------------
Net sales $ 1,858.3 $ 153.8 $ - $ 2,012.1
Cost of goods sold 1,418.9 110.6 - 1,529.5
---------------- --------------- --------------- ---------------
Gross profit 439.4 43.2 - 482.6
Operating expenses 373.3 39.7 (5.2)(a) 407.8
Amortization expense - - 1.2 (b) 1.2
---------------- --------------- --------------- ---------------
Operating income 66.1 3.5 4.0 73.6
Interest expense (11.9) (8.8) 4.9 (c) (15.8)
Other, net 0.9 0.1 - 1.0
---------------- --------------- --------------- ---------------
Income (loss) before income taxes
and extraordinary loss 55.1 (5.2) 8.9 58.8
Income tax expense (benefit) 22.0 (1.9) 3.4 (d) 23.5
---------------- --------------- --------------- ---------------
Income (loss) before extraordinary loss $ 33.1 $ (3.3) $ 5.5 $ 35.3
================ =============== =============== ===============
Basic income per share before extraordinary loss $ 0.96
Diluted income per share before extraordinary loss $ 0.93
The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.
33
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Pro Forma Statements of Operations
The pro forma adjustments to the accompanying financial information for the
year ended December 28, 2001 and for the 39 weeks ended September 27, 2002 are
described below:
(a) To reduce both rental expense for facilities that were not acquired and
legal and professional fees that were directly related to the bankruptcy
proceedings of Pentacon.
(b) This adjustment reflects the exclusion of the 2001 goodwill
amortization expense incurred by Pentacon, partially offset by purchase
accounting adjustments for the amortization of $13.9 million of other
intangibles with finite lives.
(c) To reflect the exclusion of total interest expense incurred by
Pentacon, partially offset by the interest expense that would have been incurred
by Anixter resulting from $110.4 million of borrowings used to fund the
acquisition at an annualized interest rate of 4.75% over the respective period.
(d) To record the estimated income tax expense impacts related to the pro
forma adjustments (a) through (c) above and the inclusion of Pentacon at the
combined federal and state effective income tax rates of 40.0% and 42.2% for
2002 and 2001, respectively.
Note 2. Restructuring and Other Charges
In 2001, Pentacon initiated a plan to restructure its current business
operations and conducted an assessment of its business in the aerospace and
telecommunication industries in view of the impact of the September 11, 2001
events in New York and Washington, D.C. and the financial difficulties in the
telecommunications industry. As a result, Pentacon recorded restructuring and
other charges of $54.6 million. Included in cost of sales are charges totaling
$39.1 million for the write-off of inventory. Of that total, $33.5 million
related to noncash write-offs of excess aerospace and telecommunications
inventory based on a review of the anticipated future demand for the inventory
resulting from decreased usage levels. The remaining $5.6 million represented a
noncash charge resulting from offering $9.8 million of slower moving inventory
at substantially reduced prices in order to take advantage of the cash flows and
tax benefits. The remaining $15.5 million of restructuring and other charges
resulted from the write-down of deferred tax assets, termination benefit costs,
closing of five distribution facilities, professional fees and write-off of debt
issuance costs. See Note 2 "Restructuring and Other Charges" in Pentacon's 10-K
for the year ended December 31, 2001 for additional information.
34
Note 3. Allocation of Purchase Price
The Company's acquisition of Pentacon was accounted for as a purchase.
Assets and liabilities have been recorded at estimated fair value based on the
following preliminary allocation of purchase price. During the fourth quarter of
2002, the Company preliminarily identified certain intangible assets. Intangible
assets with finite lives totaling $13.9 million will be amortized over their
useful lives of 8 to 10 years, while intangible assets with indefinite lives and
goodwill of $1.8 million and $8.6 million, respectively, will not be amortized.
Estimated purchase price $ 108.2
Other transaction-related costs 3.2
-------
Total investment 111.4
Tangible assets acquired 117.8
Intangible assets acquired 15.7
Liabilities assumed (30.7)
-------
Net assets acquired 102.8
-------
Goodwill $ 8.6
=======
35
SIGNATURES
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.
ANIXTER INTERNATIONAL INC.
Date: November 27, 2002 By: /s/ Robert W.Grubbs
-----------------------------
Robert W. Grubbs
President and Chief Executive Officer
Date: November 27, 2002 By: /s/ Dennis J. Letham
-----------------------------
Dennis J. Letham
Senior Vice President - Finance
and Chief Financial Officer
36
EXHIBIT INDEX
Exhibit No. Description of Exhibits
----------- -----------------------
23 Consent of Ernst and Young LLP
37