AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1997.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 5085 76-0531585
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
9821 KATY FREEWAY, SUITE 500
HOUSTON, TEXAS 77024
(713) 464-7770
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARK E. BALDWIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
9821 KATY FREEWAY, SUITE 500
HOUSTON, TEXAS 77024
(713) 464-7770
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
CHRISTOPHER S. COLLINS CHARLES SZALKOWSKI
MICHAEL C. BLANEY BAKER & BOTTS, L.L.P.
ANDREWS & KURTH L.L.P. ONE SHELL PLAZA
4200 TEXAS COMMERCE TOWER 910 LOUISIANA STREET
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-4200 (713) 229-1234
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(1) PRICE(2)(3) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value ....... -- -- $60,754,722 $17,923
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price are not
included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Includes shares of Common Stock issuable upon exercise of the Underwriters'
over-allotment option.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 3, 1997
PROSPECTUS
, 1998
3,773,585 SHARES
PENTACON, INC.
(LOGO)
COMMON STOCK
All of the shares of common stock, par value $0.01 per share ("Common
Stock"), of Pentacon, Inc. (the "Company") offered hereby are being offered
by the Company. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price.
The Company will apply for listing the Common Stock on the New York Stock
Exchange under the symbol "JIT."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREOF FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS
THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
Per Share............................ $ $ $
Total(3)............................. $ $ $
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES ESTIMATED AT $ , WHICH WILL BE PAID BY
THE COMPANY.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30 DAY OPTION TO PURCHASE UP
TO 566,038 ADDITIONAL SHARES AT THE PRICE TO THE PUBLIC LESS UNDERWRITING
DISCOUNT AND COMMISSIONS, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH
OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING
DISCOUNTS AND COMMISSIONS AND PROCEEDS TO THE COMPANY WILL BE $ ,
$ AND $ , RESPECTIVELY. SEE "UNDERWRITING."
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made in New York, New York,
on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN
SCHRODER & CO. INC.
<PAGE>
[Map of the United States indicating the location of
the Company's facilities.]
<PAGE>
[Photographs of bolts, screws and other small parts,
automated picking equipment and parts bagging equipment.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
CONCURRENTLY WITH AND AS A CONDITION TO THE CONSUMMATION OF THE OFFERING
MADE HEREBY (THE "OFFERING"), PENTACON PLANS TO ACQUIRE, IN SEPARATE
TRANSACTIONS (COLLECTIVELY, THE "ACQUISITIONS"), FOR CONSIDERATION INCLUDING
CASH AND SHARES OF ITS COMMON STOCK, THE FOLLOWING FIVE ENTITIES ENGAGED IN THE
FASTENER AND SMALL PARTS DISTRIBUTION BUSINESS: ALATEC PRODUCTS, INC.
("ALATEC"), AXS SOLUTIONS, INC. ("AXS"), CAPITOL BOLT & SUPPLY, INC.
("CAPITOL"), MAUMEE INDUSTRIES, INC. ("MAUMEE") AND SALES SYSTEMS, LIMITED
("SSL" AND, TOGETHER WITH ALATEC, AXS, CAPITOL AND MAUMEE, THE "FOUNDING
COMPANIES"). UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO "PENTACON" MEAN
PENTACON, INC., AND REFERENCES TO THE "COMPANY" MEAN PENTACON AND THE FOUNDING
COMPANIES, COLLECTIVELY. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
THE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE
FINANCIAL INFORMATION AND PER SHARE DATA IN THIS PROSPECTUS (I) HAVE BEEN
ADJUSTED FOR (A) THE ACQUISITIONS, (B) THE EFFECTS OF CERTAIN PRO FORMA
ADJUSTMENTS TO THE HISTORICAL FINANCIAL STATEMENTS AND (C) THE CONSUMMATION OF
THE OFFERING, AND (II) ASSUME THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO COMMON STOCK
INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE PER SHARE, AND RESTRICTED VOTING
COMMON STOCK, $0.01 PAR VALUE PER SHARE (THE "RESTRICTED COMMON STOCK"), OF
THE COMPANY.
THE COMPANY
The Company is a leading distributor of fasteners and other small parts and
provider of related inventory procurement and management services to original
equipment manufacturers ("OEMs") on a worldwide basis. Fasteners and small
parts include screws, bolts, nuts, washers, pins, rings, fittings, springs,
electrical connectors and similar parts. Pentacon was founded in March 1997 to
aggressively pursue the consolidation of the highly-fragmented fastener
distribution industry. According to an industry study by The Freedonia Group,
Inc., sales by fastener manufacturers in 1996 were approximately $8.0 billion in
the United States and $25.0 billion globally. The United States fastener market
is estimated to have over 1,900 distributors. The Company believes that the OEM
fastener and small part distribution industry is in the early stages of
consolidation, and the Company plans to lead the consolidation of the industry.
The Company believes that its broad selection of fasteners and small parts, high
quality services, professional management team, and strong competitive position
as a publicly-owned fastener distributor focused on the OEM market, will allow
it to be the leading consolidator.
Fasteners and other small parts constitute a majority of the total number
of parts needed by an OEM to manufacture many products, but represent only a
small fraction of the total materials cost. The cost for an OEM to internally
manage its inventory of fasteners and small parts is relatively high due to (i)
the large number of fasteners and other small parts in the inventory, (ii) the
risk of interruptions for just-in-time ("JIT") manufacturing operations, and
(iii) the need to perform quality assurance testing of the fasteners and small
parts. The Company believes that OEMs are increasingly outsourcing their
fastener and other small parts inventory procurement and management needs to
distributors in order to focus on their core manufacturing businesses and to
reduce costs. To further reduce costs, many manufacturers are seeking to
consolidate the number of distributors they use and are selecting national
distributors with extensive product lines who can also provide inventory-related
services. To capitalize on these trends, the Company offers a broad array of
fasteners and small parts and provides a variety of related procurement and
inventory management services, including inventory management information
systems ("MIS") and reports, JIT delivery, quality assurance, advisory
engineering services, component kit production and delivery, small component
assembly and electronic data interchange ("EDI").
Upon consummation of the Offering, Pentacon will acquire the five Founding
Companies, which have been in business an average of 25 years and which had
combined net sales of $120.0 million in 1996 and $112.8 million for the nine
months ended September 30, 1997. While total U.S. sales of fasteners have
increased at a compound annual rate of approximately 6.1% during the four years
ended December 31,
3
<PAGE>
1996, the combined net sales of the Founding Companies have increased at a
compound annual rate of approximately 14.8% per year over the same period. The
Company believes that it has generated superior growth primarily by expanding
the breadth of its product offerings and value-added services, which has allowed
the Founding Companies to increase market share at existing customers and
attract new customers.
The Company operates a national sales and distribution network with 24
facilities in 14 states. Through this network and international agents, the
Company serves more than 2,600 customers in over 25 countries. These customers
manufacture a wide variety of products including diesel engines, locomotives,
power turbines, motorcycles, telecommunications equipment, refrigeration
equipment and aerospace equipment. The Company's largest customers include
Cummins Engine Company, General Electric Corporation, Harley-Davidson, Inc., the
Hughes Aircraft subsidiary of General Motors Corporation, The Trane Company,
Lockheed Martin Corporation, and The Boeing Company. The Company anticipates
that its ability to provide a comprehensive product line and offer related
services over a broad geographic area will assist the Company in obtaining
additional nationwide accounts with large national and international OEMs.
BUSINESS STRATEGY
The Company intends to become the leading fastener and small parts
distributor on a worldwide basis. Key elements of the Company's strategy to
achieve its objective are:
PROVIDE VALUE-ADDED SERVICES. The Company seeks to continually
develop and supply inventory-related services designed to reduce its
customers' operating costs. Quality assurance, JIT delivery and component
kit production are examples of such services currently provided by the
Company to its customers. By supplying such services, the Company becomes
more integrated into the customers' internal manufacturing processes and is
better able to anticipate its customers' needs, which the Company believes
results in improved profitability and customer retention.
DELIVER SUPERIOR CUSTOMER SERVICE. OEMs and other fastener customers
choose fastener suppliers based, in significant part, on the quality of the
service supplied. The Company believes that its superior customer service
depends on its well-trained, technically competent workforce and that its
workforce provides an advantage over other fastener distributors. The
Company intends to review the training and operating practices at each
Founding Company to identify and adopt those "best practices" in
providing customer service that can be successfully implemented throughout
its operations. As part of its commitment to superior customer service, the
Company intends to have each of its operating companies certified under the
International Standards Organization ("ISO") standards for distribution
companies.
ACCELERATE INTERNAL SALES GROWTH. One of the primary goals of the
Company is to accelerate internal growth by both expanding the range of
products and services provided to existing customers and aggressively
pursuing new customers domestically and abroad. The Company believes it
will be able to expand sales to existing customers by capitalizing on (i)
the diverse products and the marketing expertise of the Founding Companies,
(ii) cross-selling opportunities across the Company's customer base, and
(iii) the additional financial resources that are expected to be available
after consummation of the Offering. The Company believes its broad
geographic coverage will present opportunities to capture additional
business from existing customers that operate on a national and
international basis. The Company intends to implement a company-wide
marketing program and to adopt the "best practices" used by the Founding
Companies to identify, obtain and maintain new customers.
EXPAND OPERATING MARGINS. The Company believes that the combination
of the Founding Companies will provide significant opportunities to
increase its profitability. The key components of this strategy are to
increase operating efficiencies and centralize appropriate administrative
functions. The Company intends to use its increased purchasing power to
improve contractual relationships and gain volume discounts from its
suppliers. The Company also intends to improve productivity through
4
<PAGE>
enhanced inventory management procedures, increased utilization of the
Company's laboratories and distribution facilities, and the consolidation
of information systems and employee benefits.
AGGRESSIVELY PURSUE ACQUISITIONS. The Company believes that the
fastener distribution industry is highly fragmented and in the early stages
of consolidation. The Company intends to pursue an aggressive acquisition
program targeting fastener distributors that will help the Company increase
its presence in markets it currently serves, sell to new markets, develop
new customer relationships with major OEMs, increase its presence in the
international markets and expand its range of products and services. The
Company believes there is a significant number of acquisition candidates
available and that it will be regarded as an attractive acquiror due to its
position as an industry leader, its ability to offer cash and/or
publicly-traded stock for acquisitions, and the potential for improved
growth and profitability as part of the Company.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the
Company............................ 3,773,585 shares
Common Stock to be outstanding after
the Offering(1).................... 13,323,585 shares
Use of proceeds...................... The net proceeds from the Offering will be used to
repay certain indebtedness, including the obligation
to pay the cash portion of the purchase price for the
Founding Companies. See "Use of Proceeds."
Proposed NYSE trading symbol......... JIT
</TABLE>
- ------------
(1) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding
Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii)
2,380,000 shares issued to McFarland, Grossman Capital Ventures, II, L.C.
("MGCV"), including 367,000 shares of Restricted Common Stock, and (iv)
3,773,585 shares to be sold in the Offering. Excludes (i) outstanding
options to purchase 370,000 shares at an exercise price equal to the initial
public offering price, (ii) options to purchase 600,000 shares at the
initial public offering price which are expected to be granted to employees
of the Founding Companies upon consummation of the Offering and (iii)
outstanding warrants to purchase 50,000 shares at an exercise price equal to
the lesser of $8.00 per share or 60% of the initial public offering price
granted to certain Company consultants. See "Management," "Certain
Transactions," and "Description of Capital Stock -- Common Stock and
Restricted Common Stock."
RISK FACTORS
Prospective investors should carefully consider all the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" for risks involved with an investment
in the shares.
5
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
Pentacon will acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offering. Pentacon has adopted a fiscal
year-end of September 30. For financial statement presentation purposes, Alatec
(one of the Founding Companies) has been identified as the "accounting
acquiror." Effective January 1, 1997, Alatec changed its fiscal year-end to
September 30 to conform with Pentacon's fiscal year-end. The following table
presents summary unaudited pro forma combined financial data for the Company, as
adjusted for (i) the effects of the Acquisitions, (ii) the effects of certain
pro forma adjustments to the historical financial statements described below and
(iii) the consummation of the Offering. See "Selected Financial Data," the
Unaudited Pro Forma Combined Financial Statements and the Notes thereto and the
historical Financial Statements of the Founding Companies and the Notes thereto
included elsewhere in this Prospectus.
NINE MONTHS ENDED
SEPTEMBER 30, 1997
PRO FORMA COMBINED(1)
---------------------
(DOLLARS IN THOUSANDS
EXCEPT FOR
PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues........................ $112,802
Cost of goods sold.............. 74,330
---------------------
Gross profit............... 38,472
Selling, general and
administrative expenses(2)..... 27,042
Goodwill amortization(3)........ 812
---------------------
Operating income........... 10,618
Interest and other income
(expense), net(4).............. (724)
---------------------
Income before income
taxes.................... 9,894
Income taxes.................... 4,397
---------------------
Net income................. $ 5,497
=====================
Net income per share............ $ 0.41
Shares used in computing pro
forma net income per
share(5)....................... 13,342,816
SEPTEMBER 30, 1997
---------------------------------------
PRO FORMA COMBINED(6) AS ADJUSTED(7)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash............................ $ 3,635 $ 3,635
Working capital................. 28,703 36,411
Total assets.................... 117,102 116,834
Total debt (including capital
lease obligations)(8)......... 55,322 11,931
Stockholders' equity............ 38,075 81,198
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
- ------------
(1) The pro forma combined income statement data assumes that the Acquisitions
and Offering were closed on January 1, 1997 (except for Capitol, whose
historical results for nine months from December 1, 1996 to August 31, 1997
were used for pro forma information), and are not necessarily indicative of
the results the Company would have obtained had these events actually then
occurred or of the Company's future results. During the periods presented
above, the Founding Companies were not under common control or management
and, therefore, the data presented may not be comparable to or indicative of
post-combination results to be achieved by the Company. The pro forma
combined income statement data are based on available information and
certain assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. Neither the potential cost savings from
consolidating certain operational and administrative functions nor the costs
of corporate overhead, other than salaries of executive officers, have been
included in the pro forma combined financial information.
(2) The pro forma combined income statement data reflects an aggregate of
approximately $2,146,000 in pro forma reductions in salary and benefits of
the owners of the Founding Companies to which they have agreed
prospectively, and $450,000 in pro forma increases in salary and benefits to
the corporate management and $119,000 of expense reductions for the effect
of revisions of certain lease agreements between certain stockholders of the
Founding Companies and those Founding Companies. See "Certain
Transactions."
(3) Reflects amortization of the goodwill for the nine month period to be
recorded as a result of the Acquisitions over a 40-year period and computed
on the basis described in the Notes to the Unaudited Pro Forma Combined
Financial Statements.
(4) Includes interest income (expense) and other income (expense); net pro forma
interest expense reflects a reduction in interest of $1,073,915 related to
repayment of indebtedness with the proceeds from the Offering. See "Use of
Proceeds."
(5) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding
Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii)
2,380,000 shares issued to MGCV, (iv) 3,773,585 shares to be sold in the
Offering, (v) the dilutive effect of warrants to purchase 50,000 shares at
an exercise price equal to the lesser of $8.00 or 60% of the initial public
offering price per share using the treasury stock method and assuming an
initial public offering price of $ per share. Subsequent to September 30,
1997 (i) options to purchase 370,000 shares at the initial public offering
price were issued and are currently outstanding and (ii) options to purchase
600,000 shares at the initial public offering price are expected to be
granted to the Company's employees upon consummation of the Offering.
(6) The pro forma combined balance sheet data assume that the Acquisitions were
closed on September 30, 1997. The pro forma combined balance sheet data is
based upon available information and certain assumptions that management
deems appropriate and should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(7) Reflects the closing of the Offering at an assumed price of $ per
share and the Company's application of the net proceeds therefrom to fund
the cash portion of the purchase price of the Acquisitions and to repay
indebtedness of the Founding Companies. See "Use of Proceeds" and
"Certain Transactions."
(8) Includes $28,662,387 for the obligation to pay the cash portion of the
purchase price for the Founding Companies.
7
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY AND COMBINED FINANCIAL DATA
The following table presents summary historical financial data for the
Founding Companies and Pentacon and Summary Pro Forma Combined Financial Data
for the stated periods. The historical income from operations has not been
adjusted for the anticipated increased costs associated with the Company's new
corporate management and with being a public company or take into account the
increase in income attributable to the compensation differential, the rent
differential, and potential cost savings from consolidating certain operational
or administrative functions. The summary unaudited pro forma combined financial
data for the Company in the table below is adjusted for (i) the effects of the
Acquisitions, (ii) the effects of certain pro forma adjustments to the
historical financial statements described below and (iii) the consummation of
the Offering. The Company has adopted a fiscal year-end of September 30. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction."
YEAR ENDED DECEMBER
31,
---------------------- NINE MONTHS ENDED
1995 1996 SEPTEMBER 30, 1997
(IN THOUSANDS)
ALATEC:
Net sales.................... $ 41,204 $ 44,726 $ 42,296
Gross profit................. 15,008 18,019 17,182
Operating income............. 3,723 5,201 5,518
AXS:
Net sales.................... $ 20,228 $ 23,177 $ 22,002
Gross profit................. 7,234 8,124 6,726
Operating income............. 2,524 2,477 1,747
CAPITOL(1):
Net sales.................... $ 9,769 $ 10,234 $ 9,043
Gross profit................. 2,882 3,135 2,717
Operating income............. 233 167 247
MAUMEE:
Net sales.................... $ 20,582 $ 26,235 $ 27,473
Gross profit................. 4,482 6,522 7,916
Operating income (loss)...... (144) 1,245 1,287
SSL:
Net sales.................... $ 12,274 $ 15,663 $ 11,988
Gross profit................. 4,238 5,168 3,931
Operating income............. 512 569 834
PENTACON:
Net sales.................... $ -- $ -- $ --
Gross profit................. -- -- --
Operating loss............... -- -- (18)
HISTORICAL COMBINED:
Net sales.................... $ 104,057 $ 120,035 $112,802
Gross profit................. 33,844 40,968 38,472
Operating income(2).......... 6,848 9,659 9,615
PRO FORMA COMBINED(3):
Net sales............................................ $112,802
Gross profit......................................... 38,472
Operating income(4).................................. 10,618
(FOOTNOTES ON FOLLOWING PAGE)
8
<PAGE>
- ------------
(1) The financial data presented on a historical basis for Capitol are based on
the years ended October 31, 1995 and 1996 and the nine months ended August
31, 1997.
(2) The combined results of operations for the periods do not purport to present
those of the combined Founding Companies and Pentacon in accordance with
generally accepted accounting principles, but represent merely a summation
of the net sales, gross profit, and operating income of the individual
Founding Companies and Pentacon on a historical basis and exclude the
effects of pro forma adjustments.
(3) The pro forma combined income statement data assumes that the Acquisitions
and Offering were closed on January 1, 1997 (except for Capitol, whose
historical results for nine months from December 1, 1996 to August 31, 1997
were used for pro forma information), and are not necessarily indicative of
the results the Company would have obtained had these events actually then
occurred or of the Company's future results. During the periods presented
above, the Founding Companies were not under common control or management
and, therefore, the data presented may not be comparable to or indicative of
post-combination results to be achieved by the Company. The pro forma
combined income statement data are based on available information and
certain assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. Neither the potential cost savings from
consolidating certain operational and administrative functions nor the costs
of corporate overhead, other than salaries of executive officers, have been
included in the pro forma combined financial information.
(4) Pro forma combined operating income reflects (i) $2,146,000 in pro forma
reductions in salary and benefits to the owners of the Founding Companies;
(ii) $450,000 increases in salary and benefits to corporate management;
(iii) $119,000 of expense reductions for the effect of revisions of certain
lease agreements between certain stockholders of the Founding Companies and
those Founding Companies; and (iv) a charge of approximately $812,000
related to amortization of goodwill over a 40-year period for the nine
months to be recorded as a result of the Acquisitions.
9
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE
PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. INFORMATION CONTAINED IN
THIS PROSPECTUS IS BASED ON BELIEFS OF, AND INFORMATION CURRENTLY AVAILABLE TO,
THE COMPANY'S MANAGEMENT AS WELL AS ESTIMATES AND ASSUMPTIONS MADE BY THE
COMPANY'S MANAGEMENT, AND MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM
ACT"). WHEN USED IN THIS PROSPECTUS, WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, AS THEY
RELATE TO THE COMPANY OR THE COMPANY'S MANAGEMENT, IDENTIFY FORWARD-LOOKING
STATEMENTS. THE FOLLOWING MATTERS AND CERTAIN OTHER FACTORS NOTED THROUGHOUT
THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS
WITH RESPECT TO ANY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
SUCH FORWARD-LOOKING STATEMENTS.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING COMPANIES
Pentacon was founded in 1997 but has conducted no operations other than in
connection with the Offering and the Acquisitions. Pentacon has not generated
any sales to date. The Founding Companies have been operating as separate
independent entities, and there can be no assurance that the Company will be
able to integrate the operations of these businesses successfully or to
institute the necessary systems and procedures, including accounting and
financial reporting systems, to manage the combined enterprise on a profitable
basis. The Company's senior management group has only limited experience working
together and there can be no assurance that the management group will be able to
manage the combined entity or to implement effectively the Company's acquisition
and internal growth operating strategies. The pro forma combined historical
financial results of the Founding Companies cover periods when the Founding
Companies and Pentacon were not under common control or management and may not
be indicative of the Company's future financial or operating results. Among the
issues to be considered in combining the Founding Companies are the different
objectives of, and accounting methodologies used by, private as opposed to
public companies, such as the level of scrutiny imposed by management on
business deductions such as salaries and benefits. The inability of the Company
to integrate the Founding Companies successfully would have a material adverse
effect on the Company's business, financial condition and results of operations
and would make it unlikely that the Company's acquisition program will be
successful. See "Business -- Strategy" and "Management."
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company's strategy for growth significantly relies on the acquisition
of additional fastener distributors. The Company expects to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
and may lead to higher acquisition prices. There can be no assurance that the
Company will be able to identify, acquire or profitably manage additional
businesses or to integrate successfully any acquired businesses into the Company
without substantial costs, delays or other operational or financial
difficulties. Further, acquisitions (including the acquisition of the Founding
Companies) involve a number of special risks, including failure of the acquired
business to achieve expected results, diversion of management's attention,
failure to retain key personnel and customers of the acquired business and risks
associated with unanticipated conditions, events or liabilities, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
the Founding Companies or other businesses acquired in the future will achieve
anticipated net sales and earnings. See "Business -- Strategy."
CAPITAL REQUIREMENTS
The Company's acquisition strategy will require substantial capital. The
Company currently intends to finance future acquisitions by using shares of its
Common Stock for all or a portion of the consideration to be paid. If the Common
Stock does not maintain a sufficient market value, or if potential acquisition
10
<PAGE>
candidates are otherwise unwilling to accept Common Stock as part of the
consideration for the sale of their businesses, the Company may be required to
utilize more of its cash resources, if available, in order to initiate and
maintain its acquisition program. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. The Company intends to obtain a
commitment for a bank line of credit of approximately $45 million for working
capital and acquisitions contingent upon consummation of the Offering. However,
there can be no assurance that the Company will be able to obtain any additional
financing it may need for acquisitions on terms that the Company deems
acceptable. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Combined Liquidity and
Capital Resources."
RISKS RELATED TO INTERNAL GROWTH AND OPERATING STRATEGIES
Although the Company intends to seek to improve the profitability of the
Founding Companies and any subsequently acquired businesses by various means,
including realizing overhead and purchasing efficiencies and centralizing
certain administrative functions, there can be no assurances that the Company
will be able to do so. The Company's ability to increase the profitability of
the Founding Companies and any subsequently acquired businesses will be affected
by various factors, including demand for fasteners, the Company's ability to
expand the range of products and services offered by each Founding Company and
by any subsequently acquired businesses and the Company's ability to
successfully enter new markets. Many of these factors are beyond the control of
the Company, and there can be no assurance that the Company's strategies will be
successful or that it will be able to generate cash flow adequate to support its
operations and internal growth. A key component of the Company's strategy is to
operate the Founding Companies and subsequently acquired businesses on a
decentralized basis, with local management retaining responsibility for
day-to-day operations, profitability and the growth of the business. If proper
overall business controls are not implemented or if management of the Founding
Companies and subsequently acquired businesses are not successful in adopting an
integrated operating approach, this decentralized operating strategy could
result in inconsistent operating and financial practices at the Founding
Companies and subsequently acquired businesses and the Company's overall
profitability could be adversely affected. See "Business -- Strategy."
RELIANCE ON PRINCIPAL CUSTOMERS
A significant portion of the Company's revenue has historically been
generated by a limited number of customers, although not necessarily the same
customers from year to year. For the nine months ended September 30, 1997, the
Company's ten largest customers collectively accounted for approximately 45% of
the Company's net sales. The loss of a significant customer for any reason,
including reduced production by a customer or competitive factors, could result
in a substantial loss of revenue and could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Customers."
INTEGRATION OF COMPUTER SYSTEMS AND RELIANCE ON COMPUTER SYSTEMS
The Company's success will be dependent in part on the Company's ability to
coordinate and integrate the management and information systems ("MIS
systems") of the Founding Companies that are used for ordering products,
recording and analyzing financial results, controlling inventory and performing
other important functions. There can be no assurance that the Company will be
able to coordinate and integrate the MIS systems economically and it may
experience delays, disruptions and unanticipated expenses in doing so. Any such
event could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company will not be able to fully
achieve certain contemplated operating efficiencies and competitive advantages
until it has fully coordinated and integrated the MIS systems. Until the Company
establishes coordinated and integrated MIS systems, which may not occur for
several years, it will rely primarily on the separate systems of the Founding
Companies. After the MIS systems are integrated, the Company will rely heavily
on them in its daily operations. Consequently, any interruption in the operation
of the MIS systems may have a material adverse effect on the Company's business,
financial condition and results of operations.
11
<PAGE>
RELIANCE ON INDUSTRIES SUBJECT TO FLUCTUATING DEMAND
Certain of the Company's products are sold to customers in industries that
experience significant fluctuations in demand based on economic conditions,
energy prices, consumer demand and other factors beyond the control of the
Company. No assurance can be given that the Company will be able to increase or
maintain its level of sales in periods of economic stagnation or downturn.
RELIANCE ON KEY PERSONNEL
The Company will be highly dependent on the continuing efforts of its
executive officers and, due in part to the Company's decentralized operating
strategy, the senior management of the Founding Companies. In addition, the
Company is likely to depend on the senior management of any significant business
it acquires in the future. The Company's business, financial condition and
results of operations could be affected adversely if any of these persons do not
continue in his or her management role until the Company is able to attract and
retain qualified replacements. See "Management."
FLUCTUATIONS IN OPERATING RESULTS
The Company's results of operations may fluctuate significantly from
quarter to quarter or year to year because of a number of factors, including the
timing of future acquisitions, fluctuations in the demand for its distribution
services and competitive factors. Accordingly, quarterly comparisons of the
Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of results to be expected for a full year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Company is engaged in a highly fragmented and competitive industry.
Competition is based primarily on service, quality and geographic proximity. The
Company competes with a large number of fastener distributors on a regional and
local basis, some of which may have greater financial resources than the Company
and some of which are public companies or divisions of public companies. The
Company may also face competition for acquisition candidates from these
companies, some of whom have acquired fastener distribution businesses during
the past decade. Other smaller fastener distributors may also seek acquisitions
from time to time. See "Business -- Competition."
DEPENDENCE ON SUPPLIERS
Certain types of specialized fasteners are available from only a limited
number of sources. If for any reason those sources became unavailable to the
Company, the Company would not be able to continue to sell such fasteners unless
an alternative supplier was located. The inability to supply certain types of
fasteners may adversely impact the Company's sales and its relationship with the
customers requiring such fasteners.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION
The Company's operations are subject to a number of federal, state and
local regulations relating to the protection of the environment and to workplace
health and safety. In addition, the Fastener Quality Act may impose additional
tracking, marking and testing requirements on the Company that could result in
operating costs that could adversely affect the Company's business, financial
condition and results of operations. See "Business -- Government Regulation."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Following the consummation of the Acquisitions and the Offering, the
Company's executive officers and directors, former stockholders of the Founding
Companies and entities affiliated with them will beneficially own approximately
71.7% of the outstanding shares of Common Stock (68.8% if the Underwriters'
over-allotment option is exercised in full). These holders of Common Stock, if
acting in concert,
12
<PAGE>
will be able to exercise control over the Company's affairs, to elect the entire
Board of Directors and to control the outcome of any matter submitted to a vote
of stockholders. See "Principal Stockholders."
SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES OF FOUNDING COMPANIES
Of the net proceeds of the Offering, $28.7 million will be paid as the cash
portion of the purchase price for the Founding Companies. Certain of the
Founding Companies have incurred indebtedness which has been personally
guaranteed by their stockholders or by entities controlled by their
stockholders. Some of the recipients of these funds will become directors of the
Company or holders of more than 5% of the Common Stock. See "Principal
Stockholders." At September 30, 1997, the aggregate amount of indebtedness of
these Founding Companies that was subject to personal guarantees was
approximately $19.5 million. After September 30, 1997, the Founding Companies
may borrow up to an aggregate of $1.5 million to fund distributions to
shareholders of the Founding Companies that are S-corporations to enable certain
shareholders to make S-corporation income tax payments for 1997 and through the
date of the Acquisitions (the
"S-Corporation Tax Payment Distributions"). The Company intends to use the net
proceeds from the Offering, together with borrowings available from the
Company's revolving credit facility, to repay substantially all of the
indebtedness of the Founding Companies. Additionally, MGCV has agreed to advance
to Pentacon, until the consummation of the Acquisitions and the Offering, such
funds as are necessary to effect the Acquisitions and the Offering and will be
reimbursed from the proceeds of the Offering in respect of such expenses. As of
September 30, 1997, MGCV had advanced the Company $0.3 million for such
expenses. See "Use of Proceeds" and "Certain Transactions."
NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Therefore, the initial public offering price for the Common Stock will be
determined by negotiation between the Company and the Representatives of the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after the Offering. See "Underwriting" for the factors to be
considered in determining the initial public offering price. The Company intends
to apply for listing of the Common Stock on the New York Stock Exchange.
However, there can be no assurance that an active trading market will develop
subsequent to the Offering or, if developed, that it will be sustained.
VOLATILITY OF MARKET PRICE
After completion of the Offering, the market price of the Common Stock
could be subject to significant fluctuations due to variations in responses to
numerous factors, including the timing of any acquisitions by the Company,
variations in the Company's annual or quarterly financial results or those of
its competitors, changes by financial research analysts in their estimates of
the future earnings of the Company, conditions in the economy in general or in
the Company's industry in particular, unfavorable publicity or changes in
applicable laws and regulations (or judicial or administrative interpretations
thereof) affecting the Company or the fastener industry. In addition, the
securities markets have experienced significant price and volume fluctuations
from time to time in recent years. This volatility has had a significant effect
on the market prices of securities issued by many companies for reasons
unrelated to their operating performance, and these broad fluctuations may
adversely affect the market price of the Common Stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Upon consummation of the Acquisitions and the Offering, 13,323,585 shares
of Common Stock will be outstanding. The 3,773,585 shares sold in the Offering
(other than shares that may be purchased by affiliates of the Company) will be
freely tradable. The remaining outstanding shares may be resold publicly only
following their registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption from registration
(such as provided by Rule 144 following a one year holding period for previously
unregistered shares). The holders of these remaining shares have agreed with the
Company that they will not sell, transfer or otherwise dispose of any of their
shares, for one year following the consummation of the Offering. Sales, or the
availability for sale, of substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
13
<PAGE>
the Company to raise equity capital and complete any additional acquisitions for
Common Stock. See "Shares Eligible for Future Sale."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Pentacon's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, one or more series of preferred stock having such
preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as the Board of Directors may determine. The
issuance of this "blank-check" preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. In addition, the Certificate of
Incorporation provides for a classified Board of Directors, which may also have
the effect of inhibiting or delaying a change in control of the Company. Certain
provisions of the Delaware General Corporation Law may also discourage takeover
attempts that have not been approved by the Board of Directors. See
"Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their stock of $ per
share, assuming an initial public offering price of $ , and may experience
further dilution in that value from issuances of Common Stock in connection with
future acquisitions. See "Dilution."
14
<PAGE>
THE COMPANY
Pentacon was founded in March 1997 to become the leading domestic and
international value-added distributor of fasteners and other small parts to
OEMs, to provide inventory procurement and management services and to
aggressively pursue the consolidation of the highly-fragmented fastener
distribution industry. Pentacon has entered into agreements to acquire the
Founding Companies simultaneously with, and as a condition to, the consummation
of the Offering. The Founding Companies, which have been in business an average
of 25 years, had combined net sales of $120.0 million in 1996 and $112.8 million
for the nine months ended September 30, 1997, and serve in excess of 2,600
customers. For a description of the transactions pursuant to which these
businesses will be acquired, see "Certain Transactions -- Organization of the
Company." The following is a brief description of the Founding Companies:
ALATEC PRODUCTS, INC. -- Alatec Products, Inc. ("Alatec"), headquartered
in Chatsworth, California, was founded in 1972 by Fred List. Alatec operates
through eight distribution facilities and sales offices located throughout the
United States. Alatec principally serves commercial aviation, defense
electronics, and other high-technology industries. Alatec had 1996 net sales of
$44.7 million, net sales of $42.3 million for the nine months ended September
30, 1997, and, as of September 30, 1997, employed 211 people. Donald B. List,
the President of Alatec, has been employed by Alatec for 20 years, will sign a
five-year employment agreement with Alatec to continue to serve as President of
Alatec following consummation of the Offering and will become a director of the
Company.
AXS SOLUTIONS, INC. -- AXS Solutions, Inc. ("AXS") is headquartered in
Erie, Pennsylvania. AXS was formed upon the merger of Hoyt Fastener, Corp.
("Hoyt"), an Illinois corporation, and Champion Bolt Corp. ("Champion"), a
Pennsylvania corporation, in 1996. Hoyt was founded in 1964 and Champion was
founded in 1968. AXS operates through two distribution facilities and sales
offices located in Pennsylvania and Illinois. AXS' principal customers are in
the power generation, locomotive, gas and steam turbine, and small motor
industries. AXS had 1996 net sales of $23.2 million, net sales of $22.0 million
for the nine months ended September 30, 1997, and, as of September 30, 1997,
employed 70 people. The principal officers of AXS are Jack L. Fatica, the Chief
Executive Officer of AXS, who has been employed by AXS for 32 years, Jeffrey P.
Fatica, the President of the Champion division of AXS, who has been employed by
AXS for 21 years, and Robert M. Hoyt, the President of the Hoyt division of AXS,
who has been employed by AXS for 9 years. Each of these individuals will sign a
five-year employment agreement with AXS to continue in his current position.
Following the consummation of the Offering, Jack L. Fatica will also become the
President and Chief Operating Officer and a director of the Company.
CAPITOL BOLT & SUPPLY, INC. -- Capitol Bolt & Supply, Inc. ("Capitol"),
headquartered in Austin, Texas, was founded in 1966 by Earl and Mary E. McClure.
Capitol operates through eight distribution facilities and sales offices located
in the Midwest and the South. Capitol principally serves the metals,
refrigeration, electronics and construction industries. Capitol had 1996 net
sales of $10.2 million, net sales of $9.0 million for the nine months ended
August 31, 1997, and, as of September 30, 1997, employed 50 people directly and
indirectly. Ms. McClure, the President of Capitol, has been employed by Capitol
for 31 years, will sign a five-year employment agreement with Capitol to
continue to serve as President of Capitol following consummation of the Offering
and will become a director of the Company.
MAUMEE INDUSTRIES, INC. -- Maumee Industries, Inc. ("Maumee"),
headquartered in Fort Wayne, Indiana, was founded in 1979 by Michael Black.
Maumee operates through four distribution facilities located primarily in the
Midwest. Maumee principally serves the automotive, recreational vehicle, heavy
duty truck and toy industries. Maumee had 1996 net sales of $26.2 million, net
sales of $27.5 million for the nine months ended September 30, 1997, and, as of
September 30, 1997, employed 141 people. The principal officers of Maumee are
Mr. Black, the President of Maumee, who has been employed by Maumee for 18
years, and Michael W. Peters, the Chief Executive Officer of Maumee, who has
been employed by Maumee for 11 years. Mr. Peters will sign a five-year
employment agreement with Maumee to continue to serve in his current position.
The Company anticipates Mr. Black will sign an Advisory Agreement with Pentacon
to provide advisory services to Pentacon. Following the consummation of the
Offering, Mr. Peters will become a director of the Company.
15
<PAGE>
SALES SYSTEMS, LIMITED -- Sales Systems, Limited ("SSL"), headquartered
in Allentown, Pennsylvania, was founded in 1979 and prior to consummation of the
Offering, will be owned principally by Benjamin E. Spence, Jr. and Richard
Knorr. SSL operates through two distribution facilities and sales offices in
Pennsylvania and South Carolina. SSL principally serves the motor vehicles,
furniture and equipment, general service machinery and transport equipment
industries. SSL had 1996 net sales of $15.7 million, net sales of $12.0 million
for the nine months ended September 30, 1997, and, as of September 30, 1997,
employed 44 people directly and indirectly. The principal officers of SSL are
Mr. Spence, the President of SSL, who has been employed by SSL for 18 years, and
Richard Knorr, the Vice President of SSL, who has been employed by SSL for 16
years. Each of these individuals will sign a five-year employment agreement with
SSL to continue to serve in their current positions. Following the consummation
of the Offering, Mr. Spence will become a director of the Company.
Pentacon's executive offices are located at 9821 Katy Freeway, Suite 500,
Houston, Texas 77024, and its telephone number is (800) 315-6979.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company) are estimated to be
approximately $43.1 million (approximately $50.0 million if the Underwriters
exercise their over-allotment option in full).
Of the net proceeds, the Company estimates that approximately $28.7 million
will be used to pay the cash portion of the purchase price for the Founding
Companies, all of which will be paid to the stockholders of the Founding
Companies. In addition, approximately $14.4 million of the net proceeds will be
used to repay outstanding indebtedness of the Founding Companies at the closing
of the Offering. Of that $14.4 million, (i) approximately $5.5 million is owed
by Maumee to a financial institution, bears interest at 1.5% over the bank's
base rate or 10% at September 30, 1997 and matures May 31, 2000 and (ii)
approximately $6.5 million of the $9.5 million currently outstanding under a
line of credit provided to Alatec by a financial institution, bears interest at
the prime rate or 8.5% at September 30, 1997 and matures in June 1999. The
remaining indebtedness of $2.4 million to be repaid from the proceeds of the
Offering consists of various notes payable which bear interest ranging from 6.2%
to 9.3% and mature at various dates through January 2002. See "Certain
Transactions."
DIVIDEND POLICY
The Company intends to retain all its earnings, if any, to finance the
expansion of its business, and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. Any future dividends will be at the
discretion of the Board of Directors after taking into account various factors,
including, among others, the Company's financial condition, results of
operations, cash flows from operations, current and anticipated cash needs and
expansion plans, the income tax laws then in effect and the requirements of
Delaware law. In addition, the credit facility may restrict or prohibit the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Results of
Operations -- Combined -- Combined Liquidity and Capital Resources."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization at September 30, 1997 (i)
of the Company on a pro forma combined basis to give effect to the Acquisitions
and (ii) of the Company, as adjusted, to give effect to both the Acquisitions
and the Offering and the application of the estimated net proceeds therefrom.
See "Use of Proceeds." This table should be read in conjunction with the
Unaudited Pro Forma Combined Financial Statements of the Company and the Notes
thereto included elsewhere in this Prospectus.
SEPTEMBER 30, 1997
------------------------------
PRO FORMA(1) AS ADJUSTED
-------------- ------------
(IN THOUSANDS)
Cash................................. $ 3,635 $ 3,635
============== ============
Current maturities of long-term
obligations, notes payable, and
capital lease obligations.......... $ 10,985 $ 3,277
Long-term obligations, less current
maturities(2)...................... 44,338 8,655
Stockholders' equity:
Preferred Stock: $0.01 par
value, 10,000,000 shares
authorized; no shares issued
and outstanding -- --
Common Stock: $0.01 par value,
51,000,000 shares authorized;
9,550,000 shares issued and
outstanding, pro forma; and
13,323,585 shares issued and
outstanding, as adjusted(3)... 96 133
Additional paid-in capital........... 28,355 71,441
Retained earnings.................... 9,624 9,624
-------------- ------------
Total stockholders' equity...... 38,075 81,198
-------------- ------------
Total capitalization....... $ 93,398 $ 93,130
============== ============
- ------------
(1) Combines the respective accounts of Pentacon and the Founding Companies as
reflected in the pro forma combined balance sheet as of September 30, 1997
except for Capitol which is combined using the balance sheet as of August
31, 1997.
(2) Includes $28,662,387 for the obligation to pay the cash portion of the
purchase price for the Founding Companies.
(3) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding
Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii)
2,380,000 shares issued to McFarland, Grossman Capital Ventures, II, L.C.
("MGCV"), including 367,000 shares of Restricted Common Stock, and (iv)
3,773,585 shares to be sold in the Offering. Excludes (i) outstanding
options to purchase 370,000 shares at an exercise price equal to the initial
public offering price, (ii) options to purchase 600,000 shares at the
initial public offering price which are expected to be granted to employees
of the Founding Companies upon consummation of the Offering and (iii)
outstanding warrants to purchase 50,000 shares at an exercise price equal to
the lesser of $8.00 per share or 60% of the initial public offering price
granted to certain Company consultants. See "Management," "Certain
Transactions," and "Description of Capital Stock -- Common Stock and
Restricted Common Stock."
18
<PAGE>
DILUTION
The deficit in pro forma net tangible book value of the Company at
September 30, 1997 was approximately $8.7 million or $0.92 per share after
giving effect to the Acquisitions but before the Offering. Pro forma net
tangible book value per share is the adjusted tangible net worth (total tangible
assets less total liabilities) of the Company divided by the number of shares of
Common Stock outstanding after giving effect to the Acquisitions. Net tangible
book value dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in the Offering and the pro
forma net tangible book value per share after the Offering. After giving effect
to the sale of the shares of Common Stock offered hereby (at an assumed price of
$ per share and after deducting underwriting discounts and commissions and
estimated offering expenses), the pro forma net tangible book value of the
Company at September 30, 1997 would have been $ million or per share,
representing an immediate increase in net tangible book value of $3.50 per share
to existing stockholders and an immediate dilution of $ per share to the
investors purchasing the shares in the Offering ("New Investors"). The
following table illustrates this dilution to New Investors:
Assumed initial public offering price
per share..........................
---------
Pro forma deficit in net
tangible book value per share
at September 30, 1997.......... $ (0.92)
Increase in net tangible book
value per share attributable to
New Investors.................. 3.50
---------
Pro forma net tangible book value per
share after the Offering........... 2.58
---------
Dilution per share to New
Investors..........................
=========
The following table sets forth as of the date of this Prospectus the number
of shares of Common Stock purchased from the Company, the total consideration to
the Company and the average price per share paid by existing stockholders (after
giving effect to the Acquisitions) and by the New Investors:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SHARES PURCHASED TOTAL CONSIDERATION(1)
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
Existing stockholders (including
owners of Founding Companies)...... 9,550,000 71.7% $(7,939,000) $ (0.83)
New Investors........................ 3,773,585 28.3
---------- ------- ----------- ------- -------------
Total........................... 13,323,585 100.0% $ 100.0% $
========== ======= =========== ======= =============
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies and Pentacon before the
Offering of approximately $20.8 million, adjusted to reflect the payment of
approximately $28.7 million in cash to the stockholders of the Founding
Companies as part of the consideration for the Acquisitions. See "Certain
Transactions."
19
<PAGE>
SELECTED FINANCIAL DATA
Pentacon will acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offering. Pentacon has adopted a fiscal
year ended September 30. For financial statement presentation purposes, Alatec
has been identified as the "accounting acquiror." Effective January 1, 1997,
Alatec changed its fiscal year to September 30. The following selected
historical financial data for Alatec as of and for the years ended December 31,
1995 and 1996 and the nine month period ended September 30, 1997 have been
derived from audited financial statements of Alatec included elsewhere in this
Prospectus. The selected historical financial data as of, and for the years
ended December 31, 1993 and 1994, have been derived from unaudited financial
statements of Alatec, which have been prepared on the same basis as the audited
financial statements and, in the opinion of Alatec, reflect all adjustments
consisting of normal recurring adjustments, necessary for a fair presentation of
such data. The following summary unaudited pro forma combined financial data
presents certain data for the Company, adjusted for (i) the Acquisitions, (ii)
the effects of certain pro forma adjustments to the historical financial
statements and (iii) the consummation of the Offering and the application of the
net proceeds therefrom. See the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THE COMPANY
-------------
PRO FORMA
ALATEC COMBINED
---------------------------------------------------------- -------------
NINE MONTHS NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------------------ SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1996 1997 1997(1)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 30,935 $ 33,700 $ 41,204 $ 44,726 $42,296 $112,802
Cost of goods sold.............. 20,004 21,926 26,196 26,707 25,114 74,330
--------- --------- --------- --------- ------------- -------------
Gross profit............... 10,931 11,774 15,008 18,019 17,182 38,472
Selling, general and
administrative expenses(2).... 9,795 10,238 11,285 12,818 11,664 27,042
Goodwill amortization(3)........ -- -- -- -- -- 812
--------- --------- --------- --------- ------------- -------------
Operating income........... 1,136 1,536 3,723 5,201 5,518 10,618
Interest and other income
(expense), net(4)............. (885) (699) (1,304) (1,062) (989) (724)
--------- --------- --------- --------- ------------- -------------
Income before income
taxes................... 251 837 2,419 4,139 4,529 9,894
Income taxes.................... 97 384 995 1,628 1,860 4,397
--------- --------- --------- --------- ------------- -------------
Net income................. $ 154 $ 453 $ 1,424 $ 2,511 $ 2,669 $ 5,497
========= ========= ========= ========= ============= =============
Net income per share........................................................ $ 0.41
Shares used in computing pro forma net income per share(5).................. 13,342,816
ALATEC
--------------------------------------------------------- THE COMPANY
AS OF DECEMBER 31, AS OF -------------------------
------------------------------------------ SEPTEMBER 30, PRO FORMA AS
1993 1994 1995 1996 1997 COMBINED(6) ADJUSTED(7)
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash............................ $ 95 $ 237 $ 117 $ 256 $ 733 $ 3,635 $ 3,635
Working capital................. 3,611 3,835 13,308 17,130 20,155 28,703 36,411
Total assets.................... 15,255 19,902 23,226 28,519 34,911 117,102 116,834
Total debt (including capital
lease obligations)............ 7,403 9,671 10,698 11,588 14,050 55,322(8) 11,931
Stockholders' equity............ 3,662 3,695 5,119 7,630 8,384 38,075 81,198
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
20
<PAGE>
- ------------
(1) The pro forma combined income statement data assumes that the Acquisitions
and Offering were closed on January 1, 1997, (except for Capitol, whose
historical results for nine months from December 1, 1996 to August 31, 1997
were used for pro forma information), and are not necessarily indicative of
the results the Company would have obtained had these events actually then
occurred or of the Company's future results. During the periods presented
above, the Founding Companies were not under common control or management
and, therefore, the data presented may not be comparable to or indicative of
post-combination results to be achieved by the Company. The pro forma
combined income statement data are based on available information and
certain assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus. Neither the potential cost savings from
consolidating certain operational and administrative functions nor the costs
of corporate overhead, other than salaries of executive officers, have been
included in the pro forma combined financial information.
(2) The pro forma combined income statement data reflects an aggregate of
approximately $2,146,000 in pro forma reductions in salary and benefits of
the owners of the Founding Companies to which they have agreed
prospectively, and $450,000 in pro forma increases in salary and benefits to
the corporate management and $119,000 of expense reductions for the effect
of revisions of certain lease agreements between certain stockholders of the
Founding Companies and those Founding Companies. See "Certain
Transactions."
(3) Reflects amortization of the goodwill for the nine month period to be
recorded as a result of the Acquisitions over a 40-year period and computed
on the basis described in the Notes to the Unaudited Pro Forma Combined
Financial Statements.
(4) Includes interest income (expense) and other income (expense); net pro forma
interest expense reflects a reduction in interest of $1,073,915 related to
repayment of indebtedness with the proceeds from the Offering. See "Use of
Proceeds."
(5) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding
Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii)
2,380,000 shares issued to MGCV, (iv) 3,773,585 shares to be sold in the
Offering, (v) the dilutive effects of warrants to purchase 50,000 shares at
an exercise price equal to the lesser of $8.00 or 60% of the initial public
offering price per share using the treasury stock method and assuming an
initial public offering price of $ per share. Subsequent to September 30,
1997 (i) options to purchase 370,000 shares at the initial public offering
price were issued and are currently outstanding and (ii) options to purchase
600,000 shares at the initial public offering price are expected to be
granted to the Company's employees upon consummation of the Offering.
(6) The pro forma combined balance sheet data assumes that the Acquisitions were
closed on September 30, 1997. The pro forma combined balance sheet data is
based upon available information and certain assumptions that management
deems appropriate and should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(7) Reflects the closing of the Offering at an assumed price of $ per
share and the Company's application of the net proceeds therefrom to fund
the cash portion of the purchase price of the Acquisitions and to repay
indebtedness of the Founding Companies. See "Use of Proceeds" and
"Certain Transactions."
(8) Includes $28,662,387 for the obligation to pay the cash portion of the
purchase price for the Founding Companies.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements and related notes thereto and "Selected
Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are derived from the sale of fasteners and other
small parts with associated inventory management services. Net sales are
recognized upon shipment of the product to the customer.
Cost of goods and services consists primarily of materials, cost of
products sold, costs for product processing and modification, freight and
obsolescence. Selling, general and administrative expenses consist primarily of
compensation and related benefits, advertising, facility rent and utilities,
communications and professional fees. Certain owners and certain key employees
of the Founding Companies have agreed to reductions totaling $2.1 million in
their compensation and related benefits in connection with their acquisition by
the Company on a pro forma basis for the nine months ended September 30, 1997.
Such reductions in salaries, bonuses and benefits are in accordance with the
terms of employment agreements. Certain facility leases have also been
renegotiated and the lessors have agreed to reductions totaling approximately
$119,000 on a pro forma basis for the nine months ended September 30, 1997. Both
adjustments have been reflected as a pro forma adjustment in the Unaudited Pro
Forma Combined Statement of Operations but have not been reflected in the
Historical Combined Statement of Operations.
The Company anticipates that following the Acquisitions it will realize
savings from (i) greater volume discounts from suppliers, and (ii) consolidation
of insurance programs and other general and administrative expenses. However,
there will be costs related to the Company's new corporate management, costs
associated with being a public company and integration costs. None of these
savings or incremental costs are reflected in the Pro Forma or Historical
Combined Statement of Operations.
Subsequent to September 30, 1997 the Company recorded a non-recurring
non-cash compensation charge of $4.7 million relating to certain shares of
Common Stock sold to management, based on the difference between an estimated
initial public offering price with a twenty percent marketability discount and
the amount paid for the shares. In addition, upon completion of the Offering, a
non-recurring non-cash charge of approximately $24.8 million based on an
estimated initial offering price to the public with a twenty percent
marketability discount will be recorded to reflect Offering expenses related to
the 2,380,000 shares of Common Stock held by MGCV. These charges will be offset
by increases in equal amounts in stockholders equity (par value common stock and
paid-in capital).
As a result of the acquisition of the Founding Companies other than Alatec,
the excess of the fair value of the consideration paid over the fair value of
the net assets to be acquired will be recorded as goodwill on the Company's
balance sheet. Goodwill will be amortized as a non-cash charge to the income
statement over a 40-year period. Based on an initial public offering price of
$ per share, the initial amount of goodwill will be $43.3 million and the pro
forma impact of this amortization expense, which is non-deductible for tax
purposes, is expected to be approximately $1.1 million per year. Such
amortization expense is reflected in the Pro Forma Combined Results of
Operations but not the Historical Combined Results of Operations.
The following sections present the results of the four largest Founding
Companies on an individual basis and on a combined basis for all Founding
Companies. The results of Capitol have not been presented separately as they do
not represent a significant portion of the combined Company's net sales. The
combined results do not include certain pro forma adjustments that the Company
expects to incur following the Acquisitions, including the reduction of salaries
among key employees of the Founding Companies and an increase in corporate
expenses. Pentacon has adopted a fiscal year ended September 30, and the
accounting acquiror, Alatec, has changed its fiscal year to September 30 to
conform to Pentacon's fiscal year end. The nine month period ended September 30,
1997, is therefore used for comparison purposes to the year ended December 31,
1996. Pentacon was founded in March 1997 and does not have financial statements
for the nine month period ended September 30, 1996. For the remaining Founding
Companies,
22
<PAGE>
the nine month period ended September 30, 1997 is compared to the year ended
December 31, 1996. The comparison below between the nine months ended September
30, 1997 and prior period is made as follows: (i) for net sales, the comparison
is made versus the unaudited nine months ended September 30, 1996, and (ii) for
cost of goods sold, gross profit, selling, general and administrative expenses
and operating income, the comparison is made on a percentage of sales basis
between the nine months ended September 30, 1997 and the twelve months ended
December 31, 1996.
RESULTS OF OPERATIONS -- COMBINED
The Combined Founding Companies Statements of Operations for the years
ended December 31, 1995 and 1996 and for the fiscal period comprised of the nine
months ended September 30, 1997 do not purport to present results of operations
of the combined Founding Companies in accordance with generally accepted
accounting principles, but are only a summation of the revenues, gross profit
and operating costs and expenses of the individual Founding Companies on a
historical basis and exclude the effects of pro forma adjustments. This data may
not be comparable to and may not be indicative of the Company's post combination
results of operations because (i) the Founding Companies were not under common
control or management during the periods presented; (ii) the Founding Companies
used different tax structures (S corporations and C corporations) during the
periods presented; (iii) the Company will incur incremental costs related to its
new corporate management and the costs of being a public company; (iv) the
Company will use the purchase method to record the Acquisitions, resulting in
the recording of goodwill that will be amortized over 40 years; and (v) the
combined data does not reflect the compensation differential and potential
benefits and costs savings the Company expects to realize when operating as a
combined entity.
The following table sets forth the combined results of operations of the
Founding Companies on a historical basis and such results as a percentage of net
sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------
1995 1996 SEPTEMBER 30, 1997
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 104.1 100.0% $ 120.0 100.0% $ 112.8 100.0%
Cost of sales........................ 70.3 67.5 79.0 65.8 74.3 65.9
--------- --------- --------- --------- --------- ---------
Gross profit......................... 33.8 32.5 41.0 34.2 38.5 34.1
Selling, general and administrative
expenses........................... 27.0 26.0 31.3 26.1 28.9 25.6
--------- --------- --------- --------- --------- ---------
Operating income..................... $ 6.8 6.5% $ 9.7 8.1% $ 9.6 8.5%
========= ========= ========= ========= ========= =========
</TABLE>
COMBINED NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Combined net sales increased $26.3 million, or 30.4%, from
$86.5 million for the nine months ended September 30, 1996 to $112.8 million for
the nine months ended September 30, 1997. The increase in combined net sales was
attributable to several factors, including net sales to new customers and an
increase in net sales to existing customers primarily at Alatec, AXS and Maumee
and an acquisition in the third quarter of 1996 by AXS. Net sales for Alatec
increased $9.0 million from the nine months ended September 30, 1996 to the nine
months ended September 30, 1997 due to an increase in net sales to new and
existing customers. Net sales for AXS increased $7.4 million from the nine
months ended September 30, 1996 to the nine months ended September 30, 1997 due
primarily to an acquisition during 1996 which accounted for $5.0 million of the
increase, three new customers which accounted for $0.8 million of the increase
and $1.0 million attributable to increased sales to new and existing customers
due to the customers' implementation of new inventory management systems. Net
sales for Maumee increased $8.3 million from the nine months ended September 30,
1996 to the nine months ended September 30, 1997 due to approximately a $4.5
million increase in sales to new customers and approximately a $5.5 million
increase with existing customers, offset by a $1.2 million reduction in net
sales to one existing customer. Net sales for the twelve months ended December
31, 1996 were $120.0 million compared to net sales for the nine months ended
September 30, 1997 of $112.8 million.
23
<PAGE>
COST OF SALES. As a percentage of net sales, combined cost of sales
remained consistent at 65.8% in the twelve months ended December 31, 1996 and
65.9% in the nine months ended September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased from 26.1% in the
twelve months ended December 31, 1996 to 25.6% in the nine months ended
September 30, 1997. As a percentage of net sales, selling, general and
administrative expenses for Alatec decreased from 28.6% in the twelve months
ended December 31, 1996 to 27.7% in the nine months ended September 30, 1997 due
to an increase in net sales without a commensurate increase in administrative
costs. As a percentage of net sales, selling, general and administrative
expenses for AXS decreased from 24.1% in the twelve months ended December 31,
1996 to 22.7% in the nine months ended September 30, 1997. The decrease was
primarily due to reduced compensation expense related to personnel reductions
related to the elimination of duplicative positions resulting from the 1996
acquisition by AXS. As a percentage of net sales, selling, general and
administrative expenses for Maumee increased from 20.2% in the twelve months
ended December 31, 1996 to 24.0% in the nine months ended September 30, 1997.
The increase was primarily attributable to $1.2 million, or 4.4%, as a
percentage of net sales, in costs associated with the issuance of stock to a key
employee.
OPERATING INCOME. As a percentage of net sales, combined operating income
increased from 8.1% in the twelve months ended December 31, 1996 to 8.5% in the
nine months ended September 30, 1997 due to the factors discussed above.
COMBINED YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
NET SALES. Combined net sales increased $15.9 million, or 15.3%, from
$104.1 million in 1995 to $120.0 million in 1996. Net sales for Alatec increased
$3.5 million from 1995 to 1996 due to an increase in net sales to existing
customers. Net sales for AXS increased $3.0 million from 1995 to 1996 due to an
acquisition in 1996 which accounted for $2.7 million of the increase. Net sales
for Maumee increased $5.6 million from 1995 to 1996 due to an increase in net
sales to new and existing customers. Net sales for SSL increased $3.5 million
primarily due to an increase of approximately $2.2 million in net sales to an
existing customer.
COST OF SALES. Combined cost of sales increased $8.7 million, or 12.4%,
from $70.3 million in 1995 to $79.0 million in 1996. The increase in combined
cost of sales was primarily a result of the increase in net sales for 1996 and
increased costs related to AXS' 1996 acquisition. As a percentage of net sales,
combined cost of sales decreased from 67.5% in 1995 to 65.8% in 1996 primarily
due to an increase in sales of products with higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general
and administrative expenses increased $4.3 million, or 15.9%, from $27.0 million
in 1995 to $31.3 million in 1996. The increase in combined selling, general and
administrative expenses was primarily due to several factors including an
increase in personnel to support a higher volume of business and increased costs
related to AXS' 1996 acquisition. As a percentage of net sales, combined
selling, general and administrative expenses increased from 26.0% in 1995 to
26.1% in 1996.
OPERATING INCOME. Due to the factors discussed above, combined operating
income increased $2.9 million, or 42.6%, from $6.8 million in 1995 to $9.7
million in 1996. As a percentage of net sales, operating income increased from
6.5% in 1995 to 8.1% in 1996.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis the Founding Companies generated $2.1 million of net
cash from operating activities for the nine months ended September 30, 1997,
which was used primarily for working capital requirements. Net cash used in
investing activities was $0.6 million on a combined basis for the nine months
ended September 30, 1997, primarily for capital expenditures. Net cash used in
financing activities was $1.9 million for the nine months ended September 30,
1997 and primarily consisted of distributions to stockholders of $1.2 million
and reductions in borrowings under lines of credit of $1.6 million. At
24
<PAGE>
September 30, 1997, the combined Founding Companies had cash of $3.6 million,
working capital of $26.0 million and total debt of $29.4 million (including $7.0
million of debt to related parties).
On a combined basis, the Founding Companies generated $2.2 million of net
cash from operating activities during 1996 primarily for working capital
requirements. Net cash used in investing activities was $0.3 million on a
combined basis for 1996 and was used primarily for capital expenditures. Net
cash used in financing activities was $0.4 million on a combined basis and
primarily consisted of advances under lines of credit of $1.8 million offset by
distributions to stockholders of $1.2 million. At December 31, 1996, the
combined Founding Companies had cash of $3.9 million, working capital of $23.9
million and total debt of $25.3 million, including $2.5 million of debt to
related parties.
The Company intends to obtain a credit facility which would be available
upon the closing of the Offering. This credit facility would provide for a
revolving line of credit up to $45 million, which would be used for general
corporate purposes, including post-offering acquisitions, capital expenditures,
and working capital. The ability of the Company to secure the credit facility is
subject to satisfactory negotiations with prospective lenders as well as the
execution of loan documentation. Upon the completion of the Offering, the
Company intends to borrow approximately $5.1 million to repay certain assumed
indebtedness of the Founding Companies.
The Company intends to actively pursue acquisition opportunities. The
Company expects to fund acquisitions through the issuance of additional Common
Stock, borrowings (including use of amounts available under its credit
facility), and cash flow from operations. The Company has agreed to repay
substantially all of the Founding Companies' outstanding bank loans. Such
payments will include $150,000 in prepayment penalties. Capital expenditures for
equipment and expansion of facilities are expected to be funded from cash flow
from operations and supplemented as necessary by borrowings from the credit
facility or other sources of financing. The Company anticipates that its cash
flow from operations will be sufficient to meet the Company's normal working
capital and debt service requirements for at least the next several years.
The Company anticipates spending approximately $2.5 million on updating and
combining the Founding Companies' computer systems. Such costs include the
estimated cost of any software updates required to allow the systems to process
data attributable to the year 2000 and thereafter.
RESULTS OF OPERATIONS -- ALATEC
Alatec, headquartered in Chatsworth, California, was founded in 1972 and
operates through eight distribution facilities and sales offices located
throughout the United States. Alatec principally serves the commercial aviation,
defense electronics and other high-technology industries.
The following table sets forth certain historic data and such data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
------------------------------------------ SEPTEMBER 30, 1997
1995 1996
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 41.2 100.0% $ 44.7 100.0% $ 42.3 100.0%
Cost of sales........................ 26.2 63.6 26.7 59.7 25.1 59.3
--------- --------- --------- --------- --------- ---------
Gross profit......................... 15.0 36.4 18.0 40.3 17.2 40.7
Selling, general and administrative
expenses........................... 11.3 27.4 12.8 28.6 11.7 27.7
--------- --------- --------- --------- --------- ---------
Operating income..................... $ 3.7 9.0% $ 5.2 11.7% $ 5.5 13.0%
========= ========= ========= ========= ========= =========
</TABLE>
ALATEC NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Net sales increased $9.0 million, or 27.0%, from $33.3 million
for the nine months ended September 30, 1996 to $42.3 million for the nine
months ended September 30, 1997. Approximately $1.0
25
<PAGE>
million of this increase was attributable to new customers and approximately
$8.0 million was due to an increase in net sales to existing customers. Net
sales for the twelve months ended December 31, 1996 were $44.7 million compared
to net sales for the nine months ended September 30, 1997 of $42.3 million.
COST OF SALES. As a percentage of net sales, cost of sales remained
relatively constant at 59.3% in the nine months ended September 30, 1997
compared to 59.7% the twelve months ended December 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased from 28.6% in the
twelve months ended December 31, 1996 to 27.7% in the nine months ended
September 30, 1997. This percentage decrease was a result of the increase in net
sales without a commensurate increase in administrative costs.
OPERATING INCOME. As a percentage of net sales, operating income increased
from 11.7% in the twelve months ended December 31, 1996 to 13.0% in the nine
months ended September 30, 1997 as a result of the factors discussed above.
ALATEC YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
NET SALES. Net sales increased $3.5 million, or 8.5%, from $41.2 million
in 1995 to $44.7 million in 1996. Approximately $1.0 million of this increase
was attributable to new customers and approximately $2.5 million was due to an
increase in net sales to existing customers.
COST OF SALES. Cost of sales increased $0.5 million, or 1.9%, from $26.2
million in 1995 to $26.7 million in 1996. As a percentage of net sales, cost of
sales decreased from 63.6% in 1995 to 59.7% in 1996. The decrease was primarily
due to an increase in sales of products with higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.5 million, or 13.3%, from $11.3 million in
1995 to $12.8 million in 1996. Approximately $0.6 million of this increase was
due to the hiring of additional personnel to support certain new just in time
supply contracts and the majority of the remainder was related to wage increases
and overtime expense. As a percentage of net sales, selling, general and
administrative expenses increased from 27.4% in 1995 to 28.6% in 1996.
OPERATING INCOME. Due to the factors discussed above, operating income
increased $1.5 million, or 40.5%, from $3.7 million in 1995 to $5.2 million in
1996. As a percentage of net sales, operating income increased from 9.0% in 1995
to 11.7% in 1996.
ALATEC LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, Alatec had working capital of $20.2 million,
compared to working capital of $17.1 million at December 31, 1996. Alatec's
principal capital requirements have been to fund inventory and accounts
receivable and purchase and upgrade property and equipment. Historically, these
requirements have been met by cash flows from operating activities and
borrowings under bank lines of credit.
Net cash provided by (used in) operating activities for the years ended
December 31, 1995 and 1996 and the nine months ended September 30, 1997 was
$(1.1) million, $(0.4) million and $0.1 million, respectively. Net cash used in
investing activities for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997 was $0.1 million, $0.3 million and $0.1 million,
respectively. The net cash used for investing activities during these periods
was primarily attributable to capital expenditures of which the individual
components of these expenditures were not significant.
Net cash provided by financing activities for the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 was $1.0 and $0.9
million and $0.5 million, respectively.
As of September 30, 1997, Alatec had a $13.3 million bank credit facility
secured by accounts receivable, inventories, equipment and the guarantee of the
principal stockholder. The facility will expire in June 1999. At September 30,
1997, approximately $3.0 million was available for borrowings. The credit
agreement contains certain restrictive financial covenants including, but not
limited to, minimum working capital requirements and dividend restrictions. As
of September 30, 1997, the Company was in compliance with the financial
covenants. However, at September 30, 1997 Alatec was not in compliance with
certain
26
<PAGE>
nonfinancial covenants relating to providing information and notice of defined
transactions and events to the bank. The bank has provided a written waiver for
these covenant violations and management believes that the Company will be in
compliance with these covenants in future periods. It is anticipated that the
bank credit facility will be repaid upon consummation of the Offering.
RESULTS OF OPERATIONS -- AXS
AXS, headquartered in Erie, Pennsylvania, was founded in 1996 upon the
merger of Hoyt (founded 1964) and Champion (founded 1968). AXS operates through
two distribution facilities and sales offices located in Pennsylvania and
Illinois. AXS principally serves the power generation, locomotive, gas and steam
turbine and small motor industries.
The following table sets forth certain historic data and such data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
------------------------------------------ SEPTEMBER 30, 1997
1995 1996
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 20.2 100.0% $ 23.2 100.0% $ 22.0 100.0%
Cost of sales........................ 13.0 64.4 15.1 65.1 15.3 69.6
--------- --------- --------- --------- --------- ---------
Gross profit......................... 7.2 35.6 8.1 34.9 6.7 30.4
Selling, general and administrative
expenses........................... 4.7 23.3 5.6 24.1 5.0 22.7
--------- --------- --------- --------- --------- ---------
Operating income..................... $ 2.5 12.3% $ 2.5 10.8% $ 1.7 7.7%
========= ========= ========= ========= ========= =========
</TABLE>
AXS NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Net sales increased $7.4 million, or 50.7% from $14.6 million
for the nine months ended September 30, 1996 to $22.0 million for the nine
months ended September 30, 1997. The increase was due to the acquisition of Hoyt
during the third quarter of 1996, which accounted for $5.0 million of the
increase, three new customers which accounted for $0.8 million of the increase
and $1.0 million attributable to increased sales to new and existing customers
due to the customers' implementation of inventory management systems. Net sales
for the twelve months ended December 31, 1996 were $23.2 million compared to net
sales for the nine months ended September 30, 1997 of $22.0 million.
COST OF SALES. As a percentage of net sales, cost of sales increased from
65.1% in the twelve months ended December 31, 1996 to 69.6% in the nine months
ended September 30, 1997. The increase was primarily due to the writedown of
slow-moving inventory to market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased from 24.1% in the
twelve months ended December 31, 1996 to 22.7% in the nine months ended
September 30, 1997. The decrease was primarily due to reduced compensation
expense related to the termination of an executive level position and other
personnel reductions related to the elimination of duplicative positions
resulting from the 1996 acquisition of Hoyt.
OPERATING INCOME. As a percentage of net sales, operating income decreased
from 10.8% in the twelve months ended December 31, 1996 to 7.7% in the nine
months ended September 30, 1997.
AXS YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
NET SALES. Net sales increased $3.0 million, or 14.9%, from $20.2 million
in 1995 to $23.2 million in 1996. The increase was primarily due to the
acquisition of Hoyt during the third quarter of 1996, which accounted for $2.7
million of the increase.
COST OF SALES. Cost of sales increased $2.1 million, or 16.2%, from $13.0
million in 1995 to $15.1 million in 1996. The increase was primarily
attributable to the increase in net sales in 1996 and costs
27
<PAGE>
associated with the 1996 acquisition of Hoyt. As a percentage of net sales, cost
of sales increased from 64.4% in 1995 to 65.1% in 1996. The increase was
primarily due to an increase in the sale of products with lower profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.9 million, or 19.1%, from $4.7 million in
1995 to $5.6 million in 1996. Substantially all of this increase was related to
costs associated with the 1996 acquisition of Hoyt. As a percentage of net
sales, selling, general and administrative expenses increased from 23.3% in 1995
to 24.1% in 1996.
OPERATING INCOME. Due to the factors discussed above, operating income
remained constant at $2.5 million for both periods. As a percentage of net
sales, operating income decreased from 12.3% in 1995 to 10.8% in 1996.
AXS LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, AXS' working capital was $4.3 million, compared to
working capital of $6.4 million at December 31, 1996. AXS' principal capital
requirements have been to fund inventory and purchase and upgrade property and
equipment. Historically, these requirements have been met by cash flows from
operating activities and borrowings under bank lines of credit.
Net cash provided by operating activities for the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 was $3.4 million,
$2.5 million and $1.9 million, respectively. Net cash provided by (used in)
investing activities for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997 was $(0.2), $0.3 million and $(0.1) million,
respectively. The net cash used in investing activities during these periods was
primarily attributable to capital expenditures of which the individual
components of these expenditures were not significant.
Net cash used in financing activities for the years ended December 31, 1995
and 1996 and the nine months ended September 30, 1997 was $2.5, $0.9 million and
$2.5 million, respectively.
As of September 30, 1997, AXS had a $3.0 million bank credit facility
secured by separate balances with the bank and the guarantee of the two
principal stockholders, which was due on demand. At September 30, 1997
approximately $1.1 million was available for borrowings. It is anticipated that
the bank credit facility will be repaid upon consummation of the Offering.
RESULTS OF OPERATIONS -- MAUMEE
Maumee, headquartered in Fort Wayne, Indiana, was founded in 1979 and
operates through four facilities and sales offices in two states. Maumee
principally serves the automotive, recreational vehicle, heavy duty truck and
toy industries.
The following table sets forth certain historic data and such data as a
percentage of net sales for the period indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,
------------------------------------------ SEPTEMBER 30, 1997
1995 1996
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 20.6 100.0% $ 26.2 100.0% $ 27.5 100.0%
Cost of sales........................ 16.1 78.2 19.7 75.2 19.6 71.3
--------- --------- --------- --------- --------- ---------
Gross profit......................... 4.5 21.8 6.5 24.8 7.9 28.7
Selling, general and administrative
expense............................ 4.6 22.3 5.3 20.2 6.6 24.0
--------- --------- --------- --------- --------- ---------
Operating income..................... $ (0.1) (0.5)% $ 1.2 4.6% $ 1.3 4.7%
========= ========= ========= ========= ========= =========
</TABLE>
MAUMEE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Net sales increased $8.3 million, or 43.2%, from $19.2 million
for the nine months ended September 30, 1996 to $27.5 million for the nine
months ended September 30, 1997. Approximately $4.0
28
<PAGE>
million of this increase was attributable to new customers and approximately
$5.5 million was due to an increase in net sales to existing customers offset by
approximately a $1.2 million reduction in net sales to one existing customer.
Net sales for the twelve months ended December 31, 1996 were $26.2 million
compared to net sales for the nine months ended September 30, 1997 of $27.5
million.
COST OF SALES. As a percentage of net sales, cost of sales decreased from
75.2% in the twelve months ended December 31, 1996 to 71.3% in the nine months
ended September 30, 1997. The decrease was due to a higher margin product mix
from new products and from the use of lower cost suppliers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general, and administrative expenses increased from 20.2% in the
twelve months ended December 31, 1996 to 24.0% in the nine months ended
September 30,1997. The increase was primarily attributable to $1.2 million, or
4.4%, as a percentage of net sales, in costs associated with the issuance of
stock to a key employee.
OPERATING INCOME. As a percentage of net sales, operating income increased
from 4.6% in the twelve months ended December 31, 1996 to 4.7% in the nine
months ended September 30, 1997.
MAUMEE YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
NET SALES. Net sales increased $5.6 million, or 27.2%, from $20.6 million
in 1995 to $26.2 million in 1996. Approximately $1.0 million of this increase
was attributable to a new customer and the majority of the remainder was
attributable to an increase in net sales to existing customers.
COST OF SALES. Cost of sales increased $3.6 million, or 22.4%, from $16.1
million in 1995 to $19.7 million in 1996, primarily as a result of the increase
in sales in 1996. As a percentage of net sales, cost of sales decreased from
78.2% in 1995 to 75.2% in 1996. The decrease was due to increased sales of
higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.7 million, or 15.2%, from $4.6 million in
1995 to $5.3 million in 1996. This increase was primarily due to an increase in
personnel needed to support increased sales volume. As a percentage of net
sales, selling, general and administrative expenses decreased from 22.3% in 1995
to 20.2% in 1996.
OPERATING INCOME. Operating income increased $1.3 million from $(0.1)
million in 1995 to $1.2 million in 1996. As a percentage of net sales, operating
income increased from a loss in 1995 to 4.6% in 1996.
MAUMEE LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, Maumee had a working capital deficit of $1.9
million, compared to a working capital deficit of $3.0 million at December 31,
1996. Maumee's principal capital requirements have been to fund inventory and
accounts receivable and purchase and upgrade property and equipment to support
the growth of the Company. Historically, these requirements have been met by
cash flows from operating activities and borrowings under bank lines of credit.
Net cash used in operating activities for the years ended December 31, 1995
and 1996 and the nine months ended September 30, 1997 was $0.6 million, $0.03
million and $0.6 million, respectively. Net cash used in investing activities
for the years ended December 31, 1995 and 1996 and the nine months ended
September 30, 1997 was $0.2 million, $0.1 million and $0.2 million,
respectively. The net cash used for investing activities during these periods
was primarily attributable to capital expenditures of which the individual
components of these expenditures were not significant.
Net cash provided by financing activities for the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 was $0.8 million,
$0.2 million and $0.7 million, respectively.
As of September 30, 1997, Maumee had a $7.7 million bank credit facility
secured by substantially all of Maumee's assets including accounts receivable,
inventories, equipment and the guarantee of the principal stockholder, and will
expire May 31, 2000. At September 30, 1997, approximately $2.2 million was
available for borrowings. It is anticipated that the bank credit facility will
be repaid upon consummation of the Offering.
29
<PAGE>
RESULTS OF OPERATIONS -- SSL
SSL, headquartered in Allentown, Pennsylvania, was founded in 1979 and
operates through two distribution facilities and sales offices in Pennsylvania
and South Carolina. SSL principally serves the motor vehicles, furniture and
equipment, general service machinery and transport equipment industries.
The following table sets forth certain historic data and such data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------ SEPTEMBER 30, 1997
1995 1996
-------------------- -------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 12.2 100.0% $ 15.7 100.0% $ 12.0 100.0%
Cost of sales........................ 8.0 65.6 10.5 66.9 8.1 67.5
--------- --------- --------- --------- --------- ---------
Gross profit......................... 4.2 34.4 5.2 33.1 3.9 32.5
Selling, general and administrative
expenses........................... 3.7 30.3 4.6 29.3 3.1 25.8
--------- --------- --------- --------- --------- ---------
Operating income..................... $ 0.5 4.1% $ 0.6 3.8% $ 0.8 6.7%
========= ========= ========= ========= ========= =========
</TABLE>
SSL NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1996
NET SALES. Net sales increased $0.1 million, or 0.8%, from $11.9 million
for the nine months ended September 30, 1996 to $12.0 million for the nine
months ended September 30, 1997. Revenues remained relatively constant for both
periods primarily due to a reduction of approximately $2.0 million in net sales
to one existing customer offset by an increase in net sales of approximately
$2.0 million to other customers. Net sales for the twelve months ended December
31, 1996 were $15.7 million compared to net sales for the nine months ended
September 30, 1997 of $12.0 million.
COST OF SALES. As a percentage of net sales, cost of sales increased from
66.9% in the twelve months ended December 31, 1996 to 67.5% in the nine months
ended September 30, 1997 due to increased supplier costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased from 29.3% in the
twelve months ended December 31, 1996 to 25.8% in the nine months ended
September 30, 1997. The decrease was attributable to a reduction in personnel
and related expenses.
OPERATING INCOME. As a percentage of net sales, operating income increased
from 3.8% in the twelve months ended December 31, 1996 to 6.7% in the nine
months ended September 30, 1997, due to the factors discussed above.
SSL YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995
NET SALES. Net sales increased $3.5 million, or 28.7%, from $12.2 million
in 1995 to $15.7 million in 1996. Approximately $2.2 million of this increase
was attributable to one customer and the remainder of the increase was due to
increased net sales to other customers.
COST OF SALES. Cost of sales increased $2.5 million, or 31.3%, from $8.0
million in 1995 to $10.5 million in 1996, primarily as a result of the increase
in sales in 1996. As a percentage of net sales, cost of sales increased from
65.6% in 1995 to 66.9% in 1996. The increase was due to competitive pricing and
lower margins on the increased net sales related to the one customer mentioned
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.9 million, or 24.3%, from $3.7 million in
1995 to $4.6 million in 1996. The increase was due in part to the higher volume
of business, but also reflects the addition of personnel to support the
additional net sales related to the one existing customer mentioned above. As a
percentage of net sales, however, selling, general and administrative expenses
decreased from 30.3% in 1995 to 29.3% in 1996.
30
<PAGE>
OPERATING INCOME. Operating income increased $0.1 million, or 20.0%, from
$0.5 million in 1995 to $0.6 million in 1996. As a percentage of net sales,
operating income decreased from 4.1% in 1995 to 3.8% in 1996, due to the factors
discussed above.
SSL LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, SSL had working capital of $1.9 million, compared to
working capital of $1.4 million at December 31, 1996. SSL's principal capital
requirements have been to fund inventory and accounts receivable and purchase
and upgrade property and equipment. Historically, these requirements have been
met by cash flows from operating activities and borrowings under bank lines of
credit.
Net cash provided by (used in) operating activities for the fiscal year
ended December 31, 1996 and the nine months ended September 30, 1997 was $(0.1)
million and $1.2 million, respectively. Net cash used in investing activities
for the fiscal year ended December 31, 1996 and the nine months ended September
30, 1997 was $0.2 million and $0.1 million, respectively. The net cash used for
investing activities during these periods was primarily attributable to capital
expenditures of which the individual components of these expenditures were not
significant.
Net cash provided by (used in) financing activities for the fiscal year
ended December 31, 1996 and the nine months ended September 30, 1997 was $0.3
million and $(1.2) million, respectively. SSL paid distributions to shareholders
of $0.2 million in 1996 and 1997. Borrowings in 1996 were primarily made to fund
working capital requirements. During 1997 SSL repaid a portion of the borrowings
under its revolving bank credit facility. Prior to the Acquisitions, SSL
anticipates borrowing approximately $0.5 million to fund its portion of the S
Corporation Tax Payment Distributions.
As of September 30, 1997, SSL had a $1.3 million bank credit facility
secured by accounts receivable and inventories and the guarantee of the
stockholders which will expire on June 1, 1998. At September 30, 1997,
approximately $0.9 million was available for borrowings. It is anticipated that
the bank credit facility will be repaid upon consummation of the Offering.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company experiences modest seasonal declines in the fourth calendar
quarter due to declines in its customers' activities in that quarter. The
Company's volume of business may be adversely affected by a decline in projects
as a result of regional or national downturns in economic conditions. Quarterly
results may also be materially affected by the timing of acquisitions and the
timing and magnitude of acquisition assimilation costs. Accordingly, the
operating results for any three-month period are not necessarily indicative of
the results that may be achieved for any subsequent fiscal quarter or for a full
fiscal year.
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
31
<PAGE>
BUSINESS
GENERAL
The Company is a leading distributor of fasteners and other small parts and
provider of related inventory procurement and management services to original
equipment manufacturers ("OEMs") on a worldwide basis. Fasteners and small
parts include screws, bolts, nuts, washers, pins, rings, fittings, springs,
electrical connectors and similar parts. Pentacon was founded in March 1997 to
aggressively pursue the consolidation of the highly-fragmented fastener
distribution industry. According to an industry study by The Freedonia Group,
Inc., sales by fastener manufacturers in 1996 were approximately $8.0 billion in
the United States and $25.0 billion globally. The United States fastener market
is estimated to have over 1,900 distributors. The Company believes that the OEM
fastener and small part distribution industry is in the early stages of
consolidation, and the Company plans to lead the consolidation of the industry.
The Company believes that its broad selection of fasteners and small parts, high
quality services, professional management team, and strong competitive position
as a publicly-owned fastener distributor focused on the OEM market, will allow
it to be the leading consolidator.
Fasteners and other small parts constitute a majority of the total number
of parts needed by an OEM to manufacture many products, but represent only a
small fraction of the total materials cost. The cost for an OEM to internally
manage its inventory of fasteners and small parts is relatively high due to (i)
the large number of fasteners and other small parts in the inventory, (ii) the
risk of interruptions for just-in-time ("JIT") manufacturing operations, and
(iii) the need to perform quality assurance testing of the fasteners and small
parts. The Company believes that OEMs are increasingly outsourcing their
fastener and other small parts inventory procurement and management needs to
distributors in order to focus on their core manufacturing businesses and to
reduce costs. To further reduce costs, many manufacturers are seeking to
consolidate the number of distributors they use and are selecting national
distributors with extensive product lines who can also provide inventory-related
services. To capitalize on these trends, the Company offers a broad array of
fasteners and small parts and provides a variety of related procurement and
inventory management services, including inventory management information
systems ("MIS") and reports, JIT delivery, quality assurance, advisory
engineering services, component kit production and delivery, small component
assembly and electronic data interchange ("EDI").
Upon consummation of the Offering, Pentacon will acquire the five Founding
Companies, which have been in business an average of 25 years and which had
combined net sales of $120.0 million in 1996 and $112.8 million for the nine
months ended September 30, 1997. While total U.S. sales of fasteners have
increased at a compound annual rate of approximately 6.1% during the four years
ending December 31, 1996, the combined net sales of the Founding Companies have
increased at a compound annual rate of approximately 14.8% per year over the
same period. The Company believes that it has generated superior growth
primarily by expanding the breadth of its product offerings and value-added
services, which has allowed the Founding Companies to increase market share at
existing customers and attract new customers.
INDUSTRY OVERVIEW
Companies operating in the fastener distribution business can generally be
characterized by the end users they serve, which are comprised broadly of OEMs,
maintenance and repair operations ("MROs") and construction companies. The
traditional fastener distribution market is similar to most industrial
distribution markets. Fasteners are purchased from both domestic and overseas
manufacturers and sold to both domestic and overseas customers. The majority of
these fasteners are sold to OEM and MRO clients on a purchase order basis. Some
smaller distributors specialize along industry lines because of the uniqueness
of manufacturer requirements. Other smaller distributors provide a wide range of
fasteners used for general assembly. Larger distributors, such as the Company,
generally provide a wide range of fasteners as well as meet certain specialized
industry needs.
The U.S. sales by fastener manufacturers was estimated to be approximately
$8.0 billion in 1996, and the global market for fasteners is estimated to be
$25.0 billion. The OEM market represents in excess of 80% of the total U.S.
fastener market, the MRO market accounts for 13% with construction and other
32
<PAGE>
markets accounting for the remaining 7%. There are in excess of 1,900 fastener
distributors in the United States, none of which is responsible for more than 3%
of the market sales. The Company believes that there is currently only one
public company whose primary business is fastener distribution. The industry
data provided herein were derived from several sources including Dun &
Bradstreet and The Freedonia Group, Inc. The following table lists the
approximate number of privately owned fastener companies in the U.S. by size:
NUMBER OF PRIVATELY OWNED FASTENER DISTRIBUTION COMPANIES BY SALES VOLUME
NUMBER OF PRIVATE
SALES VOLUME COMPANIES
- ------------------------------------- -----------------
(DOLLARS IN MILLIONS)
$100+ 3
$50-$100 10
$25-$50 11
$10-$25 61
$5-$10 112
$2-$5 270
(less than)$2 1,523
Customer demand for inventory management services and electronic data
exchange have required industry participants to make substantial investments in
sophisticated computer systems in order to remain competitive. Automated
inventory picking, component kit assembly and quality control laboratories also
require significant capital investment in equipment. In addition, many customers
are seeking to reduce their operating costs by decreasing the number of
suppliers with whom they do business, often eliminating those suppliers offering
limited ranges of products and services. The Company believes that these trends
have placed a substantial number of small, owner-operated fastener distributors
at a competitive disadvantage because of their limited product lines and
inventory systems. In addition they have limited access to the capital resources
necessary to modernize and expand their capabilities. The owners of these
businesses traditionally have not had a viable exit strategy, leaving them with
few attractive liquidity options. Due in part to these factors, the Company
believes that the opportunity exists for a well capitalized professionally
managed company to lead the consolidation of the industry.
BUSINESS STRATEGY
The Company intends to become the leading fastener and small parts
distributor on a worldwide basis. Key elements of the Company's strategy to
achieve its objective are:
PROVIDE VALUE-ADDED SERVICES. The Company seeks to continually
develop and supply inventory-related services designed to reduce its
customers' operating costs. Quality assurance, JIT delivery and component
kit production are examples of such services currently provided by the
Company to its customers. By supplying such services, the Company becomes
more integrated into the customers' internal manufacturing processes and is
better able to anticipate its customers' needs which the Company believes
results in improved profitability and customer retention.
DELIVER SUPERIOR CUSTOMER SERVICE. OEMs and other fastener customers
choose fastener suppliers based, in significant part, on the quality of the
service supplied. The Company believes that its superior customer service
depends on its well-trained, technically competent workforce and that its
workforce provides an advantage over other fastener distributors. The
Company intends to review the training and operating practices at each
Founding Company to identify and adopt those "best practices" in
providing customer service that can be successfully implemented throughout
its operations. As part of its commitment to superior customer service, the
Company intends to have each of its operating companies certified under the
International Standards Organization ("ISO") standards for distribution
companies.
33
<PAGE>
ACCELERATE INTERNAL SALES GROWTH. One of the primary goals of the
Company is to accelerate internal growth by both expanding the range of
products and services provided to existing customers and aggressively
pursuing new customers domestically and abroad. The Company believes it
will be able to expand sales to existing customers by capitalizing on (i)
the diverse products and the marketing expertise of the Founding Companies,
(ii) cross-selling opportunities across the Company's customer base, and
(iii) the additional financial resources that are expected to be available
after consummation of the Offering. The Company believes its broad
geographic coverage will present opportunities to capture additional
business from existing customers that operate on a national and
international basis. The Company intends to implement a company-wide
marketing program and to adopt the "best practices" used by the Founding
Companies to identify, obtain and maintain new customers.
EXPAND OPERATING MARGINS. The Company believes that the combination
of the Founding Companies will provide significant opportunities to
increase its profitability. The key components of this strategy are to
increase operating efficiencies and centralize appropriate administrative
functions. The Company intends to use its increased purchasing power to
improve contractual relationships and gain volume discounts from its
suppliers. The Company also intends to improve productivity through
enhanced inventory management procedures, increased utilization of the
Company's laboratories and distribution facilities, and the consolidation
of information systems and employee benefits.
AGGRESSIVELY PURSUE ACQUISITIONS. The Company believes that the
fastener distribution industry is highly fragmented and in the early stages
of consolidation. The Company intends to pursue an aggressive acquisition
program targeting fastener distributors that will help the Company increase
its presence in markets it currently services, sell to new markets, develop
new customer relationships with major OEMs, increase its presence in the
international markets and expand its range of products and services. The
Company believes there is a significant number of acquisition candidates
available and that it will be regarded as an attractive acquiror due to its
position as an industry leader, its ability to offer cash and/or
publicly-traded stock for acquisitions, and the potential for improved
growth and profitability as part of the Company.
ACQUISITION STRATEGY
The Company intends to pursue an aggressive acquisition program. The
Company intends to acquire other fastener distributors in order to enter new
industries and markets; increase sales in certain industries it currently
serves; develop new customer relationships with major OEMs; expand the
geographical reach of the Company; and expand its range of products and
services. Potential acquisition candidates will be evaluated on the strength of
management, quality of customer service, profitability and industry orientation.
The Company believes it will be regarded by acquisition candidates as an
attractive acquiror because of (i) the Company's strategy for creating an
international, comprehensive and professionally managed value-added distributor
of fasteners and other small parts to OEMs; (ii) the Company's ability to
acquire businesses with a combination of cash and publicly traded stock; (iii)
the Company's increased visibility and access to financial resources as a public
company; and (iv) the potential for increased profitability of the acquired
company due to purchasing economies, centralization of administrative functions,
enhanced systems capabilities and access to increased marketing resources.
The Company believes management of the Founding Companies will be
instrumental in identifying and completing future acquisitions. Moreover,
several of the principals of the Founding Companies have held leadership roles
in industry trade associations, which have enabled these individuals to develop
relationships with the owners of numerous acquisition targets across the
country. The Company expects that the visibility of these individuals and the
Company within the industry will increase the awareness of, and interest of
acquisition candidates in, the Company and its acquisition program. Within the
past several months, the Company has contacted the owners of a number of
acquisition candidates, several of whom have expressed interest in discussing
the sale of their businesses to the Company. The Company currently has no
agreements to effect any acquisitions other than with the Founding Companies.
34
<PAGE>
As consideration for future acquisitions, the Company intends to primarily
use various combinations of its Common Stock and cash. The consideration for
each future acquisition will vary on a case-by-case basis, with the major
factors in establishing the purchase price being historical operating results,
future prospects of the target and the ability of the target to provide entry to
new OEM markets or customers. Within 90 days following the completion of the
Offering, the Company intends to register 3,350,000 additional shares of Common
Stock under the Securities Act for its use in connection with future
acquisitions. The Company believes that it can structure certain acquisitions as
tax-free reorganizations by using its Common Stock as consideration, which will
be attractive to those targeted business owners with a low-tax basis in the
stock of their businesses. See "Risk Factors -- Risks Related to the Company's
Acquisition Strategy."
PRODUCTS
The Company distributes over 100,000 different fasteners and other small
parts, generally denoted by a unique standard identifier known as a Stockkeeping
Unit ("SKU"). The SKUs fall into two general categories: fasteners and other
small parts.
FASTENERS. Fasteners sold by the Company include screws, bolts, nuts,
washers, rings, pins, rivets and staples. These items come in a variety of
materials, sizes, platings, and shapes. The variety is driven by the end-use
requirement or specification of the fastener, such as strength, resistance to
corrosion, reusability, and many other factors. The Company's sales and
purchasing departments have extensive knowledge of the available products
offered by fastener manufacturers, and play an important role in assisting OEMs
to select the appropriate fastener for a given application. Some of the more
common variable characteristics of the fasteners sold by the Company include:
o Materials -- The materials used in the manufacture of fasteners
include steel, brass, aluminum, nylon, bronze, stainless steel,
titanium, copper, polypropylene, alloys and other materials. Most
of these materials come in different grades with each having a
unique set of properties.
o Sizes -- The sizes vary by length, outside diameter, depth of the
threads, threads per inch or centimeter and pitch, or angle, of the
threads.
o Platings -- Platings may be applied to enhance the properties of a
given metal, and include zinc, cadmium, chrome, nickel, organic and
other materials.
o Shapes -- The range of shapes is broad, including hex head, U-bolt,
L-bolt, shouldered, eye bolt, external tooth, internal tooth and
many others.
OTHER SMALL PARTS. The Company also distributes other small parts used by
OEMs to assemble their products. These items include standoffs, inserts, clamps,
spacers, springs, brackets, electrical connectors, small molded parts, cable
ties, plugs, hoses, fittings and other small parts. Like fasteners, these parts
come in many shapes, sizes and materials depending upon the designated end-use.
OEMs are increasingly requesting that the Company provide these parts because
they are often used during the manufacturing or assembly process in conjunction
with the fasteners supplied by the Company.
SERVICES
In connection with its sale of fasteners and other small parts, the Company
also provides a wide range of value-added services to OEMs. The OEMs' demand for
these services is driven by the reduction in costs achievable through the use of
such services. These value-added services also benefit the Company by further
integrating the Company into its customers' process. The Company's services
include:
INVENTORY PROCUREMENT AND MANAGEMENT SYSTEMS. Increasingly,
manufacturers are outsourcing their inventory management needs to
distributors. These services range from installing a simple inventory bin
card system to developing a complete turn-key inventory management system
with full-time staff. These inventory systems are designed to meet the
specific needs of the Company's customers. They range in sophistication
from helping the OEM set appropriate order quantities and frequencies to
delivering the correct fastener or small part to the assembly floor on a
JIT basis. In some
35
<PAGE>
cases, the Company utilizes computer systems deployed at the OEM's sites to
facilitate the management of the fastener and parts inventories. Inventory
replenishment services and product consolidation services decrease the
number of invoices and vendors, lower inventory carrying cost, and allow
customers to focus on their core manufacturing business.
COMPREHENSIVE PRODUCT AVAILABILITY. OEMs have reduced their operating
costs by reducing the number of suppliers they use. The Company provides a
wide array of fasteners and other small parts and will, upon a customer's
request, stock additional parts. As a result, the Company's customers are
able to reduce the number of distributors they use.
KIT SERVICES. OEMs often request that the Company package several
fasteners or parts into a package or "kit." A common use of this service
is to supply fastener kits included with products the retail consumer is
required to assemble such as lawn mowers, bicycles and furniture. The use
of kits has also expanded into the manufacturing environment. Manufacturers
frequently desire to have several related fasteners or components arrive at
the assembly line in a single package; this ensures that all of the parts
arrive at the same time and that no part will be missed in the installation
process. This "kit" process aids the manufacturer by decreasing the
number of distributors needed and improves productivity by having the
fasteners delivered to the assembly line with the other related parts. Kit
services improve the efficiency and effectiveness of the manufacturing line
and decreases the number of stock outs and subsequent manufacturing line
stoppages.
QUALITY ASSURANCE SERVICES. These services involve the testing of
fasteners to ensure they meet the specifications stated by the
manufacturer. Although fasteners are not a significant part of the costs in
a product, they are often critical components whose failure can cause the
entire product to fail. As a result, many OEMs require strict quality
control with respect to the fasteners. Certain of the Founding Companies
have installed specialized equipment and laboratories and hired trained
technicians to perform quality control tests on some of their fastener
products. Quality assurance services lower the warranty costs of the OEMs.
The Company operates four labs to test fasteners. The labs can test
metallurgy, size consistency, corrosion and strength as well as other
properties. Additionally, two of the Founding Companies are ISO-9002
certified and the remaining three are in the process of becoming certified
under ISO-9002 or a comparable standard.
PRODUCT ENHANCEMENT SERVICES. In order to meet the exacting
requirements of customers, the Company maintains relationships with vendors
that provide plating, galvanizing and coating services. These services are
used to enhance in-stock fasteners in order to meet the specific
requirements of OEMs. The ability of the Company to manage the process and
quickly respond to small orders enhances the relationship with the
Company's customers.
SUB-ASSEMBLY SERVICES. Customers may request that two or more parts
in a kit be pre-assembled into a single unit prior to being placed in the
kit. These services are closely related to the kit services offered by the
Company and are offered at the request of customers. Similar to kits, the
sub-assembly services improve the productivity of the OEM's manufacturing
line.
ENGINEERING SERVICES. Upon a customer's request, the Company will
provide advice regarding the types of fasteners to use in a product. These
services are often used by customers during early product development or
re-engineering to decrease the production cost, improve the assembly
process or enhance the product quality. The Company works with its
customers' engineering departments to select the appropriate fasteners and
components based upon the specifications of the customer. These services
often lower the customer's cost by reducing the number of fasteners
required to assemble the product, replacing expensive special fasteners
with less expensive standards or identifying different coatings to improve
quality.
EDI SERVICES. The Company offers a wide range of options with respect
to the type and level of EDI services available to its customers. In
addition to offering invoice and payment options, the Company can also
offer its customers direct access to its current inventory, images of
fasteners with specifications, and the ability to enter an order directly
into the Company's system.
36
<PAGE>
CUSTOMERS
The Company sells fasteners and other small parts to more than 2,600
customers in over 25 countries. The customers manufacture a wide variety of
products including diesel engines, locomotives, power turbines, motorcycles,
telecommunications equipment, refrigeration equipment and aerospace equipment.
For the nine months ended September 30, 1997, the Company had net sales of
$112.8 million. The Company's ten largest customers, including Cummins Engine
Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes
Aircraft subsidiary of General Motors Corporation, The Trane Company, Lockheed
Martin Corporation, and The Boeing Company, represented approximately 45% of the
Company's net sales in the nine months ended September 30, 1997. The Company has
been selling fasteners and small parts to these customers for an average of 12
years. Cummins Engine Company and its affiliates accounted for approximately 17%
of the Company's net sales in the nine months ending September 30, 1997. No
other customer represented more than 9% of the Company's net sales in the nine
months ended September 30, 1997. All of the Company's contracts with its
customers for the supply of fasteners and parts may be canceled by either party
on no more than 60 days notice. Approximately 10% of the Company's net sales
during 1997 were to customers or customer locations outside of the U.S. Several
of the Company's customers have international operations and some of them have
requested that the Company provide products and services to them in their
foreign locations. Historically, resource constraints have limited the Founding
Companies' ability to expand internationally and therefore the Founding
Companies have not been able to capitalize on these opportunities. However, the
Company anticipates aggressively pursuing these international opportunities.
The following table sets forth information with respect to the Founding
Companies' estimated combined net sales by end-user industry base for the nine
months ended September 30, 1997:
SALES BY INDUSTRY
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30, 1997
---------------------------------
PERCENTAGE
INDUSTRY NET SALES OF SALES
- ------------------------------------- ---------- -------------------
Industrial Machinery................. $ 39.8 35.3%
Aerospace............................ 24.9 22.1
Electrical Machinery & Electronics... 16.5 14.6
Motor Vehicles....................... 6.3 5.6
Fabricated Metal Products............ 2.4 2.1
Other Industries..................... 22.9 20.3
---------- ------
$112.8 100.0%
========== ======
SALES AND MARKETING
The Company utilizes a sales force comprised of 65 sales people. The
primary responsibilities of the sales force are to:
o Identify potential customers;
o Educate the customers about the Company's products, services and
potential value;
o Manage the transition from existing vendors or systems to the
Company's systems, products and services;
o Conduct follow-up sessions to identify additional product and service
possibilities;
o Furnish product advice and options for specific customers
requirements; and
o Resolve customers' problems and concerns.
The Company expects to focus on marketing its products and services
primarily to mid- to large-size OEMs. The Company generally targets those OEMs
that could achieve significant cost savings from the products and services
offered by the Company; these would include OEMs that (i) maintain substantial
37
<PAGE>
inventories of fasteners and components; (ii) utilize multiple vendors but wish
to decrease that number; (iii) experience a significant number of stockouts;
(iv) desire to improve the quality and reliability of their products; or (v)
desire to improve the efficiency and effectiveness of the manufacturing process.
The Company believes that its commitment to consistent quality and service has
enabled it to develop and maintain long-term relationships with existing
customers, while expanding its market penetration through the use of its sales
and marketing program.
DELIVERY
The Company utilizes several forms of transportation to deliver its
products to its customers depending upon the urgency and frequency of delivery,
the customer's preference and cost. The Company primarily utilizes several
common carriers to deliver products to its customers. The cost of transportation
is generally paid by the customer. The Company believes that by maintaining
relationships with several carriers, it can effectively avoid the impact caused
by any one carrier ceasing operations. The Company does not believe that it is
materially dependent on any single transportation service or carrier and that it
currently maintains good relationships with all of its common carriers. The
Company operates 24 distribution and sales facilities across the U.S.
SUPPLIERS
The fasteners and small parts sold by the Company are manufactured by over
2,000 suppliers located in more than 16 countries. The Company purchases
fasteners and small parts directly from manufacturers or, to a lesser degree,
from authorized distributors. During the nine months ended September 30, 1997,
the Company purchased no more than 5% of its fasteners and small parts from any
single source. The Company's decision to purchase from a specific supplier is
based on product specifications, quality, reliability of delivery, production
lead times and price.
The Company anticipates reviewing its supplier base after completion of the
Acquisitions and believes that by reorganizing its supplier base, it will be
able to purchase fasteners and other small parts in sufficient volumes to
achieve improved service and pricing. The Company believes that it is not
materially dependent on any single supplier and that it currently maintains good
relationships with all of its suppliers.
COMPETITION
The Company is engaged in a highly fragmented and competitive industry.
Competition is based primarily on service, quality, and geographic proximity.
The Company competes with a large number of fastener distributors on a regional
and local basis, some of which may have greater financial resources than the
Company and some of which are public companies or divisions of public companies.
The Company may also face competition for acquisition candidates from these
companies, some of whom have acquired fastener distribution businesses during
the past decade. Other smaller fastener distributors may also seek acquisitions
from time to time.
The Company believes that it will be able to compete effectively because of
its significant number of locations, geographic diversity, knowledgeable and
trained sales force, integrated computer systems, modern equipment, broad-based
product line, long-term customer relationships, combined purchasing volume and
operational economies of scale. The Company intends to seek to differentiate
itself from its competition in terms of service and quality by investing in
systems and equipment and by offering a broad range of products and services as
well as through its entrepreneurial culture and decentralized operating
structure.
MANAGEMENT INFORMATION SYSTEMS
Each of the Founding Companies operates a management information system
that is used to purchase, monitor and allocate inventory throughout its
facilities. The Company believes that these systems enable it to manage
inventory costs effectively and to achieve appropriate inventory turnover rates.
All of these systems include computerized order entry, sales analysis, inventory
status, invoicing and payment, and all but one includes bar-code tracking. These
systems are designed to improve productivity for both the Company and its
customers. All of the Founding Companies use EDI, through which they offer their
38
<PAGE>
customers a paperless electronic process for order entry, shipment tracking,
customer billing, remittance processing and other routine matters.
In connection with developing its internal Company-wide systems following
the Offering, the Company expects to draw upon the best features of the existing
systems that have been utilized by the Founding Companies. Once the systems of
the Founding Companies are integrated, certain of the information systems will
operate over a wide area network, and the real-time information system will
allow each warehouse and sales center to share information and monitor daily
progress relating to sales activities, credit approval, inventory levels, stock
balancing, vendor returns, order fulfillment, and other measures of performance.
GOVERNMENT REGULATION
The Fastener Quality Act (the "Fastener Act") was signed into law by
President Bush on November 16, 1990 and was subsequently amended in March 1996.
Due to a lack of accredited testing facilities required under the Fastener Act,
the implementation date has been delayed until May 26, 1998. The Fastener Act is
intended to protect the public safety by deterring the introduction of
non-conforming fasteners into commerce and by improving the traceability of
fasteners. Generally, the Fastener Act covers fasteners including screws, nuts,
bolts or studs with internal or external threads and load indicating washers
with nominal diameters of greater than approximately one quarter inch, which
contain metal or are held out as meeting a standard or specification that
requires through-hardening. The Fastener Act also covers fasteners and washers
that are marked with a grade identification required by a specification or
standard. An estimated 25% to 55% of currently available fasteners meet this
definition and are therefore subject to the Fastener Act's requirement.
Fastener distributors such as the Company are subject to the Fastener Act.
The Fastener Act places responsibility on fastener manufacturers and
distributors to ensure that fasteners conform to the standards and
specifications to which the manufacturer represents it has been manufactured by
having them tested in a laboratory accredited under the Fastener Act. Persons
who significantly alter fasteners must mark the fasteners so as to permit
identification of the source of the alteration. Further, the Fastener Act
prohibits manufacturers and distributors from commingling like fasteners from
more than two different lots in the same container during packaging.
The Company currently operates four quality control labs at its facilities
and believes it will not be obligated to make any significant investment to
comply with the Fastener Act. The Company is applying for accreditation of its
laboratories under the Fastener Act. The Company anticipates that the majority
of any additional costs resulting from compliance with the Fastener Act will be
included in the prices to its customers. Some small distributors that are unable
to invest in the quality control equipment or services required to comply with
the Fastener Act may be forced to discontinue or reduce the parts of their
business that become subject to the Fastener Act.
EMPLOYEES
At September 30, 1997, the Company had approximately 516 employees. The
Company is a party to one collective bargaining agreement covering approximately
nine employees. The Company believes that its relationship with employees is
good.
PROPERTIES
The Company operates 24 distribution and sales facilities throughout the
United States. These facilities range in size from 500 square feet to 90,000
square feet, and generally consist of warehouse space with a small amount of
associated office space. Four of the facilities include laboratory space for
quality testing. The Company believes that its facilities are adequate for its
expected needs over the next several years. However, the Company may add new
facilities as a result of acquisitions or due to a customer's request for an
on-site or local facility.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business that management
believes would not have a material adverse effect on its business, financial
condition or results of operations.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers, and those persons who will become directors
and executive officers following the consummation of the Offering:
NAME AGE POSITION
- -------------------------- --- ---------------------------------------------
Mark E. Baldwin........... 44 Chairman of the Board and Chief Executive
Officer
Jack L. Fatica............ 53 President*, Chief Operating Officer* and
Director*
Brian Fontana............. 40 Senior Vice President and Chief Financial
Officer
Bruce M. Taten............ 41 Senior Vice President, Chief Administrative
Officer and General Counsel
Cary M. Grossman.......... 43 President+ and Director
Donald B. List............ 42 Director*
Mary E. McClure........... 57 Director*
Michael W. Peters......... 38 Director*
Benjamin E. Spence, Jr.... 43 Director*
Jeffrey A. Pugh........... 34 Director+
- ------------
* Effective as of the consummation of the Offering.
+ Mr. Grossman will resign as President of the Company and Mr. Pugh will resign
as a director of the Company effective as of the consummation of the Offering.
Mark E. Baldwin became Chief Executive Officer of the Company in September
1997 and became Chairman of the Board in November 1997. Mr. Baldwin has been
involved in the organization of the Company, the acquisition of the Founding
Companies and the Offering. From 1980 through August 1997, Mr. Baldwin was
employed by Keystone International, Inc., a publicly traded manufacturer of
industrial valves and controls, serving most recently as President of the
Industrial Valves & Controls Group, a division with 17 manufacturing locations
and multiple company-owned sales and distribution locations in 15 countries. Mr.
Baldwin received a B.S. in Mechanical Engineering from Duke University and a
M.B.A. from Tulane University.
Jack L. Fatica will become President, Chief Operating Officer and director
of the Company upon consummation of the Offering. Mr. Fatica has in excess of 32
years of experience in the fastener distribution business. He has been employed
by AXS since 1965, and currently serves as its President.
Brian Fontana became Chief Financial Officer of the Company in October
1997. From 1996 to 1997 Mr. Fontana served as Executive Vice President and Chief
Financial Officer of Prime Service, Inc., one of the largest rental equipment
companies in the United States. From 1990 to 1996, he was employed by National
Convenience Stores Incorporated most recently as Vice President and Chief
Financial Officer. From 1995 to 1990, Mr. Fontana was employed by Nationsbank as
a Vice President of Corporate Banking and earlier by Allied Bank of Texas as
Assistant Vice President. Mr. Fontana received a B.B.A. degree in finance from
the University of Texas at Austin.
Bruce M. Taten became Vice President and General Counsel of the Company in
October 1997. From 1993 to 1997, Mr. Taten was employed by Keystone
International, Inc. most recently as Vice President and General Counsel. From
1988 to 1993, Mr. Taten practiced law at Sutherland Asbill & Brennan, a law firm
based in Atlanta, Georgia. From 1983 to 1986, Mr. Taten practiced law with the
New York firm of Simpson, Thacher & Bartlett. Mr. Taten is a C.P.A. and received
a J.D. from Vanderbilt University and a B.S. and M.S. from Georgetown
University.
40
<PAGE>
Cary M. Grossman is currently the President of the Company and has been a
Director of the Company since it was formed. Mr. Grossman will relinquish his
position as President upon consummation of the Offering, but will continue as a
Director. Mr. Grossman has been involved in the organization of the Company, the
acquisition of the Founding Companies and the Offering. Mr. Grossman cofounded
McFarland, Grossman & Company, Inc., an investment banking firm, in 1991 and
serves as its Chief Executive Officer. From 1977 until 1991 Mr. Grossman was
engaged in the practice of public accounting. Mr. Grossman is a C.P.A. and
received a B.B.A. in Accounting from the University of Texas.
Donald B. List will become a director of the Company upon consummation of
the Offering. Mr. List has over 20 years of experience in the fastener and
distribution business and has served as President of Alatec since 1980.
Mary E. McClure will become a director of the Company upon consummation of
the Offering. Ms. McClure cofounded Capitol in 1966 and has served as Capitol's
President since 1981. Ms. McClure has served as Chairman of the Southwest
Fastener Association and as Chairman/President of the National Fastener
Distributor Association. Ms. McClure has also been inducted into the Fastener
Hall of Fame.
Michael W. Peters will become a director of the Company upon consummation
of the Offering. Mr. Peters has over 11 years of experience in the fastener and
distribution business. He joined Maumee in 1986 and has served as its Chief
Executive Officer since July 1995.
Benjamin E. Spence, Jr. will become a director of the Company upon
consummation of the Offering. Mr. Spence has over 22 years of experience in the
fastener and distribution business and has served as President of SSL since
1986.
Jeffrey A. Pugh has served as a director of the Company since it was
formed, and will relinquish his position as director upon consummation of the
Offering. Mr. Pugh has been an employee with McFarland, Grossman & Co. since
1996. From 1994 to 1995, Mr. Pugh served as Chief Financial Officer to JAC Home
Health, Inc., a home health service provider he helped found in 1993. From 1990
to 1994, Mr. Pugh served as a management consultant with the Chicago office of
Deloitte & Touche.
Directors are elected at each annual meeting of stockholders. Effective
upon consummation of the Offering the Board of Directors will be divided into
three classes of directors, with directors serving staggered three-year terms,
expiring at the annual meeting of stockholders for fiscal years 1998, 1999 and
2000, respectively. At each annual meeting of stockholders, one class of
directors will be elected for a full term of three years to succeed to that
class of directors whose terms are expiring. Messrs. List and Fatica will serve
for initial three year terms; Messrs. Spence and Peters will serve for initial
two year terms and Ms. McClure, Mr. Baldwin and Mr. Grossman will serve for
initial one year terms. Mr. Grossman is the director elected by the holders of
the Restricted Common Stock. The Company has agreed to nominate each of the
Directors from the five Founding Companies for re-election upon any expiration
of their terms occurring within five years of the consummation of the Offering.
All officers serve at the discretion of the Board of Directors, subject to the
terms of their employment agreement. See "-- Employment Agreements" and
"Description of Capital Stock."
The Board of Directors will establish an Audit Committee and Compensation
Committee. The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company. The Compensation
Committee determines executive officers' and key employees' salaries and bonuses
and administers the Pentacon, Inc. 1998 Stock Plan. It is expected that Messrs.
and will serve as members of the Company's Compensation
Committee and Audit Committee.
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives an annual fee of $16,000 paid in equal quarterly amounts.
Directors of the Company are reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof, and for
other expenses incurred in their capacity as directors of the Company. Each
non-employee director will receive stock options to purchase
41
<PAGE>
15,000 shares of Common Stock upon election to the Board of Directors and an
annual grant of 5,000 options. See "-- Stock Plan."
EXECUTIVE COMPENSATION
The Company was incorporated in March 1997 and, prior to the Offering, has
not conducted any operations other than activities related to the Acquisitions
and the Offering. The Company anticipates that during 1998 annualized base
salaries of each of its most highly compensated executive officers, Messrs.
Baldwin, Fatica, Taten and Fontana, will be $150,000. Options for a total of
185,000, 100,000 and 85,000 shares of Common Stock at the initial public
offering price have been granted to Messrs. Baldwin, Taten and Fontana,
respectively . Thirty percent (30%) of the options vest on the second
anniversary of the employment agreements and the remainder vest on the third
anniversary.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each executive
officer of the Company that prohibits such officers from disclosing the
Company's confidential information and trade secrets and generally restricts
these individuals from competing with the Company for a period of two years
after the termination of their respective employment agreements. Mr. Baldwin's
employment agreement has an initial term of five years. The agreements for
Messrs. Taten and Fontana have an initial term of three years. All of the
employment agreements are terminable by the Company for "good cause" upon ten
days' written notice and without "cause" or for "good reason" by the officer
upon fourteen days' written notice. All employment agreements provide that if
the officer's employment is terminated by the Company without "good cause,"
such officer will be entitled to receive a lump-sum severance payment at the
effective time of termination.
The employment agreements of the executive officers contain certain
provisions concerning a change-in-control of the Company, including the
following: (i) in the event that the executive is not notified by the acquiring
company that it will assume the Company's obligations under the employment
agreement at least five days in advance of the transaction giving rise to the
change in control, the change in control will be deemed a termination of the
employment agreement by the Company without "cause," and the provisions of the
employment agreement governing the same will apply, except that the severance
amount otherwise payable (discussed in the preceding paragraph) shall be tripled
and the provisions which restrict competition with the Company shall not apply;
and (ii) in any change-of-control situation, such officer may elect to terminate
his employment by giving five days' written notice prior to the anticipated
closing of the transaction giving rise to the change-in-control, which will be
deemed a termination of the employment agreement by the Company without
"cause," and the provisions of the employment agreement governing the same
will apply, except that the severance amount otherwise payable shall be doubled
and the time period during which such officer is restricted from competing with
the Company will be eliminated.
STOCK PLAN
The Board of Directors has adopted, and the stockholders of the Company
have approved, the Pentacon, Inc. 1998 Stock Plan (the "Stock Plan"). The
purpose of the Stock Plan is to provide directors, officers, key employees and
certain other persons who will be instrumental in the success of the Company or
its subsidiaries with additional incentives by increasing their proprietary
interest in the Company. The aggregate amount of Common Stock with respect to
which options may be granted may not exceed the greater of 1,600,000 shares
(subject to adjustment to reflect stock splits) or 13% of the number of
outstanding shares of Common Stock, as determined on each date an option is
granted.
The Stock Plan is administered by the Compensation Committee, which is
composed of non-employee directors (the "Committee"). Subject to the terms of
the Stock Plan, the Committee generally determines to whom options will be
granted and the terms and conditions of option grants. Options granted under the
Stock Plan may be either non-qualified stock options, or may qualify as
incentive stock options ("ISOs"), provided that 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
42
<PAGE>
year under all plans of the Company and any parent or subsidiary corporation
shall not exceed $100,000. The exercise price of any option may not be less than
the fair market value of the underlying Common Stock as of the date of grant and
no employee or consultant may receive an option in any year to purchase more
than 200,000 shares of Common Stock. The Committee determines the period over
which options become exercisable, provided that all options become immediately
exercisable upon death of the grantee or upon a change-in-control (as defined in
the Stock Plan) of the Company.
The 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 fully exercisable following the expiration
of six months from the date of grant.
Options which are not exercisable at the time of a voluntary termination of
the grantee's employment (or directorship) or in the case of a termination "for
cause" are immediately forfeited. In no event may an ISO granted to a control
person (as defined in the Stock Plan) be exercisable more than five years from
the date of grant. Each option granted to a non-employee director shall have a
term of five years from the later of: (i) the date of the option grant or (ii)
from the date the grantee becomes a non-employee director.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), places a $1 million cap on the deductible compensation that can be
paid to certain executives of publicly traded corporations. Amounts that qualify
as "performance based" compensation under Section 162(m)(4)(C) of the Code are
exempt from the cap and do not count toward the $1 million limit. Generally,
options granted with an exercise price at least equal to the fair market value
of the shares of Common Stock on the date of grant will qualify as performance
based.
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 capital 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.
An optionee will not be subject to federal income taxation upon the
exercise of ISOs granted under the Stock Plan, and the Company will not be
entitled to a federal income tax deduction by reason of such exercise. A sale of
shares of Common Stock acquired by exercise of an ISO that does not occur within
one year after the exercise or within two years after the grant of the option
generally will result in the recognition of long-term capital gain or loss in
the amount of the difference between the amount realized on the sale and the
exercise price, and the Company will not be entitled to any tax deduction in
connection therewith. If a sale of shares of Common Stock acquired upon exercise
of an ISO occurs within one year from the date of exercise of the option or
within two years from the date of the option grant (a "disqualifying
disposition"), the optionee generally will recognize ordinary compensation
income equal to the lesser of (i) the excess of the fair market value of the
shares on the date of exercise of the options over the exercise price, or (ii)
the excess of the amount realized on the sale of the shares over the exercise
price. Any amount realized on a disqualifying disposition in excess of the
amount treated as ordinary compensation income will be a long-term or a
short-term capital gain, depending upon the length of time the shares were held.
The Company generally will be entitled to a tax deduction on a disqualifying
disposition corresponding to the ordinary compensation income recognized by the
participant.
43
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
During 1997, members of the management team and certain consultants were
assembled by
McFarland, Grossman Capital Ventures II, L.C. ("MGCV") to pursue the
consolidation of the Founding Companies. MGCV, an investment entity formed to
focus on consolidations in highly-fragmented industries, provided the Company
with expertise regarding the consolidation process and advanced the Company the
capital needed to pay organizational and offering expenses.
In connection therewith, during 1997, Pentacon sold 200,000, 125,000 and
125,000 shares of Common Stock to Messrs. Baldwin, Taten and Fontana,
respectively, of the Company for $0.01 per share. As a result, the Company has
recorded non-recurring, non-cash compensation charges of $4.7 million in the
fourth quarter of 1997, representing the difference between the amount paid for
the shares and the estimated initial public offering price net of a twenty
percent marketability discount. The Company also granted two consultants
warrants to purchase an aggregate of 50,000 shares of Common Stock at the lesser
of $8.00 or 60% of the public offering price.
The Company has agreed to reimburse MGCV for expenses incurred by MGCV in
connection with the Acquisitions and the Offering. The Company has agreed to pay
Donald Luke, a manager of MGCV, a success fee of $100,000 upon consummation of
the Offering. The Company will pay McFarland, Grossman & Company, Inc.
("McFarland, Grossman"), an affiliate of MGCV, customary fees in connection
with its placement of the Company's senior debt; the Company has also engaged
McFarland, Grossman, on customary terms, to provide financial advice regarding
acquisitions during the first four months after the Offering.
Simultaneously with the closing of the Offering, the Company will acquire
by merger all of the issued and outstanding capital stock of the Founding
Companies, at which time each Founding Company will become a wholly owned
subsidiary of the Company. The aggregate consideration that will be paid by the
Company to acquire the Founding Companies consists of (i) approximately $28.7
million in cash and (ii) 6,720,000 shares of Common Stock. In addition, the
Company intends to repay approximately $19.5 million of the indebtedness of the
Founding Companies, including approximately $14.4 million from the proceeds of
the Offering.
The following table sets forth for each Founding Company the approximate
consideration to be paid to the stockholders of the Founding Companies (i) in
cash and (ii) in shares of Common Stock, in each case subject to adjustments
through the date of the consummation of the Acquisition for the amount of S
corporation earnings previously taxed to stockholders of certain of the Founding
Companies.
SHARES OF
CASH COMMON STOCK
--------- ------------
(IN THOUSANDS OF DOLLARS
EXCEPT SHARE AMOUNTS)
Alatec............................... $ 12,666 2,969,493
AXS.................................. 7,759 1,819,257
Maumee............................... 5,126 1,201,762
SSL.................................. 2,340 548,554
Capitol.............................. 772 180,934
--------- ------------
Total........................... $ 28,663 6,720,000
========= ============
Immediately prior to consummation of the Acquisitions, certain of the
Founding Companies will make distributions estimated to be approximately $3.6
million, representing S corporation earnings previously taxed to their
respective stockholders. The amount of such distributions (in excess of
estimated shareholder tax liabilities for 1997 and 1998) shall be deducted from
the cash payments indicated in the table above.
In connection with the Acquisitions, and as consideration for their
interests in the Founding Companies, certain officers, directors and holders of
more than 5% of the outstanding shares of the Company,
44
<PAGE>
together with trusts for which they act as trustees, will receive cash and
shares of Common Stock of the Company as follows. These amounts do not include
any S corporation distributions.
SHARES OF
CASH COMMON STOCK
--------- ------------
(IN THOUSANDS OF DOLLARS,
EXCEPT SHARE AMOUNTS)
Donald B. List....................... $ 12,665 2,969,493
Jack L. Fatica....................... 3,404 802,653
Michael Black........................ 3,844 901,321
Benjamin E. Spence, Jr............... 1,170 232,132
Mary E. McClure...................... 661 154,898
--------- ------------
Total........................... $ 21,744 5,060,497
========= ============
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties by the Founding Companies,
their principal stockholders and by the Company; the performance by each of the
parties of their respective covenants; and the nonexistence of a material
adverse change in the results of operations, financial condition or business of
each Founding Company.
Certain of the Founding Companies have incurred indebtedness which has been
personally guaranteed by their stockholders or by entities controlled by their
stockholders. At September 30, 1997, the aggregate amount of indebtedness of
these Founding Companies that was subject to personal guarantees was
approximately $19.5 million. The Company intends to use a portion of the net
proceeds from this Offering, together with borrowings available from the
Company's anticipated revolving credit facility, to repay substantially all of
the indebtedness of the Founding Companies.
There can be no assurance that the conditions to the closing of the
Acquisitions will be satisfied or waived or that the agreements relating to the
Acquisitions will not be terminated prior to the closing. If any of the
Acquisitions is terminated for any reason, the Company does not intend to
consummate the Offering on the terms described herein.
Pursuant to the agreements relating to the Acquisitions, all significant
stockholders of each of the Founding Companies have agreed not to compete with
the Company for a period of five years commencing on the date of closing of the
Acquisitions.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
LEASES OF REAL PROPERTY BY FOUNDING COMPANIES
Following the Acquisitions, Alatec will continue to lease its facilities
located in Chatsworth, California from Mr. List, who will become a director of
the Company upon consummation of the Offering. The lease provides for a total
annual rent of $462,840 with the term of the lease expiring in March 2012.
Alatec shall also pay taxes and utilities on the leased premises. The rent will
be adjusted in accordance with the Consumer Price Index ("CPI") subject to a
minimum of 4% and a maximum of 8%. In addition, Alatec will continue to lease
its warehouse in Fremont, California from FDR Properties, an entity controlled
and partially owned by Mr. List. This lease expires August 31, 1998 and provides
for an annual rent of $114,336. Alatec shall also pay taxes and utilities on
those premises. The Company will also continue to lease from the List Family
Trust an office and warehouse in Chatsworth, California. The lease provides for
an annual rental of $170,832 and terminates in October, 2012. Alatec shall also
pay utilities and taxes on the premises. The Company believes that the rent for
each of these properties does not exceed fair market value.
Following the Acquisitions, AXS will continue to lease certain real
property located in Erie, Pennsylvania from JFJ Realty Company, an entity owned
and controlled by Jeffrey Fatica and Jack Fatica. Jack Fatica will become an
officer and director of the Company upon consummation of the Offering. The lease
for the property runs through August 2006 and provides for an annual rent of
$240,000 through August 30, 2001. Beginning September 1, 2001, the rent shall be
adjusted to fair market value as determined on
45
<PAGE>
February 1, 2001. Furthermore, AXS shall pay taxes and utilities on the leased
premises. In addition, following the mergers, AXS will continue to lease certain
real property located in Niles, Illinois from the Joseph Hoyt Residual Trust and
the Hoyt Family Residual Trust, in which Mr. Hoyt has an economic and beneficial
interest. The lease on this property will expire August 30, 2006, and provides
for an annual rent of $175,500 through August 31, 2001. Beginning September 1,
2001, the rental shall be adjusted to fair market value as determined on
February 1, 2001. Furthermore, AXS shall pay utilities and taxes on the leased
premises. The Company believes that the rent for these properties does not
exceed fair market value.
Following the Acquisitions, SSL will lease certain real properties located
in Chester, South Carolina from Chester Associates, LLC, an entity owned and
controlled by Messrs. Spence and Knorr. Mr. Spence will become a director of the
Company upon the consummation of the Offering. One facility in Chester, South
Carolina will be leased for an initial five year term expiring December 31,
2002, with an option to extend the lease for an additional five year term. The
annual rent for the first year of this lease is $61,250. The rent shall increase
each subsequent year of the lease based on the CPI, not to increase more than
4%. SSL shall be responsible for utilities. Also, certain warehouse space in
South Carolina will be leased to SSL. This warehouse will be leased for an
initial five year term expiring December 31, 2002, with an option to extend for
an additional five year term. The annual rent for the first year of this lease
is $55,000, with subsequent rental rates to increase per the CPI, not to exceed
4% in any one year. SSL shall be responsible for utilities. The Company believes
that the rent for these properties does not exceed fair market value.
Following the Acquisitions, Maumee will continue to lease certain real
property located in Fort Wayne, Indiana from Mr. Black. The current lease for
the property expires March 31, 1998 and provides for an annual rental of
$312,000. In addition, Maumee is required to pay utilities and certain taxes and
assessments. The Company currently intends to renew the lease at current rates.
The Company believes such rent exceeds fair market value by approximately 30%.
Such excess rate was taken into consideration in determining the consideration
paid in connection with the acquisition of Maumee.
OTHER TRANSACTIONS
Mr. List owns approximately 50% of a supplier from which the Company
purchased approximately $1.1 million of products during the nine months ended
September 30, 1997. The Company believes all such purchases have been at fair
market prices. The Company anticipates continuing to purchase products from the
supplier in the future so long as the prices and terms remain competitive with
those of alternative suppliers.
In November 1997, Mr. Grossman and Mr. Pugh, each principals in MGCV,
became officers of Alatec in order to assist in, facilitate and expedite the
audit process in connection with the Offering. Alatec and Mr. List, its sole
stockholder, have agreed to indemnify Messrs. Grossman and Pugh against various
claims, damages, costs and expenses which might be incurred by them as officers
of Alatec, including their execution of representation letters to Alatec's
accountants.
The Company has agreed to permit Jack L. Fatica to acquire certain life
insurance policies from AXS at a price to be mutually agreed upon, which will
approximate the fair market value of the policies.
COMPANY POLICY
Any future transactions with directors, officers, employees or affiliates
of the Company are anticipated to be minimal, and must be approved in advance by
a majority of disinterested members of the Board of Directors.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, after giving effect to the issuance of
shares of Common Stock in connection with the Acquisitions and after giving
effect to the Offering, by (i) all persons known to the Company to be the
beneficial owner of 5% or more thereof, (ii) each director and nominee for
director, (iii) each executive officer and (iv) all officers and directors as a
group. Unless otherwise indicated, the address of each such person is c/o
Pentacon, Inc., 9821 Katy Freeway, Suite 500, Houston, Texas 77024. All persons
listed have sole voting and investment power with respect to their shares unless
otherwise indicated.
SHARES BENEFICIALLY
OWNED AFTER OFFERING
---------------------
NUMBER PERCENT
--------- -------
Donald B. List....................... 2,969,493 22.3%
MGCV(1).............................. 2,380,000 17.9
Cary M. Grossman(2).................. 2,380,000 17.9
Michael Black........................ 901,321 6.8
Jack L. Fatica....................... 802,656 6.0
Donald L. Luke(3).................... 753,523 5.7
Michael W. Peters.................... 300,441 2.3
Benjamin E. Spence, Jr............... 232,132 1.7
Mary E. McClure(4)................... 154,898 1.2
Mark E. Baldwin...................... 200,000 1.5
Brian Fontana........................ 125,000 *
Bruce M. Taten....................... 125,000 *
Jeffrey A. Pugh(5)................... 132,679 *
All officers and directors as a group
(10 persons)....................... 7,289,620 54.7%
- ------------
* Less than one percent.
(1) MGCV intends to distribute to its members the Company's Common Stock MGCV
holds after the consummation of the Offering.
(2) Consists of 2,380,000 shares of Common Stock issued to MGCV. Mr. Grossman is
the President of MGCV. Of the shares of Common Stock issued to MGCV, 321,194
shares will be distributed to Mr. Grossman and 224,423 shares will be
distributed to McFarland Grossman & Company, Inc., of which Mr. Grossman
owns a 50% interest, in each case assuming an initial public offering price
of $ per share.
(3) Mr. Luke is a member of MGCV. Of the shares of Common Stock issued to MGCV,
753,523 shares will be distributed to Mr. Luke, assuming an initial public
offering price of $ per share. Mr. Luke's address is 8 Greenway Plaza,
Suite 1500, Houston, Texas 77046.
(4) Includes 71,759 shares of Common Stock owned by the Earl Milton McClure, Jr.
Residuary Trust of which Ms. McClure is trustee.
(5) Mr. Pugh is a member of MGCV. Of the shares of Common Stock issued to MGCV,
132,679 shares will be distributed to Mr. Pugh, assuming an initial public
offering price of $ per share.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, 1,000,000 shares of Restricted Common
Stock, par value $0.01 per share and 10,000,000 shares of Preferred Stock, par
value $0.01 per share. After giving effect to the Acquisitions, there will be
9,550,000 shares of Common Stock outstanding, which will be held of record by 31
stockholders, 367,000 shares of Restricted Common Stock outstanding, which are
held of record by MGCV and no shares of Preferred Stock outstanding. After the
closing of the Offering, 13,323,585 shares of Common Stock will be issued and
outstanding. The following summary of the terms and provisions of the Company's
capital stock does not purport to be complete and is qualified in its entirety
by reference to the Company's Certificate of Incorporation and Bylaws, which
have been filed as exhibits to the Company's registration statement, of which
this Prospectus is a part, and applicable law.
COMMON STOCK
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock, voting together as a
single class, are entitled to elect one member of the Company's Board of
Directors and will be entitled to 0.25 of a vote per share on all other matters
on which the Common Stock is entitled to vote. Holders of Restricted Common
Stock are not entitled to vote on the election of any other directors. Upon
consummation of this Offering, the Board of Directors will be classified into
three classes as nearly equal in number as possible, with the term of each class
expiring on a staggered basis. The classification of the Board of Directors may
make it more difficult to change the composition of the Board of Directors and
thereby may discourage or make more difficult an attempt by a person or group to
obtain control of the Company. Cumulative voting for the election of directors
is not permitted. Any director, or the entire Board of Directors, may be removed
at any time, with cause, by a majority of the aggregate number of votes which
may be cast by the holders of outstanding shares of Common Stock and Restricted
Common Stock entitled to vote for the election of directors, provided, however,
that only the holders of the Restricted Common Stock may remove the director
such holders are entitled to elect.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefor. See "Dividend Policy." Holders of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of any Preferred Stock then outstanding. The holders of Common Stock have
no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. All outstanding shares of
Common Stock are fully paid and nonassessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution
which is a distribution by a holder to its partners or beneficial owners, or a
transfer to a related party of such holder (as defined in Sections 267, 707, 318
and/or 4946 of the Internal Revenue Code of 1986, as amended)), (ii) in the
event any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock, or (iii) in the event any person offers to acquire 15%
or more of the total number of outstanding shares of Common Stock. After January
1, 2000, the Board of Directors may elect to convert any outstanding shares of
Restricted Common Stock into shares of Common Stock in the event 80% or more of
the originally outstanding shares of Restricted Common Stock have been
previously converted into shares of Common Stock.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of
48
<PAGE>
Incorporation and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, to fix the number
of shares and to change the number of shares constituting any series, and to
provide for or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any class or series of the Preferred Stock, in each case
without any further action or vote by the stockholders. The Company has no
current plans to issue any shares of Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or an associate of such
person, who is an "interested stockholder" for a period of three years from
the date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans), or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by including in its certificate of incorporation or by-laws by
action of its stockholders to exempt itself from coverage. The Company has not
adopted such an amendment to its Amended and Restated Certificate of
Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit. The Company has entered into indemnification agreements with
its directors and executive officers which indemnify such person to the fullest
extent permitted by its
49
<PAGE>
Certificate of Incorporation, its Bylaws and the Delaware General Corporation
Law. The Company also intends to obtain directors' and officers' liability
insurance.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. Upon
consummation of the Offering there will be 13,323,585 shares of Common Stock
were issued and outstanding. All of the 3,773,585 shares sold in the Offering,
except for shares acquired by affiliates of the Company, will be freely
tradeable.
Simultaneously with the closing of the Offering, the stockholders of the
Founding Companies received, in the aggregate, 6,720,000 shares of Common Stock
as a portion of the consideration for their businesses. Certain other
stockholders of the Company held, in the aggregate, an additional 2,830,000
shares of Common Stock. None of these 9,550,000 shares were issued in a
transaction registered under the Securities Act, and, accordingly, such shares
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration, including the exemption contained in
Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned his or her shares for at
least one year, or a person who may be deemed an "affiliate" of the Company
who has beneficially owned shares for at least one year, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the proposed sale is sent to the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. A person who is not deemed to have
been an affiliate of the Company at any time for 90 days preceding a sale and
who has beneficially owned his shares for at least two years would be entitled
to sell such shares under Rule 144 without regard to the volume limitations,
manner of sale provisions, notice requirements or the availability of current
public information about the Company.
The Company has authorized the issuance of up to the greater of 1,600,000
shares of its Common Stock or 13% of the number of outstanding shares of Common
Stock in accordance with the terms of the 1998 Stock Option Plan. Options to
purchase 370,000 shares have been granted to certain officers of Pentacon under
the 1998 Stock Option Plan and it is anticipated that options to purchase
600,000 shares of Common Stock will be granted upon closing of the Offering to
certain employees of the Founding Companies. The Company intends to file a
registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Stock Plan. As a
result, such shares will be eligible for resale in the public market.
The Company currently intends to file a registration statement covering
3,350,000 additional shares of Common Stock under the Securities Act for its use
in connection with future acquisitions. These shares generally will be freely
tradeable after their issuance by persons not affiliated with the Company unless
the Company contractually restricts their resale.
The Company has issued to certain consultants warrants to purchase 50,000
shares of Common Stock with an exercise price equal to the lesser of $8.00 or
60% of the public offering price.
The Company has agreed that it will not offer or sell any shares of Common
Stock or options, rights or warrants to acquire any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), except for shares
issued (i) in connection with acquisitions and (ii) pursuant to the Stock Plan.
Further, the Company's directors, officers, stockholders and substantially all
of the owners of the Founding Companies who
50
<PAGE>
beneficially own approximately 9,320,000 shares in the aggregate have agreed not
to directly or indirectly offer for sale, sell or otherwise dispose of any
Common Stock for a period of one year after the date of this Prospectus without
the prior written consent of DLJ.
Prior to the Offering, there has been no established trading market for the
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk
Factors -- Shares Eligible for Future Sale."
The former stockholders of the Founding Companies, after one year, and
certain officers, directors and stockholders holding in the aggregate 9,550,000
shares of Common Stock are entitled to certain rights with respect to the
registration of their shares of Common Stock under the Securities Act. If the
Company proposes to register any of its securities under the Securities Act,
such stockholders are entitled to notice of such registration and are entitled
to include, at the Company's expense, all or a portion of their shares therein,
subject to certain conditions. These registration rights will not apply to the
registration statement the Company intends to file for use in future
acquisitions.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement (the
"Underwriting Agreement"), the Underwriters named below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), BT Alex. Brown
Incorporated and Schroder & Co. Inc. (collectively, the "Representatives"),
have severally agreed to purchase from the Company the respective numbers of
shares of Common Stock set forth opposite their names below.
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------- ----------
Donaldson, Lufkin & Jenrette
Securities Corporation.............
BT Alex. Brown Incorporated..........
Schroder & Co. Inc...................
----------
Total...........................
==========
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, to certain
other dealers a concession not in excess of $ per share. After the
initial offering of the Common Stock, the public offering price and other
selling terms may be changed by the Representatives at any time without notice.
The Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 566,038 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the Offering. To the extent
that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company has agreed, subject to certain exceptions noted
below, not to (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any Common Stock (regardless of whether any of
the transactions described in clause (i) or (ii) is to be settled by the
delivery of Common Stock, or such other securities, in cash or otherwise) for a
period of 180 days after the date of this Prospectus without the prior written
consent of DLJ. In addition, during such period, the Company has also agreed not
to file any registration statement with respect to, and each of its executive
officers, directors and certain stockholders of the Company has agreed, except
as noted below, not to make any demand for, or exercise any right with respect
to, the registration of any shares of
52
<PAGE>
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock without DLJ's prior written consent.
The Underwriters have agreed to allow the Company to issue shares of Common
Stock in connection with acquisitions after the thirtieth day following the date
of the Prospectus and pursuant to the Stock Plan. In addition, the Company
intends to register 3,350,000 shares of Common Stock under the Securities Act
for use by the Company in future acquisitions. See "Shares Eligible For Future
Sale."
Prior to the Offering, there has been no established trading market of the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Founding
Companies, the historical results of the operations of the Founding Companies,
the prospects for future earnings of the Company, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of the Offering.
Application will be made to list the Common Stock on the New York Stock
Exchange (the "NYSE"). In order to meet the requirements for listing the
Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100
or more shares to a minimum of 2,000 beneficial owners.
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering and the distribution of this Prospectus. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of Common Stock offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
Certain employees of DLJ and BT Alex. Brown Incorporated are investors in
MGCV. Pursuant to the terms of the limited liability company agreement of MGCV,
upon completion of the Offering those employees will receive an aggregate of
69,231 shares of Common Stock (assuming an initial public offering price of
$ per share) and $225,000 of the proceeds of the Offering.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Andrews & Kurth L.L.P. and for the
Underwriters by Baker & Botts, L.L.P.
EXPERTS
The financial statements of Pentacon, Inc., as of September 30, 1997 and
the period from inception (March 20, 1997) through September 30, 1997, the
consolidated financial statements of Alatec Products, Inc., as of September 30,
1997 and for the year ended December 31, 1995 and the period from January 1,
53
<PAGE>
1997 through September 30, 1997, the financial statements of AXS Solutions,
Inc., as of December 31, 1996 and September 30, 1997 and for the years ended
December 31, 1995 and 1996 and the period from January 1, 1997 to September 30,
1997, the financial statements of Maumee Industries, Inc., as of December 31,
1996 and September 30, 1997 and for the years ended December 31, 1995 and 1996
and the period from January 1, 1997 to September 30, 1997, the financial
statements of Sales Systems, Limited, as of December 31, 1996 and September 30,
1997 and for the year ended December 31, 1996 and the period from January 1,
1997 to September 30, 1997 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Alatec Products, Inc. as of
December 31, 1996 and for the year then ended, appearing in this Prospectus and
Registration Statement have been audited by McGladrey & Pullen, LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto the "Registration Statement") under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, file as part of the Registration Statement, does not contain all the
information contained in the Registration Statement, certain portions of which
have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement including
the exhibits and schedules thereto. Statements made in the Prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete; with respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected, without charge, at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, IL 60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or
on the Internet at http://www.sec.gov. Copies of such material can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by an independent public
accounting firm for each fiscal year.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
------
PENTACON, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma
Combined Financial Statements...... F-2
Unaudited Pro Forma Combined
Balance Sheet...................... F-3
Unaudited Pro Forma Combined
Statement of Operations............ F-5
Notes to Unaudited Pro Forma
Combined Financial Statements...... F-6
PENTACON, INC.
Report of Independent Auditors..... F-9
Balance Sheet...................... F-10
Statement of Operations............ F-11
Statement of Stockholders'
Deficit............................ F-12
Statement of Cash Flows............ F-13
Notes to Financial Statements...... F-14
FOUNDING COMPANIES(1)
ALATEC PRODUCTS, INC.
Report of Independent Auditors..... F-17
Independent Auditor's Report....... F-18
Consolidated Balance Sheets........ F-19
Consolidated Statements of
Income............................. F-20
Consolidated Statements of Changes
in Stockholders' Equity............ F-21
Consolidated Statements of Cash
Flows.............................. F-22
Notes to Consolidated Financial
Statements......................... F-23
AXS SOLUTIONS, INC.
Report of Independent Auditors..... F-30
Balance Sheets..................... F-31
Statements of Income............... F-32
Statements of Changes in
Shareholders' Equity............... F-33
Statements of Cash Flows........... F-34
Notes to Financial Statements...... F-35
MAUMEE INDUSTRIES, INC.
Report of Independent Auditors..... F-41
Balance Sheets..................... F-42
Statements of Operations........... F-43
Statements of Changes in
Stockholders' Deficit.............. F-44
Statements of Cash Flows........... F-45
Notes to Financial Statements...... F-46
SALES SYSTEMS, LIMITED
Report of Independent Auditors..... F-51
Balance Sheets..................... F-52
Statements of Income and Retained
Earnings........................... F-53
Statements of Cash Flows........... F-54
Notes to Financial Statements...... F-55
(1) Capital Bolt & Supply, Inc. is a Founding Company but is not included herein
because audited financial statements were not required.
F-1
<PAGE>
PENTACON, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisition by Pentacon, Inc. ("Pentacon"), of the outstanding capital
stock of (a) Alatec Products, Inc. ("Alatec"), (b) AXS Solutions, Inc.
("AXS"), (c) Capitol Bolt & Supply, Inc. ("Capitol"), (d) Maumee Industries,
Inc. ("Maumee"), and (e) Sales Systems, Limited ("SSL") (together, the
"Founding Companies"). Pentacon and the Founding Companies are hereinafter
referred to as the "Company." These acquisitions (the "Acquisitions") will
occur simultaneously with the closing of Pentacon's initial public offering (the
"Offering") and will be accounted for using the purchase method of accounting.
Alatec, one of the Founding Companies, has been identified as the accounting
acquiror because its shareholder will receive the largest portion of voting
rights of the Company.
These statements are based on the historical financial statements of
Pentacon, Inc., and the Founding Companies included elsewhere in the Prospectus.
The unaudited pro forma combined balance sheet gives effect to the Acquisitions
and the Offering as if they had occurred on September 30, 1997. The unaudited
pro forma combined statement of operations gives effect to these transactions as
if they were consummated on January 1, 1997.
The Company has estimated the savings that it expects to be realized by
consolidating certain operations and general and administrative functions. To
the extent the owners and certain key employees of the Founding Companies have
agreed prospectively to reductions in salary, bonuses, benefits, and rent
expense paid to the owners, these reductions have been reflected in the
unaudited pro forma combined statement of operations. With respect to other
potential costs savings, the Company has not and cannot quantify these savings
until completion of the combination of the Founding Companies. It is anticipated
that these savings will be offset by the costs of being a publicly held company
and the incremental increase in costs related to the Company's new management.
However, these costs, like the savings that they offset, cannot be estimated at
this time. Neither the anticipated savings nor the anticipated costs have been
included in the pro forma combined financial information. In addition, the pro
forma combined statement of operations does not include an adjustment for a
nonrecurring, non-cash charge of $4.7 million for issuing common stock to
employees and officers of Pentacon. Such issuance will occur subsequent to
September 30, 1997 and prior to completion of the Offering and will be recorded
in the period in which it occurs. Upon completion of the Offering, a non-cash,
non-recurring charge of approximately $24.8 million based on a twenty percent
marketability discount from the estimated Offering price to the public will be
recorded to reflect Offering expenses related to the 2,380,000 shares of common
stock issued to MGCV. Both of these charges will result in an equal increase in
common stock and paid in capital.
The pro forma adjustments are based on preliminary estimates, available
information, and certain assumptions and may be revised as additional
information becomes available. The unaudited pro forma financial data does not
purport to represent what the Company's financial position or results of
operations would actually have been if such transactions in fact had occurred on
those dates and are not representative of the Company's financial position or
results of operations for any future period. Since the Founding Companies were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance. The unaudited pro forma
combined financial statements should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
See "Risk Factors" included elsewhere herein.
F-2
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED BALANCE SHEETS -- UNAUDITED
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MERGER
ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS
------------ -------- ------------ ----------- ------------ ----------- -----------
(NOTE 4)
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Cash................................. $ 733,000 $ 1,050 $ 2,777,160 $ 123,865 $ -- $ -- $ --
Accounts receivable.................. 7,892,000 -- 3,160,537 1,326,192 5,200,253 1,090,628 --
Inventory............................ 22,951,000 -- 5,323,516 2,019,545 6,524,717 2,255,465 --
Deferred taxes....................... 1,420,000 -- -- 65,708 139,000 -- --
Other................................ -- -- 197,213 160,643 24,362 6,589 --
------------ -------- ------------ ----------- ------------ ----------- -----------
Current assets....................... 32,996,000 1,050 11,458,426 3,695,953 11,888,332 3,352,682 --
Property, plant, and equipment, net.. 1,578,000 7,210 1,600,646 276,997 974,983 345,970 --
Deferred taxes....................... 65,000 -- -- 5,130 284,000 -- --
Intangible assets.................... -- -- 3,516,115 -- -- -- 43,300,000
Other................................ 272,000 268,138 1,109,065 79,453 -- 27,109 --
------------ -------- ------------ ----------- ------------ ----------- -----------
Total assets......................... $ 34,911,000 $276,398 $ 17,684,252 $ 4,057,533 $ 13,147,315 $ 3,725,761 $43,300,000
============ ======== ============ =========== ============ =========== ===========
PRO FORMA OFFERING AS
COMBINED ADJUSTMENTS ADJUSTED
------------- ----------- -------------
(NOTE 4)
ASSETS
Cash................................. $ 3,635,075 $ -- $ 3,635,075
Accounts receivable.................. 18,669,610 -- 18,669,610
Inventory............................ 39,074,243 -- 39,074,243
Deferred taxes....................... 1,624,708 -- 1,624,708
Other................................ 388,807 -- 388,807
------------- ----------- -------------
Current assets....................... 63,392,443 -- 63,392,443
Property, plant, and equipment, net.. 4,783,806 -- 4,783,806
Deferred taxes....................... 354,130 -- 354,130
Intangible assets.................... 46,816,115 -- 46,816,115
Other................................ 1,755,765 (268,138) 1,487,627
------------- ----------- -------------
Total assets......................... $ 117,102,259 $ (268,138) $ 116,834,121
============= =========== =============
</TABLE>
F-3
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED BALANCE SHEETS -- UNAUDITED (CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MERGER
ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS
------------ -------- ------------ ----------- ------------ ----------- -----------
(NOTE 4)
LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C>
Accounts payable..................... $ 7,521,000 $ -- $ 1,919,913 $ 741,627 $ 4,967,263 $ 980,922 $ --
Accrued expenses..................... 4,956,000 -- 467,432 239,819 1,850,398 60,484 --
Notes payable and current portion of
capital lease obligations.......... 206,000 -- 2,015,420 784,709 6,009,841 420,197 --
Due to related parties............... 158,000 292,945 2,789,613 -- 997,181 23,890 (2,713,162)
------------ -------- ------------ ----------- ------------ ----------- -----------
Current liabilities.................. 12,841,000 292,945 7,192,378 1,766,155 13,824,683 1,485,493 (2,713,162)
Loan payable......................... 9,668,000 -- 347,264 82,890 270,984 199,967 --
Capital lease obligations............ 1,489,000 -- 911,955 -- -- -- --
Due to related parties............... 2,529,000 -- -- -- -- 176,154 28,662,387
------------ -------- ------------ ----------- ------------ ----------- -----------
13,686,000 -- 1,259,219 82,890 270,984 376,121 28,662,387
STOCKHOLDERS' EQUITY
Common stock......................... 1,450,000 23,800 5,705,972 262,758 691,000 6,400 (8,044,430)
Additional paid-in capital........... -- 50 -- -- -- -- 28,355,616
Retained earnings.................... 9,624,000 (40,397) 3,526,683 2,046,960 (1,068,802) 1,904,945 (6,369,389)
Treasury stock....................... (2,690,000) -- -- (101,230) (570,550) (47,198) 3,408,978
------------ -------- ------------ ----------- ------------ ----------- -----------
8,384,000 (16,547) 9,232,655 2,208,488 (948,352) 1,864,147 17,350,775
------------ -------- ------------ ----------- ------------ ----------- -----------
Total liabilities and stockholders'
equity............................. $ 34,911,000 $276,398 $ 17,684,252 $ 4,057,533 $ 13,147,315 $ 3,725,761 $43,300,000
============ ======== ============ =========== ============ =========== ===========
PRO FORMA OFFERING AS
COMBINED ADJUSTMENTS ADJUSTED
------------- ----------- -------------
(NOTE 4)
LIABILITIES
Accounts payable..................... $ 16,130,725 $ -- $ 16,130,725
Accrued expenses..................... 7,574,133 -- 7,574,133
Notes payable and current portion of
capital lease obligations.......... 9,436,167 (6,418,748) 3,017,419
Due to related parties............... 1,548,467 (1,289,209) 259,258
------------- ----------- -------------
Current liabilities.................. 34,689,492 (7,707,957) 26,981,535
Loan payable......................... 10,569,105 (6,844,283) 3,724,822
Capital lease obligations............ 2,400,955 -- 2,400,955
Due to related parties............... 31,367,541 (28,838,541) 2,529,000
------------- ----------- -------------
44,337,601 (35,682,824) 8,654,777
STOCKHOLDERS' EQUITY
Common stock......................... 95,500 37,736 133,236
Additional paid-in capital........... 28,355,666 43,084,907 71,440,573
Retained earnings.................... 9,624,000 -- 9,624,000
Treasury stock....................... -- -- --
------------- ----------- -------------
38,075,166 43,122,643 81,197,809
------------- ----------- -------------
Total liabilities and stockholders'
equity............................. $ 117,102,259 $ (268,138) $ 116,834,121
============= =========== =============
</TABLE>
F-4
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MERGER
ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS
------------ -------- ------------ ----------- ------------ ------------ -----------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... $ 42,296,000 $ -- $ 22,002,438 $ 9,042,747 $ 27,472,902 $ 11,987,479 $ --
Cost of sales....................... 25,114,000 -- 15,275,990 6,326,112 19,557,148 8,056,780 --
------------ -------- ------------ ----------- ------------ ------------ -----------
Gross profit........................ 17,182,000 -- 6,726,448 2,716,635 7,915,754 3,930,699 --
Operating expenses.................. 11,664,000 17,597 4,979,848 2,469,745 6,628,643 3,096,934 (1,815,079)(1)
Goodwill amortization............... -- -- -- -- -- -- 811,875 (2)
------------ -------- ------------ ----------- ------------ ------------ -----------
Operating income.................... 5,518,000 (17,597) 1,746,600 246,890 1,287,111 833,765 1,003,204
Other income........................ -- -- 7,513 60,684 10,476 -- --
Interest expense.................... (1,015,000) -- (207,766) (37,422) (547,274) (95,162) --
Interest income..................... 26,000 -- -- -- -- -- --
------------ -------- ------------ ----------- ------------ ------------ -----------
(989,000) -- (200,253) 23,262 (536,798) (95,162) --
------------ -------- ------------ ----------- ------------ ------------ -----------
Income before taxes................. 4,529,000 (17,597) 1,546,347 270,152 750,313 738,603 1,003,204
Income tax provision................ 1,860,000 -- -- 87,914 316,000 -- 1,692,379 (4)
------------ -------- ------------ ----------- ------------ ------------ -----------
Net income (loss)................... $ 2,669,000 $(17,597) $ 1,546,347 $ 182,238 $ 434,313 $ 738,603 $ (689,175)
============ ======== ============ =========== ============ ============ ===========
Net income per share................
Shares used in computing net income
per share (Note 5.(5))............
PRO FORMA OFFERING AS
COMBINED ADJUSTMENTS ADJUSTED
------------- ----------- -------------
(NOTE 5)
Net sales............................ $ 112,801,566 $ -- $ 112,801,566
Cost of sales........................ 74,330,030 -- 74,330,030
------------- ----------- -------------
Gross profit......................... 38,471,536 -- 38,471,536
Operating expenses................... 27,041,688 -- 27,041,688
Goodwill amortization................ 811,875 -- 811,875
------------- ----------- -------------
Operating income..................... 10,617,973 -- 10,617,973
Other income......................... 78,673 -- 78,673
Interest expense..................... (1,902,624) 1,073,915(3) (828,709)
Interest income...................... 26,000 -- 26,000
------------- ----------- -------------
(1,797,951) 1,073,915 (724,036)
------------- ----------- -------------
Income before taxes.................. 8,820,022 1,073,915 9,893,937
Income tax provision................. 3,956,293 440,305(4) 4,396,598
------------- ----------- -------------
Net income (loss).................... $ 4,863,729 $ 633,610 $ 5,497,339
============= =========== =============
Net income per share................. $ 0.41
=============
Shares used in computing net income
per share (Note 5.(5))............. 13,342,816
</TABLE>
F-5
<PAGE>
PENTACON, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Pentacon, Inc. was organized on March 20, 1997 to (i) become a leading
domestic and international value-added distributor of fasteners and other small
parts to original equipment manufacturers ("OEMs"), (ii) provide related
inventory management services to OEMs and others, and (iii) pursue the
consolidation of the highly-fragmented fastener distribution industry. Pentacon
has conducted no operations to date and will acquire the Founding Companies
simultaneously with the consummation of the Offering.
2. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements represent the financial position and
results of operations of Pentacon and the Founding Companies and were derived
from the respective financial statements. The Company selected a fiscal year-end
of September 30 and all Founding Companies have been presented as of and for the
nine months ended September 30, 1997, except for Capitol, which has been
presented as of and for the period from December 1, 1996 to August 31, 1997.
3. ACQUISITION OF FOUNDING COMPANIES
Concurrent with the closing of the Offering, Pentacon will acquire all of
the capital stock of the Founding Companies. The acquisition will be accounted
for using the purchase method of accounting, and Alatec has been identified as
the accounting acquiror.
The following table sets forth for each Founding Company the estimated
consideration to be paid to its common stockholders (a) in cash and (b) in
shares of common stock. The estimated consideration is subject to certain
adjustments at and following closing.
SHARES OF
CASH COMMON STOCK
--------- -------------
(DOLLARS IN THOUSANDS)
Alatec............................... $ 12,666 2,969,493
AXS.................................. 7,759 1,819,257
Capitol.............................. 772 180,934
Maumee............................... 5,126 1,201,762
SSL.................................. 2,340 548,554
--------- -------------
Total......................... $ 28,663 6,720,000
========= =============
F-6
<PAGE>
PENTACON, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
<TABLE>
<CAPTION>
MERGER OFFERING
(A) (B) ADJUSTMENTS (C) (D) ADJUSTMENTS
------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash................................. $ -- $ -- $ -- $ 43,122,643 $ (43,122,643) $ --
Other assets......................... -- -- -- (268,138) (268,138)
Intangibles.......................... -- 43,300,000 43,300,000 -- -- --
Notes payable and current portion of
capital lease obligations.......... -- -- -- -- 6,418,748 6,418,748
Due to related parties............... 2,713,162 -- 2,713,162 268,138 1,021,071 1,289,209
Loan payable......................... -- -- -- -- 6,844,283 6,844,283
Due to related parties............... (2,713,162) (25,949,225) (28,662,387) 28,838,541 28,838,541
Common stock......................... -- 8,044,430 8,044,430 (37,736) -- (37,736)
Additional paid-in capital........... -- (28,355,616) (28,355,616) (43,084,907) -- (43,084,907)
Retained earnings.................... -- 6,369,389 6,369,389 -- -- --
Treasury stock....................... -- (3,408,978) (3,408,978) -- -- --
------------ ------------- ------------- ------------- ------------- -------------
$ -- $ -- $ -- $ -- $ -- $ --
============ ============= ============= ============= ============= =============
</TABLE>
- ------------
(a) Reflects the reclass of cumulative S-Corporation earnings that will be
repaid with the cash portion of the purchase consideration as accrued at
September 30, 1997.
(b) Records the purchase of the Founding Companies consisting of $28.7 million
in cash and 6,720,000 shares of common stock for a total estimated purchase
price of $98.6 million (based on an estimated fair value per share which
represents a marketability discount of 20% from the estimated initial public
offering price) resulting in excess purchase price over the fair market
value of assets acquired of $43.3 million.
(c) Records the proceeds of $43.1 million from the issuance of 3,773,585 shares
of common stock, net of estimated offering costs of $6.0 million (based on
an estimated initial public offering price of $ ).
(d) Records cash portion of the consideration to be paid to the stockholders of
the Founding Companies in connection with the Acquisitions and the repayment
of certain debt obligations with the proceeds of this offering.
F-7
<PAGE>
PENTACON, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
Nine months ended September 30, 1997:
(1) Adjusts salaries, bonuses, benefits, and lease expense amounts to
reflect those established in contractual agreements between the
Company and certain owners and key employees of the Founding
Companies.
(2) Records pro forma goodwill amortization using a 40-year estimated
life.
(3) Reflects the reduction in interest expense attributed to obligations
retired with proceeds from the Offering.
(4) Adjusts the provision for federal and state income taxes to an
estimated 41% effective tax rate for the Company before the effect of
non-deductible goodwill.
(5) Includes (i) 2,830,000 shares issued by Pentacon, Inc. prior to the
Offering (including 450,000 shares issued to management), (ii)
6,720,000 shares to be issued to the stockholders of the Founding
Companies in connection with the Acquisitions, (iii) 3,773,585 shares
to be issued in connection with the Offering (excluding the
over-allotment), (iv) the effect of the 50,000 warrants with an
assumed exercise price of $8.00 per share using the treasury stock
method. Excludes 970,000 shares of common stock subject to options to
be granted in connection with the Offering at an exercise price equal
to the initial public offering price.
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pentacon, Inc.
We have audited the accompanying balance sheet of Pentacon, Inc. (the
"Company"), as of September 30, 1997 and the related statement of operations,
stockholders' deficit, and cash flows for the period from inception (March 20,
1997) through September 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pentacon, Inc., as of
September 30, 1997, and the results of its operations and cash flows for the
period from inception (March 20, 1997) through September 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 16, 1997
F-9
<PAGE>
PENTACON, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,050
----------
Total current assets.................... 1,050
Deferred offering costs................. 268,138
Property and equipment.................. 7,210
----------
Total assets............................ $ 276,398
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Amounts due to stockholder.............. $ 292,945
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value,
10,000,000 shares authorized, -0-
outstanding....................... --
Common stock, $0.01 par value,
51,000,000 shares authorized,
2,380,000 outstanding............. 23,800
Paid-in capital.................... 50
Accumulated deficit, net of
subscriptions receivable.......... (40,397)
----------
Total stockholders' deficit............. (16,547)
----------
Total liabilities and stockholders'
deficit............................... $ 276,398
==========
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
PENTACON, INC.
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (MARCH 20, 1997) THROUGH SEPTEMBER 30, 1997
Net sales............................ $ --
Selling, general, and administrative
expenses........................... 17,597
----------
Loss before income taxes............. (17,597)
Income tax expense................... --
----------
Net loss...................... $ (17,597)
==========
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
PENTACON, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- SUBSCRIPTIONS PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT DEFICIT
--------- ------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization............... 2,380,000 $23,800 $ (22,800) $-- $ -- $ 1,000
Issuance of warrants................. -- -- -- 50 -- 50
Net loss............................. -- -- -- -- (17,597) (17,597)
--------- ------- ------------- ----------- ------------ -------------
Balance at September 30, 1997........ 2,380,000 $23,800 $ (22,800) $ 50 $(17,597) $ (16,547)
========= ======= ============= =========== ============ =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
PENTACON, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (MARCH 20, 1997) THROUGH SEPTEMBER 30, 1997
OPERATING ACTIVITIES
Net loss........................... $ (17,597)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Deferred offering costs....... (268,138)
Amounts due to stockholder.... 292,945
------------
Net cash provided by operating
activities........................ 7,210
INVESTING ACTIVITIES
Capital expenditures............... (7,210)
------------
Net cash used in investing
activities........................ (7,210)
FINANCING ACTIVITIES
Proceeds from sale of common stock
and warrants...................... 1,050
------------
Net cash provided by financing
activities........................ 1,050
------------
Net increase in cash............... 1,050
Cash and cash equivalents at
beginning of year................. --
------------
Cash and cash equivalents at end of
year.............................. $ 1,050
============
SEE ACCOMPANYING NOTES.
F-13
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BUSINESS AND ORGANIZATION
Pentacon, Inc., a Delaware corporation ("Pentacon" or the "Company"),
was organized on March 20, 1997 to (i) become a leading domestic and
international value-added distributor of fasteners and other small parts to
original equipment manufacturers ("OEMs"), (ii) provide related inventory
management services to OEMs and others, and (iii) pursue the consolidation of
the highly-fragmented fastener distribution industry. Pentacon intends to
acquire five businesses (the "Acquisitions"), contemporaneously complete an
initial public offering (the "Offering") of its common stock.
Pentacon has not conducted any operations, and all activities to date have
related to the Offering and the Acquisitions. Initial capitalization of the
Company by McFarland, Grossman Capital Ventures II, L.C. ("MGCV"), was $1,000.
All expenditures to date have been funded by MGCV, on behalf of the Company. As
of September 30, 1997, costs of approximately $268,138 have been paid by MGCV on
behalf of the Company in connection with the Offering. Pentacon has treated
these costs as deferred offering costs. Pentacon is dependent upon the Offering
to execute the pending Acquisitions and to repay MGCV. The Company has agreed to
pay Donald Luke, a manager of MGCV, a success fee of $100,000 upon consummation
of the Offering. There is no assurance that the pending Acquisitions discussed
below will be completed or that Pentacon will be able to generate future
operating revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results could differ from those estimates.
INCOME TAXES
The Company has incurred a net operating loss since inception of which a
100% valuation allowance has been established for financial reporting purposes.
Accordingly no deferred tax asset has been recorded.
2. STOCKHOLDERS' EQUITY
COMMON STOCK
Pentacon has entered into agreements whereby the total shares and warrants
to purchase shares of common stock of Pentacon held by MGCV, certain consultants
to MGCV, and management of the Company, will represent 30% of the total shares
outstanding immediately before completion of the Offering. Of these shares,
certain members of management will hold 4.7% of the total shares outstanding
immediately before completion of the Offering and MGCV will hold the remaining
shares. Based on these agreements and the estimated total shares to be
outstanding upon completion of the Offering, the shares presented herein have
been restated to effect 2,380-for-one stock split and an increase in authorized
shares of common stock to 50,000,000 voting shares and 1,000,000 non-voting
shares.
In connection with the organization and initial capitalization of Pentacon,
the Company issued 2,380,000 shares of common stock to MGCV. In November 1997,
management of the Company acquired 450,000 shares of common stock for $0.01 per
share. As a result of the issuance of the 450,000 shares, the Company will
record a nonrecurring, non-cash compensation charge in November 1997 of
approximately $4.7 million, based on an estimated Offering price to the public
net of a twenty percent marketability discount. Upon completion of the Offering,
a non-cash, non-recurring charge of approximately $24.8 million based on a
twenty percent marketability discount from the estimated initial public offering
price will be recorded to reflect Offering expenses related to the 2,380,000
shares of common stock held by MGCV.
F-14
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED COMMON STOCK
In December 1997, MGCV exchanged 367,000 shares of Common Stock for an
equal number of shares of restricted voting common stock ("Restricted Common
Stock"). The holder of Restricted Common Stock is entitled to elect one member
of the Company's Board of Directors and to 0.25 of one vote for each share held
on all other matters on which they are entitled to vote.
Each share of Restricted Common Stock will automatically convert into
Common Stock on a share-for-share basis (a) in the event of a disposition of
such share of Restricted Common Stock by the holder thereof (other than a
disposition which is a distribution by a holder to its partners or beneficial
owners or a transfer to a related party of such holder (as defined)), (b) in the
event any person acquires beneficial ownership of 15% or more of the outstanding
shares of Common Stock of the Company, or (c) in the event any person offers to
acquire 15% or more of the total number of outstanding shares of Common Stock.
After January 1, 2000, the Corporation may elect to convert any outstanding
shares of Restricted Common Stock into shares of Common Stock.
WARRANTS
At the date of the Company's organization, warrants were issued for 50,000
shares of common stock with an exercise price equal to the lesser of $8 per
share or 60% of the initial public offering price. These warrants were issued to
legal and investment advisors for a total of $50. As the Company was subject to
significant uncertainties, the value of the warrants and their underlying shares
was de minimus at that date and no value beyond the consideration received has
been assigned to them. The warrants may be exercised up to four years after the
consummation of the Offering.
STOCK PLAN
The board of directors of the Company intends to adopt the Pentacon, Inc.
1998 Stock Plan (the "Plan"). The Company anticipates that upon or shortly
after the consummation of its Offering that it will have granted options to
purchase up to the greater of 1.6 million shares of common stock or 13% of the
aggregate number of shares of common stock outstanding. Subsequent to September
30, 1997 the Company has granted certain members of management and employees of
the Founding Companies options for 370,000 shares of common stock and intends to
grant additional options for 600,000 shares of common stock with the exercise
prices to be equal to the Offering price. The Company will account for options
issued to employees and nonemployee directors under the Plan in accordance with
APB Opinion No. 25 and, accordingly, no compensation cost will be recognized to
the extent that shares are issued at the fair market value as of the date of
grant. The Company will provide the pro forma disclosure of net earnings per
share in the notes to the financial statements as if the fair value-based method
of accounting has been applied to awards as required by Statement of Financial
Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
3. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE. For the Company, SFAS No. 128 will be effective for the
first quarter ended December 31, 1997. SFAS No. 128 simplifies the standards
required under current accounting rules for computing earnings per share and
replaces the presentation of primary earnings per share and fully diluted
earnings per share with a presentation of basic earnings per share ("basic
EPS") and diluted earnings per share ("diluted EPS"). Basic EPS excludes
dilution and is determined by dividing income available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities and
other contracts to issue common stock were exercised or converted into common
stock. Diluted EPS is computed similarly to fully diluted earnings per share
under
F-15
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
current accounting rules. The implementation of SFAS No. 128 is not expected to
have a material effect on the Company's earnings per share as determined under
current accounting rules.
4. EVENT SUBSEQUENT TO THE DATE OF AUDITOR'S REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
Wholly-owned subsidiaries of Pentacon, Inc. have signed definitive
agreements to acquire by merger or share exchange five companies ("Founding
Companies") to be effective contemporaneously with the Offering. The companies
to be acquired are Alatec Products, Inc., AXS Solutions, Inc., Capitol Bolt &
Supply, Inc., Maumee Industries, Inc., and Sales Systems, Limited The aggregate
consideration that will be paid by Pentacon to acquire the Founding Companies is
approximately $28.7 million in cash and 6,720,000 shares of Common Stock.
In December, 1997 Pentacon filed a registration statement on Form S-1 for
the sale of its common stock.
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc.
and
Board of Directors
Alatec Products, Inc.
We have audited the accompanying consolidated balance sheet of Alatec
Products, Inc., as of September 30, 1997, and the related statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1995 and
the period from January 1, 1997 through September 30, 1997. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alatec
Products, Inc., as of September 30, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1995 and the period from January
1, 1997 through September 30, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
November 21, 1997, except for Note 3,
as to which the date is November 26, 1997
F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Alatec Products, Inc.
Chatsworth, California
We have audited the accompanying consolidated balance sheet of Alatec
Products, Inc., as of December 31, 1996, and the related statements of income,
stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alatec
Products, Inc., as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Pasadena, California
November 21, 1997, except for Note 3,
as to which the date is November 26, 1997
F-18
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS
Current assets:
Cash............................... $ 256,000 $ 733,000
Receivables, less allowance for
doubtful accounts of $118,000 and
$173,000 in 1996 and 1997,
respectively...................... 5,304,000 7,892,000
Inventory.......................... 19,615,000 22,951,000
Deferred taxes..................... 1,457,000 1,420,000
------------ -------------
Total current assets.......... 26,632,000 32,996,000
Property under capital lease, leasehold
improvements and equipment, net....... 1,583,000 1,578,000
Other assets:
Deferred taxes..................... 32,000 65,000
Security deposits and other........ 272,000 272,000
------------ -------------
Total other assets............ 304,000 337,000
------------ -------------
Total assets.................. $ 28,519,000 $ 34,911,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable
to related party.................. $ -- $ 158,000
Current maturities of long-term
debt.............................. 169,000 169,000
Current maturities of obligation
under capital lease............... 32,000 37,000
Accounts payable................... 5,771,000 7,521,000
Income taxes payable............... 2,668,000 3,594,000
Accrued compensation and
commissions....................... 556,000 866,000
Other accrued expenses............. 306,000 496,000
------------ -------------
Total current liabilities..... 9,502,000 12,841,000
Subordinated note payable to related
party, less current maturities........ 776,000 2,529,000
Revolving line of credit................ 8,800,000 9,500,000
Long-term debt, less current
maturities............................ 294,000 168,000
Obligation under capital lease, less
current maturities.................... 1,517,000 1,489,000
------------ -------------
Total liabilities............. 20,889,000 26,527,000
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value;
authorized 2,500,000 shares;
issued 100 shares (pre
stock-split) in 1996 and 145,000
shares in 1997.................... 1,000 1,450,000
Treasury stock, 51,290 shares at
cost.............................. -- (2,690,000)
Additional paid-in capital......... 24,000 --
Retained earnings.................. 7,605,000 9,624,000
------------ -------------
Total stockholders' equity.... 7,630,000 8,384,000
------------ -------------
Total liabilities and
stockholders' equity...... $ 28,519,000 $ 34,911,000
============ =============
SEE ACCOMPANYING NOTES.
F-19
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 THROUGH
------------------------------ SEPTEMBER 30,
1995 1996 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Net sales............................... $ 41,204,000 $ 44,726,000 $ 42,296,000
Cost of goods sold...................... 26,196,000 26,707,000 25,114,000
-------------- -------------- -------------
Gross profit............................ 15,008,000 18,019,000 17,182,000
Selling, general and administrative
expenses.............................. 11,285,000 12,818,000 11,664,000
-------------- -------------- -------------
Operating income........................ 3,723,000 5,201,000 5,518,000
Interest expense........................ (1,235,000) (1,118,000) (1,015,000)
Interest income......................... 22,000 56,000 26,000
Other expense........................... (91,000) -- --
-------------- -------------- -------------
Income before income taxes.............. 2,419,000 4,139,000 4,529,000
Provision for income taxes.............. 995,000 1,628,000 1,860,000
-------------- -------------- -------------
Net income.............................. $ 1,424,000 $ 2,511,000 $ 2,669,000
============== ============== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK AT COST
----------------------- PAID-IN ------------------------- RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS
--------- ------------ ---------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 100 $ 1,000 $ 24,000 -- $ -- $ 3,670,000
Net income...................... -- -- -- -- -- 1,424,000
--------- ------------ ---------- --------- -------------- ------------
Balance, December 31, 1995........... 100 1,000 24,000 -- -- 5,094,000
Net income...................... -- -- -- -- -- 2,511,000
--------- ------------ ---------- --------- -------------- ------------
Balance, December 31, 1996........... 100 1,000 24,000 -- -- 7,605,000
Shares issued and shares
repurchased................... 45 -- 776,000 (51) (2,690,000) --
Stock-split (1,000 to 1)........ 144,855 1,449,000 (800,000) (51,239) -- (650,000)
Net income...................... -- -- -- -- -- 2,669,000
--------- ------------ ---------- --------- -------------- ------------
Balance, September 30, 1997.......... 145,000 $ 1,450,000 $ -- (51,290) $ (2,690,000) $ 9,624,000
========= ============ ========== ========= ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1,
1997 THROUGH
YEAR ENDED DECEMBER 31, SEPTEMBER
------------------------------ 30,
1995 1996 1997
-------------- -------------- ------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income......................... $ 1,424,000 $ 2,511,000 $ 2,669,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization............... 271,000 180,000 129,000
Deferred taxes................ (173,000) (372,000) 4,000
Loss on disposal of asset..... 14,000 -- --
Changes in operating assets
and liabilities:
Accounts receivable...... (612,000) 847,000 (2,588,000)
Inventory................ (2,502,000) (5,567,000) (3,336,000)
Other receivables........ -- (31,000) --
Accounts payable and
accrued expenses...... 501,000 2,023,000 3,176,000
-------------- -------------- ------------
Net cash provided by (used in)
operating activities............. (1,077,000) (409,000) 54,000
INVESTING ACTIVITIES
Collections of note receivable..... -- 42,000 --
(Investment in) return of security
deposits and other assets........ 6,000 (251,000) --
Purchase of leasehold improvements
and equipment.................... (89,000) (114,000) (138,000)
Proceeds from sale of assets....... 13,000 -- 14,000
-------------- -------------- ------------
Net cash used in investing
activities....................... (70,000) (323,000) (124,000)
FINANCING ACTIVITIES
Principal payments on long-term
debt............................. (128,000) (169,000) (127,000)
Net advances on revolving line of
credit........................... 1,175,000 1,063,000 700,000
Principal payments on obligation
under capital lease.............. (20,000) (23,000) (23,000)
Repayment on stockholder note...... -- -- (3,000)
-------------- -------------- ------------
Net cash provided by financing
activities....................... 1,027,000 871,000 547,000
-------------- -------------- ------------
Net increase (decrease) in cash.... (120,000) 139,000 477,000
Cash at beginning of year.......... 237,000 117,000 256,000
-------------- -------------- ------------
Cash at end of year................ $ 117,000 $ 256,000 $ 733,000
============== ============== ============
Cash paid during the year for:
Interest...................... $ 899,000 $ 1,029,000 $ 829,000
============== ============== ============
Income taxes.................. $ 715,000 $ 404,000 $ 930,000
============== ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-22
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Alatec Products, Inc. (the "Company") is a wholesale distributor of
industrial and aerospace fasteners throughout the United States, Canada, Europe,
South America, and the Far East. Sales to the aerospace and defense industries
represent a significant portion of the Company's total annual sales. The
Company's corporate headquarters are based in Chatsworth, California, and it has
regional sales offices in six states.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company's wholly owned
subsidiaries, Trace Alatec Supply Company, Inc.; Alatec Race, Inc.; Alatec
Fastener and Component Group, Inc.; Alatec Cable Harness and Assembly Division,
Inc.; and Alatec International Sales, Inc., a foreign international sales
corporation. All significant intercompany accounts and transactions have been
eliminated.
CONCENTRATIONS OF CREDIT RISK
The Company distributes industrial and aerospace fasteners to manufacturers
in a wide variety of industries including the aerospace and defense industries.
Credit is extended based on an evaluation of the customer's financial condition
and collateral is typically not required. Credit losses are provided for in the
financial statements through a charge to operations. Credit losses have been
consistently within management's expectations. Provisions for bad debts and
accounts receivable write-offs have not been significant.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash maintained in bank deposit accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories consist primarily of industrial and aerospace fasteners and
related hardware held for sale and are valued at the lower of cost (first-in,
first-out method) or market.
PROPERTY UNDER CAPITAL LEASES, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
Leasehold improvements, buildings acquired under capital leases, and
equipment are recorded at cost. Depreciation is computed using straight-line and
primarily accelerated methods over useful lives ranging from 5 to 20 years.
Leasehold improvements and buildings acquired under capital leases are amortized
over the lesser of the life of the lease or the life of the improvements.
The amortization expense on assets acquired under capital leases is
included with depreciation expense on owned assets.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
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 carrying value of the Company's debt facilities and capital
lease agreements approximates fair value because the rates on such facilities
are
F-23
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
variable, based on current market, or are at fixed rates currently available to
the Company. The rate of the subordinated note payable to stockholder (discussed
in Note 4 and Note 7) is less than the market rate currently available to the
company, however, the difference between the carrying value of this note and the
fair value is not significant.
NET SALES RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily allowances for discounts and
returns.
EXPORT SALES
The Company recorded export sales of $8,847,000, $8,875,000, and $9,434,000
in the years ended December 31, 1995 and 1996 and the period from January 1,
1997 through September 30, 1997, respectively. The Company has export sales
through its foreign sales corporation to Canada, Europe, South America, and the
Far East of which no country or region is individually significant.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
2. PROPERTY AND EQUIPMENT
Property under capital leases, leasehold improvements, and equipment
consist of:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
Automobile equipment................. $ 181,000 $ 181,000
Leasehold improvements............... 201,000 208,000
Office equipment..................... 299,000 327,000
Warehouse equipment.................. 290,000 312,000
Computer equipment................... 674,000 741,000
Buildings acquired under capital
leases............................... 1,637,000 1,637,000
------------- --------------
3,282,000 3,406,000
Less accumulated depreciation,
including amortization of assets
acquired under capital leases...... 1,699,000 1,828,000
------------- --------------
$ 1,583,000 $1,578,000
============= ==============
F-24
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. REVOLVING LINE OF CREDIT
The revolving line of credit represents borrowings under a $13.3 million
line of credit with a bank. This facility expires in June 1999. At September 30,
1997, unused credit available under this facility was $3,000,000. The Company
has classified all borrowings outstanding under its line of credit as a
long-term liability as it intends to maintain borrowings of at least $9.5
million during 1998. The Company may borrow amounts against 80% of eligible
trade receivables and 50% of eligible inventory, up to $7,000,000. The note
provides for interest at the prime rate (8.5% at September 30, 1997) and is
collateralized by inventory, accounts receivable, equipment and the personal
guarantee of a stockholder. The credit agreement also provides for standby
letters of credit of up to $100,000. At September 30, 1997, there were no
amounts outstanding on the letters of credit. The credit agreement contains
certain restrictive financial covenants including, but not limited to, minimum
working capital requirements and dividend restrictions. As of September 30,
1997, the Company was in compliance with the financial covenants. However, at
September 30, 1997, the Company was not in compliance with certain nonfinancial
covenants relating to providing information and notice of defined transactions
and events to the bank. The bank has provided a written waiver for these
covenant violations and management believes that the Company will be in
compliance with these covenants in future periods.
4. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Note payable to a bank, secured by a
vehicle costing $32,850, with monthly
payments of $507, including interest
at 9.99%, maturing June 1999.......... $ 13,000 $ 9,000
Note payable to a bank, secured by
accounts receivable, inventory and
equipment, with monthly payments of
$13,646 plus interest at .75% over the
bank's prime rate (8.5% at September
30, 1997), maturing September 1999.... 450,000 328,000
Note payable to a stockholder,
unsecured, due February 1998, with
interest payable monthly at 9%,
subordinated to all senior bank
debt.................................. 776,000 --
Note payable to a former stockholder,
secured by assets of the corporation,
due November 2024, with interest
payable monthly at 5.64%, subordinated
to all senior bank debt............... -- 2,687,000
------------ -------------
1,239,000 3,024,000
Less current maturities................. 169,000 327,000
------------ -------------
$1,070,000 $ 2,697,000
============ =============
As discussed in Note 7, the $776,000 note payable to a stockholder was
cancelled in exchange for 45 shares (pre stock-split) of common stock.
F-25
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities required on long-term debt at September 30, 1997
(not including the revolving line of credit) are due in future years as follows:
Fiscal year ending:
1998............................... $ 327,000
1999............................... 334,000
2000............................... 174,000
2001............................... 182,000
2002............................... 191,000
Thereafter......................... 1,816,000
------------
$ 3,024,000
============
5. LEASE COMMITMENTS
The Company leases a portion of its facilities, equipment, and vehicles
under noncancelable capital and operating lease agreements. In April 1992, the
Company entered into a capital lease with a stockholder for its Chatsworth
facilities with an original cost of $1,637,000. Monthly installments, subject to
Consumer Price Index adjustments and including interest at 11.6%, are required
through March 2012. Additionally, the Company leases a smaller facility from the
stockholder under an operating lease.
Future minimum lease payments under the capital and operating leases,
together with the present value of the net minimum lease payments, as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
RELATED-PARTY
------------------------
CAPITAL OPERATING
LEASE LEASES OTHER TOTAL
---------- ---------- ---------- ------------
Fiscal year ending:
<S> <C> <C> <C> <C> <C>
1998............................ $ 212,000 $ 457,000 $ 268,000 $ 937,000
1999............................ 212,000 352,000 246,000 810,000
2000............................ 212,000 352,000 220,000 784,000
2001............................ 212,000 352,000 173,000 737,000
2002............................ 215,000 349,000 43,000 607,000
Thereafter...................... 2,135,000 3,082,000 -- 5,217,000
---------- ---------- ---------- ------------
Total minimum lease payments.... 3,198,000 $4,944,000 $ 950,000 $ 9,092,000
========== ========== ============
Less amount representing interest.... 1,672,000
----------
Present value of net minimum lease
payments........................... 1,526,000
Current maturities................... 37,000
----------
Long-term portion.................... $1,489,000
==========
</TABLE>
Total rental and interest expense charged to operations for the nine months
ended September 30, 1997 and the years ended December 31, 1996 and 1995 was
approximately $640,000, $778,000, and $697,000, respectively, including amounts
to related parties of $451,000, $359,000, and $322,000, respectively.
6. 401(K) PLAN
The Company has a defined contribution 401(k) plan (the "Plan") for
substantially all of the Company's full-time employees. The Company may make
discretionary contributions and, in addition, may match participants'
contributions. The Company contributed $80,000, $99,000, and $80,000 in matching
contributions to the plan for the nine months ended September 30, 1997 and the
years ended December 31,
F-26
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 and 1995, respectively. Additionally, in 1997, the Board of Directors
approved a $300,000 discretionary contribution to the Plan. Accordingly, the
contribution was accrued and expensed as of September 30, 1997.
7. RELATED-PARTY TRANSACTIONS
EQUITY TRANSACTIONS
At December 31, 1996, the Company was a closely held corporation and all of
the outstanding common stock was owned by immediate family members. During May
1997, certain equity transactions occurred simultaneously. The Company issued 45
shares (pre stock-split) of common stock in exchange for the cancellation of the
a stockholder note payable of $776,000. Simultaneously, the Company purchased as
treasury stock 51.29 shares (pre stock split) of common stock representing all
of the shares of common stock held by one of the family members in exchange for
a note payable in the original amount of $2,690,000. The terms of these notes
payable are described below.
NOTES PAYABLE AND RECEIVABLE
As discussed above, the Company had a 9%, $776,000 note payable to a
stockholder at December 31, 1996. At September 30, 1997, the Company had a
5.64%, $2,687,000 note payable to a former stockholder and current Director, due
November 2024. The note is subordinated to all senior bank debt and is
guaranteed by the President and sole remaining stockholder of the Company. The
note contains provisions that upon the death of the former stockholder, the note
will be terminated and the related debt will be cancelled. During the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
interest expense of $70,000, $69,000, and $50,000, respectively, was incurred on
these notes.
In addition, the Company has a non-interest-bearing receivable from a
stockholder of $9,000 as of December 31, 1996 and accrued rents and interest due
to a stockholder of $88,000 as of December 31, 1996. These balances are included
in receivables and other accrued expenses, respectively.
DEBT GUARANTEE
The U.S. Small Business Administration ("SBA") has issued a Secured
Business Disaster Loan to a related party for earthquake repairs and
improvements to the Chatsworth facility, which is owned by a stockholder and
leased to the Company. The Company is identified as a co-borrower; however, the
Company has reflected this as a contingent liability similar to a debt
guarantee. The remaining balance on the SBA loan was $1,255,231 and $1,217,000
at December 31, 1996 at September 30, 1997, respectively. The debt matures in
August 2024. No amount of this debt is recorded in the accompanying financial
statements.
RELATED PARTY PURCHASES
The Company purchased approximately $1,100,000, $1,386,000, and $1,100,000
in 1995, 1996, and during the period from January 1, 1997 through September 30,
1997, respectively, from a supplier which is 50 percent owned by the principal
stockholder. Additionally, the Company owed $136,000, $209,000, and $154,000 for
the respective periods related to goods purchased for resale classified as
accounts payable in the balance sheet.
8. CONTINGENCIES
INCOME TAX EXAMINATION
The Company's federal income tax returns for the year ended January 31,
1995 are currently being examined by the Internal Revenue Service (the "IRS").
No notices of deficiency have been issued. The Internal Revenue Service has
proposed the capitalization of certain repairs to the Company's Chatsworth
facilities, which sustained earthquake damage, rather than to treat them as
deductible expenses in the year
F-27
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred, capitalization of freight costs and adjustments for certain other
nondeductible accrued expenses. The Company has recorded an adjustment of
approximately $120,000 for these known deficiencies as a result of the
examination. $116,000 of this adjustment is reflected in the 1996 tax provision
and approximately $4,000 in the 1997 tax provision. The Company has reached an
understanding that resolves all open issues on the audit; however, this
understanding is subject to final IRS approval. There can be no assurance that
there will be no additional assessments; however, management believes that any
additional assessment would not be material.
During 1997, the Company detected that it had erroneously omitted certain
amounts of inventory from its financial statements for federal and state income
tax purposes for tax years ending December 31, 1995 and 1996. The Company
anticipates filing amended returns for 1996 and certain prior periods and has
accrued the tax liability and related interest in the respective financial
statements. Management believes it will be successful in settling this issue
with the Internal Revenue Service and state taxing authorities within the
amounts accrued in the financial statements.
9. INCOME TAXES
Components of income tax expense are as follows:
JANUARY 1,
1997
YEAR ENDED DECEMBER 31, THROUGH
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ --------------
Currently paid or payable:
Federal......................... $ 1,049,000 $ 1,611,000 $1,496,000
State........................... 119,000 389,000 360,000
------------ ------------ --------------
1,168,000 2,000,000 1,856,000
Deferred:
Federal......................... (157,000) (357,000) 3,000
State........................... (16,000) (15,000) 1,000
------------ ------------ --------------
(173,000) (372,000) 4,000
------------ ------------ --------------
$ 995,000 $ 1,628,000 $1,860,000
============ ============ ==============
The net deferred tax assets (liabilities) consist of the following:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
Deferred tax assets:
Receivables allowance.............. $ 47,000 $ 75,000
Inventory allowance................ 562,000 632,000
Accrued expenses................... 239,000 243,000
Equipment.......................... 32,000 198,000
Uniform cost capitalization........ 618,000 583,000
------------- --------------
1,498,000 1,731,000
------------- --------------
Deferred tax liabilities, other...... (9,000) (246,000)
------------- --------------
$ 1,489,000 $1,485,000
============= ==============
Net deferred taxes consist of the
following:
Current assets....................... $ 1,457,000 $1,420,000
Noncurrent assets.................... 32,000 65,000
------------- --------------
$ 1,489,000 $1,485,000
============= ==============
F-28
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate varied from the federal statutory tax rate
during the nine months ended September 30, 1997 and the years ended December 31,
1996 and 1995 for the following reasons:
YEAR ENDED DECEMBER JANUARY 1,
31, 1997 THROUGH
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
Expected income tax rate................ 34.0% 34.0% 34.0%
International export sales partially
exempt from federal income taxes (FSC
benefit).............................. (9.2) (4.4) (2.6)
State taxes, net of federal benefit..... 7.3 7.7 7.2
Adjustment to reflect proposed IRS audit
settlement............................ -- 6.0 0.2
Nondeductible expenses.................. 4.3 2.1 1.0
Other................................... 4.7 (6.1) 1.3
--------- --------- -------------
Effective tax rate...................... 41.1% 39.3% 41.1%
========= ========= =============
10. STOCKHOLDERS' EQUITY
In May 1997, the Company's Board of Directors (the "Board") authorized an
increase in the authorized shares of common stock from 2,500 shares to 2,500,000
shares. Concurrently, the Board approved a 1,000 for 1 stock-split.
11. SUBSEQUENT EVENT (UNAUDITED)
In December 1997, the Company and its stockholder entered into a definitive
agreement with a wholly owned subsidiary of Pentacon, Inc., which among other
things calls for the merger of the Company with the Pentacon, Inc. subsidiary.
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc. and
The Board of Directors
AXS Solutions, Inc.
We have audited the accompanying balance sheets of AXS Solutions, Inc. as
of December 31, 1996 and September 30, 1997, and the related statements of
income, shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996 and the period from January 1, 1997 through
September 30, 1997. 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 generally accepted auditing
standards. 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 financial position of AXS Solutions, Inc. at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996
and the period from January 1, 1997 through September 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
November 7, 1997
F-30
<PAGE>
AXS SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 3,487,371 $ 2,777,160
Accounts receivable -- net of
allowance for doubtful accounts of
$91,500 in 1996 and $105,000 in
1997.............................. 3,710,420 3,160,537
Inventory.......................... 4,952,648 5,323,516
Prepaid expenses and other current
assets............................ 66,839 27,737
Receivable from shareholder........ 169,476 169,476
------------ -------------
Total current assets.................... 12,386,754 11,458,426
Property and equipment:
Building and improvements.......... 192,763 212,437
Machinery and equipment............ 2,162,291 2,220,002
Assets under capital lease......... 1,058,589 1,058,589
------------ -------------
Total cost.............................. 3,413,643 3,491,028
Less: accumulated depreciation and
amortization...................... (1,719,540) (1,890,382)
------------ -------------
1,694,103 1,600,646
Goodwill................................ 3,118,414 3,058,310
Non-compete agreement................... 537,050 457,805
Cash surrender value of life
insurance............................. 617,196 654,198
Other................................... 336,832 454,867
------------ -------------
Total assets............................ $ 18,690,349 $ 17,684,252
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Demand note payable................ $ 3,300,000 $ 1,939,000
Accounts payable................... 1,878,235 1,919,913
Accrued expenses and other current
liabilities....................... 713,010 467,432
Shareholder distribution payable... -- 2,713,162
Current portion of long-term debt
to former shareholder............. 70,199 76,451
Current portion of capital lease
obligation........................ 53,215 76,420
------------ -------------
Total current liabilities............... 6,014,659 7,192,378
Long-term debt to former shareholder,
less current portion.................. 423,715 347,264
Capital lease obligation, less current
portion............................... 988,375 911,955
Commitments and contingencies
Shareholders' equity:
Common stock:
AXS Solutions, Inc. class A
voting common stock, no
par value, authorized
1,000 shares, issued and
outstanding, 100 shares... 55,785 55,785
AXS Solutions, Inc. class B
nonvoting common stock, no
par value, authorized
99,000 shares, issued and
outstanding, 9,900
shares.................... 5,522,687 5,650,187
Retained earnings.................. 5,685,128 3,526,683
------------ -------------
Total shareholders' equity.............. 11,263,600 9,232,655
------------ -------------
Total liabilities and shareholders'
equity................................ $ 18,690,349 $ 17,684,252
============ =============
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE-MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Net sales............................... $ 20,227,664 $ 23,176,615 $ 22,002,438
Cost of goods sold...................... 12,993,622 15,052,732 15,275,990
------------ ------------ -------------
Gross profit............................ 7,234,042 8,123,883 6,726,448
Selling, general and administrative
expenses.............................. 4,709,974 5,647,019 4,979,848
------------ ------------ -------------
Operating income........................ 2,524,068 2,476,864 1,746,600
Interest expense........................ (289,310) (326,785) (207,766)
Other income............................ 232,747 19,619 7,513
------------ ------------ -------------
Net income.............................. $ 2,467,505 $ 2,169,698 $ 1,546,347
============ ============ =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
AXS SOLUTIONS, INC.
---------------------- CHAMPION RETAINED
CLASS A CLASS B BOLT CORP. EARNINGS TOTAL
------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.............. $ -- $ -- $ 378,472 $ 5,350,075 $ 5,728,547
1995 Net income......................... -- -- -- 2,467,505 2,467,505
1995 Shareholder distributions.......... -- -- -- (3,294,756) (3,294,756)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1995............ -- -- 378,472 4,522,824 4,901,296
1996 Net income......................... -- -- -- 2,169,698 2,169,698
Issuance of AXS Solutions, Inc. Common
Stock (80 Shares Voting Common and
7,920 Nonvoting Common) in exchange
for all of Champion Bolt Corp. Common
Stock................................. 3,785 374,687 (378,472) -- --
Purchase of Hoyt Fastener Corp. in
exchange for AXS Solutions, Inc.
Common Stock (20 Shares Voting Common
and 1,980 Shares Nonvoting Common).... 52,000 5,148,000 -- -- 5,200,000
1996 Shareholder distributions.......... -- -- -- (1,007,394) (1,007,394)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1996............ 55,785 5,522,687 -- 5,685,128 11,263,600
1997 Net income......................... -- -- -- 1,546,347 1,546,347
Transfer of 75 Nonvoting Common Shares
from existing shareholders in exchange
for acquired customers................ -- 127,500 -- -- 127,500
1997 Shareholder distributions.......... -- -- -- (991,630) (991,630)
Distribution of cumulative S-Corporation
earnings.............................. -- -- -- (2,713,162) (2,713,162)
------- ------------ ----------- -------------- --------------
Balance at September 30, 1997........... $55,785 $ 5,650,187 $ -- $ 3,526,683 $ 9,232,655
======= ============ =========== ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-33
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income........................... $ 2,467,505 $ 2,169,698 $ 1,546,347
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 250,887 326,550 373,095
Loss on disposal of fixed
assets........................... 50,371 6,299 --
Gain on sale of fixed assets..... (232,747) -- --
Increase in cash surrender value
of officers' life insurance... (59,529) (58,393) (37,002)
Changes in operating assets and
liabilities:
Accounts receivable......... 284,696 (712,179) 549,883
Inventory................... 1,237,850 759,041 (370,868)
Prepaid expenses and other
current assets............ (38,803) (16,531) 39,102
Receivable from
shareholder................. -- (169,476) --
Other....................... (82,856) 611 6,714
Accounts payable............ (450,351) 150,587 41,678
Accrued expenses and other
current liabilities....... (50,335) 1,511 (245,578)
------------ ------------ -------------
Net cash provided by operating
activities......................... 3,376,688 2,457,718 1,903,371
INVESTING ACTIVITIES
Purchases of property and
equipment............................ (210,567) (152,223) (137,538)
Proceeds from sale of fixed assets... -- 25,300 --
Cash acquired during acquisition of
Hoyt Fastener Corp. ............... -- 416,743 --
------------ ------------ -------------
Net cash (used in) provided by
investing activities............... (210,567) 289,820 (137,538)
FINANCING ACTIVITIES
Proceeds from demand note payable.... 19,850,000 23,500,000 12,589,000
Payments on demand note payable...... (18,950,000) (23,300,000) (13,950,000)
Payments on long-term debt to former
shareholder........................ (58,487) (84,541) (70,199)
Payments on capital lease
obligation........................... -- (16,999) (53,215)
Shareholder distributions............ (3,294,756) (1,007,394) (991,630)
------------ ------------ -------------
Net cash used in financing
activities........................... (2,453,243) (908,934) (2,476,044)
------------ ------------ -------------
Net increase (decrease) in cash and
cash equivalents................... 712,878 1,838,604 (710,211)
Cash and cash equivalents at
beginning of period................ 935,889 1,648,767 3,487,371
------------ ------------ -------------
Cash and cash equivalents at end of
period............................. $ 1,648,767 $ 3,487,371 $ 2,777,160
============ ============ =============
SUPPLEMENTARY CASH FLOW DATA:
- -------------------------------------
Interest paid........................ $ 284,796 $ 323,753 $ 217,305
============ ============ =============
</TABLE>
SIGNIFICANT NON-CASH TRANSACTIONS
- -------------------------------------
1995: Sale of fixed assets in
exchange for note
receivable of $250,000
1996: Incurred capital lease
obligation for $1,058,589
Acquisition of Hoyt
Fastener Corp. in exchange
for $5,200,000 of AXS
Solutions, Inc. common
stock (net assets of
$1,638,130, net of cash
acquired of $416,743)
1997: Transferred 75 nonvoting
common shares ($127,500)
from existing shareholder
in exchange for acquired
customers
Accrual of S-Corporation
distribution of $2,713,162
SEE ACCOMPANYING NOTES.
F-34
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BUSINESS AND BASIS OF PRESENTATION
AXS Solutions, Inc. ("AXS Solutions") is a wholesaler and distributor of
threaded fastener products, including nuts, bolts, washers and screws, to
customers located predominantly in the Northeastern and Midwestern United
States. AXS Solutions was incorporated on August 19, 1996. On August 31, 1996,
the shareholders of Champion Bolt Corp. ("Champion Bolt") surrendered all of
their shares of common stock of Champion Bolt in exchange for shares of both
voting and non-voting common stock of AXS Solutions. There was deemed to be no
change of control as a result of this transaction. Subsequently, the Champion
Bolt shares were cancelled for no consideration.
AXS Solutions then acquired all of the common stock of Hoyt Fastener Corp.
("Hoyt Fastener") in exchange for shares of both voting and non-voting common
stock of AXS Solutions. This acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price (approximately $5.2
million based on an independent valuation) has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. Goodwill of approximately $3,145,000 was recorded as a result of
this acquisition. The Hoyt Fastener shares were also subsequently cancelled. The
operating results of the acquired business, Hoyt Fastener, have been included in
the income statement from the date of the acquisition.
The financial statements presented herein represent the operating results
of Champion Bolt for the period from January 1, 1995 through August 31, 1996 and
the operating results of AXS Solutions for the period from September 1, 1996
through September 30, 1997. The reference to "Company" in these financial
statements includes such presentation.
The following unaudited results of operations have been prepared assuming
the acquisition had occurred on January 1, 1995. These results are not
necessarily indicative of results of future operations nor of results that would
have occurred had the acquisitions been consummated as of January 1, 1995:
1995 1996
-------------- --------------
Net sales............................... $ 27,332,285 $ 28,044,941
Net income.............................. $ 2,803,676 $ 2,428,068
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory consists of product held for resale and is stated at the lower of
cost or market, with cost determined using the first-in, first-out (FIFO) method
of inventory valuation.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the respective estimated useful lives of the assets
ranging from 5 to 40 years. The capital lease is amortized over the estimated
useful life of the asset or lease term, as appropriate, using the straight-line
method. Depreciation expense includes amortization of assets recorded under the
capital lease. Accumulated amortization for the capital lease was $35,288 and
$114,686 at December 31, 1996 and September 30, 1997, respectively.
NON-COMPETE AGREEMENT
The cost of the non-compete agreement is being amortized over 10 years, the
term of the covenant. Accumulated amortization amounted to $519,495 and $598,740
at December 31, 1996 and September 30, 1997, respectively.
F-35
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill is being amortized over a period of 40 years. Accumulated
amortization amounted to $26,713 and $86,817 at December 31, 1996 and September
30, 1997, respectively.
CASH EQUIVALENTS
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents.
INCOME TAXES
The Company is a Subchapter S Corporation and as such, its stockholders are
taxed directly on all income.
NET SALES RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily related to discounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. 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. One customer
accounted for approximately 55%, 50% and 45% of revenues for 1995, 1996 and the
period from January 1, 1997 through September 30, 1997, respectively. At
December 31, 1996 and September 30, 1997, accounts receivable balances related
to this customer represented approximately 34% and 28% of total accounts
receivable, 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 carrying value of the Company's debt facilities and capital
lease agreements approximate fair value because the rates on such facilities are
variable, based on current market or are at fixed rates currently available to
the Company.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
F-36
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Non-interest bearing obligation payable
to a former shareholder for
non-compete agreement, payable in
monthly payments of $10,000 through
January 15, 2002. Implicit interest of
8.5%.................................. $493,914 $ 423,715
Less current portion.................... 70,199 76,451
------------ -------------
$423,715 $ 347,264
============ =============
Scheduled maturities on long-term debt for each of the next five years as
of September 30, 1997 are as follows:
Year ending September 30, 1998.......... $ 76,451
1999....... 94,092
2000....... 102,409
2001....... 111,461
2002....... 39,302
----------
$ 423,715
==========
The Company has a demand note payable with a bank up to a maximum of
$3,000,000, with interest payable at the prime rate. The demand note payable is
guaranteed by separate balances with this bank of two of the four voting
shareholders of the Company.
In addition, at September 30, 1997 the Company has an available letter of
credit of approximately $50,000 for inventory purchases.
4. LEASES
The Company is obligated under a noncancelable lease with a related party
which expires August 31, 2006. Under this lease, the lessor of warehouse and
office space in Erie, Pennsylvania is a partnership composed of two of the four
voting shareholders of the Company. The Company is also obligated under
noncancelable operating leases for certain automobiles and warehouse equipment.
Future minimum annual operating lease payments under all noncancelable leases as
of September 30, 1997 are as follows:
Year ending September 30, 1998....... $ 264,177
1999.... 253,180
2000.... 241,818
2001.... 240,285
2002.... 240,000
Thereafter........................... 940,000
Rent expense was approximately $288,000, $258,000 and $188,000 for 1995,
1996 and the period from January 1, 1997 through September 30, 1997,
respectively.
The Company is also obligated under a capital lease with a related party
which expires August 31, 2006. Under this lease, the lessor of warehouse and
office space in Niles, Illinois includes family residual trusts which represent
two of the four voting shareholders of the Company.
F-37
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual capital lease payments as of September 30, 1997 are
as follows:
TOTAL
------------
Year ending September 30, 1998....... $ 157,500
1999.... 157,500
2000.... 157,500
2001.... 157,500
2002.... 157,500
Thereafter......................... 630,000
------------
Total minimum lease payments......... 1,417,500
Amount representing interest......... 429,125
------------
Present value of minimum lease
payments............................. 988,375
Current maturities................... 76,420
------------
Long-term portion.................... $ 911,955
============
5. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory defined-benefit pension plan
covering all of its employees. The benefits are based on years of service and
the employee's compensation during the entire period of employment. The
Company's funding policy is to contribute annually the amount necessary to meet
minimum funding standards of ERISA. Plan assets are invested primarily in
corporate stocks and government securities.
The following table sets forth the plan's funded status and amounts
recognized in the Company's respective balance sheets:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Actuarial present value of benefit
obligations:
Vested............................. $ (352,039) $(406,538)
Non-vested......................... (37,690) (34,920)
------------ -------------
Accumulated benefit obligations......... $ (389,729) $(441,458)
============ =============
Projected benefit obligation............ $ (503,184) $(559,125)
Plan assets at fair value............... 714,701 806,946
------------ -------------
Plan assets in excess of projected
benefit obligation.................... 211,517 247,821
Unrecognized net transition
obligation............................ 2,005 1,671
Unrecognized net gain from past
experience different from that assumed
and effects of changes in
assumptions........................... (108,110) (156,660)
------------ -------------
Prepaid pension cost.................... $ 105,412 $ 92,832
============ =============
F-38
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The prepaid pension costs are recorded in other noncurrent assets on each
of the respective balance sheets.
Net pension expense was comprised of the following:
PERIOD FROM
YEARS ENDED JANUARY 1, 1997
DECEMBER 31, TO SEPTEMBER 30,
---------------------- ----------------
1995 1996 1997
---------- ---------- ----------------
Service cost.......................... $ 43,376 $ 43,219 $ 39,305
Interest cost on projected benefit
obligation.......................... 31,594 34,419 37,739
Actual return on plan assets.......... (86,202) (46,590) (114,545)
Net amortization and deferral......... 52,751 (2,978) 18,921
---------- ---------- ----------------
$ 41,519 $ 28,070 $ (18,580)
========== ========== ================
The assumptions used in these calculations were as follows for each of the
periods presented:
Weighted average discount rate.......... 7.5%
Rate of increase in compensation
levels................................ 3%
Expected long-term rate of return on
assets................................ 8%
Employee turnover....................... None
Mortality Table......................... 1983 GAM
The Company also sponsors two defined contribution plans under Section
401(k) of the Code. The first plan covers all eligible Pennsylvania employees of
the Company, and participants are permitted to make elective pretax deferrals up
to 20% of their compensation. Under this plan, the Company has the ability to
make additional discretionary contributions allocated to the participants as a
flat dollar amount or in proportion to their compensation. The second plan
covers all eligible Illinois employees of the Company, and participants are
permitted to make elective pretax deferrals up to a set percentage of their
compensation (to be determined by the Company) as well as post-tax contributions
subject to IRS limitations. Under this plan, the Company has the ability to make
additional discretionary contributions allocated to the participants in
proportion to their compensation. The Company contributed approximately $0,
$19,200, and $9,600 to these plans for 1995, 1996, and the period January 1,
1997 through September 30, 1997, respectively.
6. RELATED PARTIES
The Company has a receivable from a shareholder which represents an excess
S Corporation distribution which is expected to be paid back to the Company by
December 31, 1997.
The shareholder distribution payable is a result of the Company declaring a
dividend in 1997 in the amount equal to the total undistributed S Corporation
accumulated earnings of the Company as of September 30, 1997.
7. COMMITMENTS AND CONTINGENCIES
Under terms of the Shareholders Agreement, upon the death or withdrawal of
a shareholder, the Company has the option to purchase that shareholder's
non-voting shares at the purchase price as defined in the Shareholders
Agreement. The remaining shareholders then have the option to purchase the
remaining decedent/withdrawn shareholder's non-voting shares at the purchase
price as defined in the Shareholders Agreement. If any of the decedent/withdrawn
shareholder's non-voting shares remain, the decedent/withdrawn shareholder's
estate has the option to require the Company to redeem such non-voting shares at
the purchase price as defined in the Shareholders Agreement.
F-39
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon the death or withdrawal of a shareholder, the Company is required to
redeem the voting shares of the decedent/withdrawn shareholder at the purchase
price as defined in the Shareholders Agreement.
8. SUBSEQUENT EVENT (UNAUDITED)
In December 1997, the Company and its shareholders entered into a
definitive agreement with a wholly-owned subsidiary of Pentacon, Inc. which
among other things calls for the merger of the Company with the Pentacon, Inc.
subsidiary.
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc.
and
Board of Directors
Maumee Industries, Inc.
We have audited the accompanying balance sheets of Maumee Industries, Inc.
(the "Company"), as of December 31, 1996 and September 30, 1997, and the
related statements of operations, stockholders' deficit, and cash flows for each
of the two years in the period ended December 31, 1996 and the period from
January 1, 1997 through September 30, 1997. 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 generally accepted auditing
standards. 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 financial position of Maumee Industries, Inc., at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996
and the period from January 1, 1997 through September 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 15, 1997
F-41
<PAGE>
MAUMEE INDUSTRIES, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS
Current assets:
Accounts receivable, less allowance
of $45,000 in 1996 and $70,000 in
1997............................. $ 3,421,509 $ 5,200,253
Inventories........................ 4,265,628 6,524,717
Prepaid expenses and other
assets........................... 26,562 24,362
Deferred income taxes.............. 165,000 139,000
------------ -------------
Total current assets.................... 7,878,699 11,888,332
Deferred income taxes................... 329,000 284,000
Property and equipment, at cost:
Machinery and equipment............ 2,367,139 2,781,709
Leasehold improvements............. 399,301 440,516
------------ -------------
2,766,440 3,222,225
Less accumulated depreciation and
amortization.......................... 1,994,219 2,247,242
------------ -------------
772,221 974,983
------------ -------------
Total assets............................ $ 8,979,920 $ 13,147,315
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft..................... $ 403,811 $ 1,001,999
Accounts payable................... 2,800,950 3,965,264
Income taxes payable............... 513,744 708,744
Accrued expenses................... 505,634 1,141,654
Notes payable...................... 5,605,357 5,855,550
Notes payable to principal
stockholder...................... 997,181 997,181
Current portion of capital lease
obligations...................... 39,412 154,291
------------ -------------
Total current liabilities............... 10,866,089 13,824,683
Long-term portion of capital lease
obligations........................... 146,496 270,984
------------ -------------
Total liabilities....................... 11,012,585 14,095,667
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value:
Authorized shares -- 2,830
Issued shares -- 318
Outstanding shares -- 103.5 in
1996 and 318 in 1997....... 41,000 691,000
Accumulated deficit..................... (1,503,115) (1,068,802)
------------ -------------
(1,462,115) (377,802)
Less treasury stock -- 77 shares in 1996
and 218 shares in 1997, at cost....... 570,550 570,550
------------ -------------
Total stockholders' deficit............. (2,032,665) (948,352)
------------ -------------
Total liabilities and stockholders'
deficit............................... $ 8,979,920 $ 13,147,315
============ =============
SEE ACCOMPANYING NOTES.
F-42
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997
YEARS ENDED DECEMBER 31, THROUGH
------------------------------ SEPTEMBER 30,
1995 1996 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Net sales............................... $ 20,582,200 $ 26,234,653 $ 27,472,902
Cost of sales........................... 16,099,808 19,712,909 19,557,148
-------------- -------------- -------------
Gross profit............................ 4,482,392 6,521,744 7,915,754
Selling and administrative expenses..... 4,626,153 5,277,107 6,628,643
-------------- -------------- -------------
Operating income (loss)................. (143,761) 1,244,637 1,287,111
Interest expense........................ (572,387) (585,090) (547,274)
Other income (expense).................. 2,578 (23,680) 10,476
-------------- -------------- -------------
Income (loss) before taxes.............. (713,570) 635,867 750,313
Income tax expense (benefit)............ (250,000) 304,000 316,000
-------------- -------------- -------------
Net income (loss)....................... $ (463,570) $ 331,867 $ 434,313
============== ============== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-43
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------------- --------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIT
------ ---------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... 103.5 $ 41,000 (77 ) $ (570,550) $(1,371,412) $ (1,900,962)
Net loss for 1995.................... -- -- -- -- (463,570) (463,570)
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1995......... 103.5 41,000 (77 ) (570,550) (1,834,982) (2,364,532)
Net income for 1996.................. -- -- -- -- 331,867 331,867
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1996......... 103.5 41,000 (77 ) (570,550) (1,503,115) (2,032,665)
Stock split (2.83 for 1)............. 189.5 -- (141 ) -- -- --
Net income for 1997.................. -- -- -- -- 434,313 434,313
Issuance of common stock............. 25 650,000 -- -- -- 650,000
------ ---------- ------ ------------ ----------- -------------
Balance at September 30, 1997........ 318 $ 691,000 (218 ) $ (570,550) $(1,068,802) $ (948,352)
====== ========== ====== ============ =========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-44
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997
YEARS ENDED DECEMBER 31, THROUGH
------------------------------- SEPTEMBER 30,
1995 1996 1997
-------------- --------------- --------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss).................. $ (463,570) $ 331,867 $ 434,313
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and
amortization............... 358,681 327,945 316,823
Issuance of common stock for
compensation............... -- -- 650,000
(Gain) or loss on disposal of
equipment.................. (1,283) 28,290 (8,980)
Deferred income taxes......... (22,000) (448,000) 71,000
Changes in operating assets
and liabilities:
Accounts receivable...... (453,257) (725,349) (1,778,744)
Inventories.............. (480,392) (1,328,228) (2,259,089)
Prepaid expenses and
other assets.......... (23,164) 12,912 2,200
Income tax receivable.... (239,150) 239,150 --
Accounts payable......... 762,714 866,783 1,164,314
Income taxes payable..... (36,653) 501,700 195,000
Accrued expenses......... (27,593) 160,410 636,020
-------------- --------------- --------------
Net cash used in operating
activities....................... (625,667) (32,520) (577,143)
INVESTING ACTIVITIES
Capital expenditures............... (204,581) (133,704) (210,968)
Proceeds from sale of equipment.... 2,367 1,342 59,200
-------------- --------------- --------------
Net cash used in investing
activities....................... (202,214) (132,362) (151,768)
FINANCING ACTIVITIES
Bank overdraft..................... (548,755) (100,295) 598,188
Payments on capital leases......... (26,475) (48,764) (119,472)
Proceeds from revolving line of
credit........................... 6,000,200 10,042,100 20,464,195
Payments on revolving line of
credit........................... (4,396,709) (10,003,263) (20,504,163)
Proceeds from notes payable........ 50,000 467,796 424,000
Payments on notes payable.......... (250,380) (192,692) (133,837)
-------------- --------------- --------------
Net cash provided by financing
activities....................... 827,881 164,882 728,911
Net increase (decrease) in cash.... -- -- --
Cash at beginning of year.......... -- -- --
-------------- --------------- --------------
Cash at end of year................ $ -- $ -- $ --
============== =============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-45
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Maumee Industries, Inc. (the "Company") is engaged in the wholesale
distribution of fasteners and nonfastener small parts primarily to
Midwestern-based manufacturers in the automotive industry. During for the years
ended December 31, 1995, and 1996, and period from January 1, 1997 through
September 30, 1997, net sales to two customers approximated $18,000,000,
$23,100,000, and $21,800,000, respectively. In relation to these customers,
approximately $4,300,000 was included in accounts receivable at September 30,
1997.
NET SALE RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily related to discounts.
INVENTORIES
Inventories consist of goods held for resale and are valued at the lower of
cost (first-in, first-out method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated on the cost basis.
Equipment is depreciated using accelerated depreciation methods based on
estimated useful lives ranging from three to ten years. Leasehold improvements
are amortized using the straight-line method over the lesser of the estimated
useful lives of the assets or the term of the related lease.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, prepaid expenses, and accounts
payable approximate fair value due to the short-term maturities of these
instruments. The carrying value of the Company's debt facilities and capital
lease agreements approximates fair value because the rates on such facilities
are variable, based on current market, or are at fixed rates currently available
to the Company.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES.
F-46
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. NOTES PAYABLE
At September 30, 1997, the Company has a bank line of credit under which
the Company may borrow up to $7,700,000. At September 30, 1997, the unused
portion of the line of credit was $2,194,032. Borrowings under this line of
credit bear interest at 1.5% over the bank's base rate (10% at September 30,
1997) and expire on May 31, 2000. The line of credit is collateralized by
substantially all of the Company's assets, including equipment, general
intangibles, inventory, receivables, and any balance in the collateral account.
The Company's principal stockholder has guaranteed the line of credit. The line
of credit agreement includes provisions for maintenance of minimum net worth and
restrictions on capital expenditures. The Company was in compliance with these
financial covenants at September 30, 1997.
At September 30, 1997, the Company has a special accommodation/over advance
note payable to a bank. The note is payable on demand and accrues interest at
the bank's base rate plus 2.5% (11% at September 30, 1997). If no demand is
made, the note is payable in 18 monthly installments of $16,667 plus interest,
beginning June 1, 1997. There was $233,332 outstanding on this note at September
30, 1997.
At September 30, 1997, the Company has an equipment loan payable to a bank.
The loan is payable on demand and accrues interest at the bank's base rate plus
1.5% (10% at September 30, 1997).
Equipment purchased from the proceeds of the installment notes is pledged
as collateral on the respective loans.
The Company made interest payments of approximately $453,000, $531,000, and
$529,000 for the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 through September 30, 1997, respectively.
3. NOTE PAYABLE TO STOCKHOLDER
At September 30, 1997, the Company has a note payable to the principal
stockholder. The note payable represents amounts advanced to the Company by the
principal stockholder. The notes require monthly interest payments at rates
ranging from 6.5% to 13.8% with principal payable upon demand. Interest payments
for the years ended December 31, 1995 and 1996 and for the period from January
1, 1997 through September 30, 1997 was approximately $45,377, $0, and $56,000,
respectively.
4. CAPITAL LEASE OBLIGATIONS
The Company has entered into capital lease arrangements to finance the
purchase of machinery and equipment. Future minimum payments under these
agreements as of September 30, 1997 are as follows:
1998................................. $ 189,251
1999................................. 134,959
2000................................. 91,196
2001................................. 53,532
2002................................. 39,237
----------
Total minimum lease payments......... 508,175
Amount representing interest......... 82,900
----------
Present value of minimum lease
payments............................. 425,275
Current maturities................... 154,291
----------
Long-term portion.................... $ 270,984
==========
The cost of assets held under capital leases as of September 30, 1997 and
December 31, 1996 was $619,987 and $261,149, respectively. Amortization of
equipment acquired under capital lease arrangements is included in depreciation
and amortization expense.
F-47
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS
The Company leases certain of its facilities and equipment under
noncancelable operating leases. Rent expense for the years ended December 31,
1995 and 1996 and the period from January 1, 1997 through September 30, 1997 was
$138,000, $174,000, and $120,000, respectively. Lease commitments at September
30, 1997 for long-term noncancelable operating leases are as follows:
1998................................. $ 278,299
1999................................. 82,486
2000................................. 43,040
----------
$ 403,825
==========
6. INCOME TAXES
Significant components of the provision for income taxes are as follows:
PERIOD FROM
JANUARY 1,
1997
YEARS ENDED DECEMBER 31, THROUGH
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
Current:
Federal....................... $ (183,000) $ 591,000 $ 192,000
State......................... (45,000) 161,000 53,000
------------ ------------ -------------
(228,000) 752,000 245,000
Deferred:
Federal....................... (22,000) (448,000) 71,000
------------ ------------ -------------
$ (250,000) $ 304,000 $ 316,000
============ ============ =============
The reconciliation of the income tax expense computed at U.S. federal
statutory tax rates to the reported tax expense is as follows:
PERIOD FROM
JANUARY 1,
1997
YEARS ENDED DECEMBER 31, THROUGH
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
Expected income tax expense (benefit)
at 34%............................. $ (242,615) $ 216,194 $ 255,106
State income taxes, net of federal
benefit............................ (36,099) 36,444 43,428
Non-deductible expenses.............. 2,662 26,050 17,466
Other................................ 26,052 25,312 --
------------ ------------ -------------
Reported total income tax expense
(benefit).......................... $ (250,000) $ 304,000 $ 316,000
============ ============ =============
The Company paid $59,076, $-0- and $50,000 of income taxes for the years
ended December 31, 1995 and 1996 and the period from January 1, 1997 through
September 30, 1997, respectively.
F-48
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. The components of the
deferred tax assets are as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Deferred tax assets:
Change in inventory estimate....... $378,834 $ 284,125
Nondeductible accruals:
Accrued interest.............. 21,496 21,496
Pension....................... 53,986 53,558
Other.............................. 39,684 63,821
------------ -------------
Total deferred tax assets............... $494,000 $ 423,000
============ =============
7. EMPLOYEE RETIREMENT PLANS
The Company maintains a defined contribution pension plan for all eligible
full-time employees. All contributions to the plan are made by the Company at an
amount equal to 7% of each participant's annual salary. The plan provides for
100% vesting of values accumulated for the employee after six years of service.
The Company also sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code which covers substantially all full-time employees.
The plan allows for both employee and Company contributions. The Company
contribution consists of a matching contribution of 50% of employee
contributions, up to 6% of eligible employee compensation.
Employees vest immediately in their contribution and vest in the Company
contribution over a six-year period of service.
The following is a summary of employee retirement plan expense for the
years ended December 31, 1995 and 1996 and the period from January 1, 1997
through September 30, 1997.
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
Defined contribution pension plan... $106,917 $104,819 $ 103,520
401(k) matching contribution........ 26,694 33,183 32,690
------------ ------------ -------------
Total............................... $133,611 $138,002 $ 136,210
============ ============ =============
8. RELATED PARTY TRANSACTIONS
The Company leases its main building facility from Maumee Properties, which
is owned by the primary shareholder and president. Annual rental expense under
the lease amounted to $312,000 for the years ended December 31, 1995 and 1996,
respectively, and $234,000 for the period from January 1, 1997 through September
30, 1997.
The Company rents an airplane from Summit Transportation, which is owned by
the primary shareholder and president. The related expense for use of the
airplane amounted to $-0- and $46,028 for the years ended December 31, 1995 and
1996, respectively, and $4,171 for the nine months ended September 30, 1997.
9. COMMON STOCK
On September 30, 1997, the Company executed a share split of 2.83 ordinary
shares for each authorized ordinary share.
F-49
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On September 30, 1997, pursuant to an agreement in July 1997 and subsequent
to the aforementioned share split, 25 shares of common stock were issued to the
chief executive officer. The issuance of the common stock resulted in a
compensation charge to the Company of $650,000 based on an independent valuation
of the Company.
10. SUBSEQUENT EVENTS (UNAUDITED)
In December 1997, Maumee Industries, Inc., and its shareholders entered
into a definitive agreement with a wholly owned subsidiary of Pentacon, Inc.,
which among other things calls for the merger of Maumee Industries, Inc., with
the Pentacon, Inc., subsidiary.
F-50
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc.
and
Board of Directors
Sales Systems, Limited
We have audited the balance sheets of Sales Systems, Limited (the
"Company"), as of December 31, 1996 and September 30, 1997, and the related
statements of income and retained earnings and cash flows for the year ended
December 31, 1996 and the period from January 1, 1997 through September 30,
1997. 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 generally accepted auditing
standards. 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 financial position of Sales Systems, Limited, at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1996 and the period from January
1, 1997 through September 30, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 20, 1997
F-51
<PAGE>
SALES SYSTEMS, LIMITED
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS
Current assets:
Cash............................... $ 63,755 $ --
Trade accounts receivable, less
allowance for doubtful accounts of
$38,000 at December 31, 1996 and
September 30, 1997................ 1,129,433 1,090,628
Inventories........................ 2,723,660 2,255,465
Prepaid expenses and other current
assets............................ -- 6,589
------------ -------------
Total current assets.................... 3,916,848 3,352,682
Property, plant, and equipment:
Fixtures and equipment............. 1,030,403 1,123,795
Automotive equipment............... 82,151 82,151
------------ -------------
1,112,554 1,205,946
Less accumulated depreciation........... (778,625) (859,976)
------------ -------------
333,929 345,970
Other assets............................ 8,477 27,109
------------ -------------
Total assets............................ $4,259,254 $ 3,725,761
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable....................... $1,250,000 $ 342,347
Trade accounts payable and accrued
expenses.......................... 943,109 980,922
Accrued salaries, wages, payroll
expenses, and commissions......... 138,804 60,484
Advances payable................... 40,000 --
Current maturities of unsecured
notes to officers................. 22,670 23,890
Current maturities of long-term
debt.............................. 78,823 77,850
------------ -------------
Total current liabilities............... 2,473,406 1,485,493
Long-term debt, less current
maturities............................ 257,176 199,967
Unsecured notes to officers, less
current maturities.................... 194,228 176,154
------------ -------------
Total liabilities....................... 2,924,810 1,861,614
Shareholders' equity:
Common stock, $100 par value:
Authorized shares -- 100
Issued and outstanding
shares -- 64............... 6,400 6,400
Retained earnings.................. 1,375,242 1,904,945
------------ -------------
1,381,642 1,911,345
Less 14 shares of treasury stock at
cost.................................. (47,198) (47,198)
------------ -------------
Total shareholders' equity.............. 1,334,444 1,864,147
------------ -------------
Total liabilities and shareholders'
equity................................ $4,259,254 $ 3,725,761
============ =============
SEE ACCOMPANYING NOTES.
F-52
<PAGE>
SALES SYSTEMS, LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
PERIOD FROM
JANUARY 1, 1997
YEAR ENDED THROUGH
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ---------------
Net sales............................... $ 15,663,326 $11,987,479
Cost of goods sales..................... 10,495,123 8,056,780
------------ ---------------
Gross profit............................ 5,168,203 3,930,699
Selling, general, and administrative
expenses.............................. 4,598,895 3,096,934
------------ ---------------
Operating income........................ 569,308 833,765
Interest expense........................ (106,799) (95,162)
Other income............................ 17,912 --
------------ ---------------
Net income.............................. 480,421 738,603
Retained earnings at beginning of
period................................ 1,114,575 1,375,242
Distributions to shareholders........... (219,754) (208,900)
------------ ---------------
Retained earnings at end of period...... $ 1,375,242 $ 1,904,945
============ ===============
SEE ACCOMPANYING NOTES.
F-53
<PAGE>
SALES SYSTEMS, LIMITED
STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1, 1997
YEAR ENDED THROUGH
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ---------------
OPERATING ACTIVITIES
Net income.............................. $ 480,421 $ 738,603
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation....................... 94,668 81,351
Loss on sale of equipment.......... 1,052 --
Change in operating assets and
liabilities:
Trade accounts receivable..... (343,571) 38,805
Inventories................... (518,271) 468,195
Prepaid expenses and other
current assets............. -- (6,589)
Other assets.................. -- (18,632)
Trade accounts payable and
accrued expenses........... 28,375 37,813
Accrued salaries, wages, and
payroll withholdings....... 102,289 (78,320)
Advances payable.............. 40,000 (40,000)
------------ ---------------
Net cash provided by (used in) operating
activities............................ (115,037) 1,221,226
INVESTING ACTIVITIES
Capital expenditures.................... (216,869) (93,392)
------------ ---------------
Net cash used in investing activities... (216,869) (93,392)
FINANCING ACTIVITIES
Distributions paid to shareholders...... (219,754) (208,900)
Borrowings on term loans................ 61,582 --
Payments on term loans.................. (91,523) (75,036)
Net borrowings (repayments) on line of
credit................................ 525,555 (907,653)
Other................................... (992) --
------------ ---------------
Net cash provided by (used in) financing
activities............................ 274,868 (1,191,589)
------------ ---------------
Decrease in cash........................ (57,038) (63,755)
Cash at beginning of period............. 120,793 63,755
------------ ---------------
Cash at end of period................... $ 63,755 $ --
============ ===============
SEE ACCOMPANYING NOTES.
F-54
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION
Sales Systems, Limited (the "Company") is a wholesaler and distributor of
industrial fasteners, primarily to manufacturers in the eastern United States.
INVENTORIES
Inventories consist of goods held for resale and are stated at the lower of
cost or market using the first-in, first-out method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation and
amortization expense, including amounts related to capital leases, is calculated
by accelerated methods over the estimated useful lives of the assets, which vary
from three to eight years.
NET SALES RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily for discounts.
INCOME TAXES
Effective January 1, 1995, the Company made an election to be taxed as an S
corporation for federal purposes and for the majority of states in which the
Company operates. Correspondingly, tax liabilities subsequent to this date
related to the Company's ongoing operations will generally be the responsibility
of the individual shareholders.
STATEMENT OF CASH FLOWS
Cash paid for interest during the year ended December 31, 1996 and the
period from January 1, 1997 through September 30, 1997 was $106,799 and $95,167,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 carrying value of the Company's debt facilities approximates
fair value because the rates on such facilities are variable, based on current
market, or are at fixed rates currently available to the Company.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
F-55
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. CONCENTRATION OF CREDIT RISK AND SALES TO LARGEST CUSTOMERS
Sales to the Company's two largest customers were approximately $9,500,000,
or 60.6% of net sales, for the year ended December 31, 1996. Sales to the
Company's four largest customers were approximately $9,400,000, or 78.7% of net
sales, for the period January 1, 1997 through September 30, 1997.
The related accounts receivable balances were $442,545 and $538,940 as of
December 31, 1996 and September 30, 1997, respectively.
3. FINANCING ARRANGEMENTS
NOTE PAYABLE
The Company has a $1,250,000 line of credit agreement with a bank. The line
of credit matures on June 1, 1998, subject to automatic renewals thereof on an
annual basis unless a contrary notice is delivered by either party within a
prescribed period. The line of credit is secured by accounts receivable and
inventory, and is guaranteed by the Company's shareholders. The line of credit
bears interest at the New York prime rate (8.5% at September 30, 1997). At
September 30, 1997, there were available amounts of $907,626 to be borrowed
under the line of credit.
The agreement includes certain restrictive covenants with respect to, among
other matters, distributions paid to shareholders, purchase or redemption of the
Company's stock, mergers or consolidated transactions, asset dispositions, and
the incurrence of additional debt. It also includes additional financial
covenants related to the maintenance of net worth, working capital, and net
income levels along with a limitation on annual capital expenditures. At
September 30, 1997 the Company was in compliance with these covenants.
LONG-TERM DEBT
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
Note payable to bank requiring
monthly principal payments of
$4,167 plus interest at a variable
rate (9.25% at September 30, 1997);
due January 2003, secured by
equipment, furniture and fixtures,
accounts receivable, and
inventory.......................... $ 254,167 $ 216,667
Notes payable to bank requiring
monthly payments totaling $2,462
including interest at 8.2% -- 8.5%;
maturing January 2002, secured by
equipment.......................... 71,176 53,715
Notes payable to bank requiring
monthly payments totaling $418
including interest at 7.75%;
maturing March 1999; secured by a
vehicle............................ 10,656 7,435
------------- --------------
335,999 277,817
Less current portion................. 78,823 77,850
------------- --------------
Long-term debt, net of current
portion............................ $ 257,176 $ 199,967
============= ==============
F-56
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate annual principal maturities of long-term debt for each of the
next five years are as follows:
1998................................. $ 77,850
1999................................. 60,782
2000................................. 59,313
2001................................. 58,616
2002................................. 21,256
----------
$ 277,817
==========
4. LEASES AND TRANSACTIONS WITH RELATED PARTIES
The Company leases an Allentown warehouse and office facility under an
informal lease arrangement, presently requiring monthly payments of $6,631.
The Company leases a South Carolina warehouse and office facility under an
informal lease arrangement with a partnership whose partners are the
shareholders of the Company. This partnership advanced $40,000 to the Company
during 1996, which was repaid during 1997.
Rent expense for these facilities for the year ended December 31, 1996 and
the period from January 1, 1997 through September 30, 1997 was $165,500 and
$144,000, respectively.
5. PENSION PLAN
The Company has a qualified profit sharing plan covering substantially all
employees with at least one year of service. Employee 401(k) contributions are
permitted and the Company is committed to contribute $1 for each $1 of employee
contributions, up to 6% of the employee's salary. The matching contributions
were $134,772 and $95,971 for the year ended December 31, 1996 and the period
from January 1, 1997 through September 30, 1997, respectively.
There were no discretionary contributions made by the Company for the year
ended December 31, 1996 and the period from January 1, 1997 through September
30, 1997.
6. RELATED PARTY TRANSACTIONS
The Company has 10% unsecured subordinated notes to certain officers
totaling $174,087 as of September 30, 1997. The Company also has an unsecured
note payable to an officer requiring monthly payments of $2,079, including
interest at 7% through October 1998, totaling $25,957 as of September 30, 1997.
7. SUBSEQUENT EVENT (UNAUDITED)
In December 1997, Sales Systems, Limited, and its shareholders entered into
a definitive agreement with a wholly owned subsidiary of Pentacon, Inc., which
among other things calls for the merger of the Company with the Pentacon, Inc.,
subsidiary.
In October 1997, an agreement was signed whereby the Company is to purchase
the interests of two owners of the Company conditioned upon the occurrence of
the above-named acquisition and resulting initial public offering.
F-57
<PAGE>
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary...................... 3
Risk Factors............................ 10
The Company............................. 15
Use of Proceeds......................... 17
Dividend Policy......................... 17
Capitalization.......................... 18
Dilution................................ 19
Selected Financial Data................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 32
Management.............................. 40
Certain Transactions.................... 44
Principal Stockholders.................. 47
Description of Capital Stock............ 48
Shares Eligible for Future Sale......... 50
Underwriting............................ 52
Legal Matters........................... 53
Experts................................. 53
Additional Information.................. 54
Index to Financial Statements........... F-1
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,773,585 SHARES
PENTACON, INC.
(LOGO)
COMMON STOCK
_____________________
PROSPECTUS
_____________________
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BT ALEX. BROWN
SCHRODER & CO. INC.
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee................. $ 17,923
NASD Filing Fee...................... 6,576
Listing Fee.......................... *
Accounting Fees and Expenses......... *
Legal Fees and Expenses.............. *
Printing Expenses.................... *
Transfer Agent's Fees................ *
Miscellaneous........................ *
---------
Total........................... $ *
=========
- ------------
(1) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the
II-1
<PAGE>
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article 7 of the Company's Amended and Restated Certificate of
Incorporation states that:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article 7
shall not eliminate or limit the liability of a director to the extent provided
by applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
Eighth shall apply to, or have any effect on, the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal. If the DGCL is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors.
In November 1997, Messrs. Grossman and Pugh, each principals in MGCV,
became officers of Alatec in order to assist in, facilitate and expedite the
audit process in connection with the Offering. Alatec and Mr. List, its sole
stockholder, have agreed to indemnify Messrs. Grossman and Pugh against various
claims, damages, costs and expenses which might be incurred by them as officers
of Alatec, including their execution of representation letters to Alatec's
accountants.
Under Section of the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify, under certain
conditions, the Company, its officers and directors, and persons who control the
Company within the meaning of the Securities Act of 1933, as amended, against
certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act of 1933.
(a) See "Certain Transactions" for a discussion of the issuance of
shares of Common Stock and options to purchase shares of Common Stock in
connection with the Acquisitions.
These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
<TABLE>
<CAPTION>
<S> <C> <C>
1.1* -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation.
3.2* -- Bylaws.
4.1* -- Specimen Common Stock Certificate.
5.1* -- Opinion of Andrews & Kurth, L.L.P. as to the legality of the securities being registered.
10.1 -- Agreement and Plan of Organization respecting Alatec Products, Inc. dated as of December
1, 1997.
10.2 -- Agreement and Plan of Organization respecting AXS Solutions, Inc. dated as of December 1,
1997.
10.3 -- Agreement and Plan or Organization respecting Capitol Bolt & Supply, Inc. dated as of
December 1, 1997.
10.4 -- Agreement and Plan of Organization respecting Maumee Industries, Inc. dated as of December
1, 1997.
10.5 -- Agreement and Plan of Organization respecting Sales Systems, Limited dated as of December
1, 1997.
10.6* -- Form of Employment Agreement.
10.7* -- Form of Officer and Director Indemnification Agreement.
10.8* -- Pentacon, Inc. 1998 Stock Option and Incentive Plan.
21.1 -- List of Subsidiaries
23.1* -- Consent of Andrews & Kurth, L.L.P. (included in Exhibit 5.1).
23.2 -- Consent of Ernst & Young LLP.
23.3 -- Consent of McGladrey & Pullen, LLP.
23.4 -- Consent of Donald B. List to be appointed director.
23.5 -- Consent of Jack L. Fatica to be appointed director.
23.6 -- Consent of Michael W. Peters to be appointed director.
23.7 -- Consent of Benjamin E. Spence, Jr. to be appointed director.
23.8 -- Consent of Mary E. McClure to be appointed director.
24.1 -- Powers of Attorney (included in signature page set forth on page II-5).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* to be filed by amendment.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON DECEMBER 2, 1997.
PENTACON, INC.
By: /s/ MARK E. BALDWIN
MARK E. BALDWIN, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Mark E. Baldwin and Bruce M. Taten, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any subsequent registration statements filed
by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which
relate to this Registration Statement, and to file same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ---------------------- ------------------------------ ------------------
/s/ MARK E. BALDWIN Chairman of the Board of December 2, 1997
MARK E. BALDWIN Directors, and Chief Executive
Officer (Principal Executive
Officer)
/s/ BRIAN FONTANA Senior Vice President and December 2, 1997
BRIAN FONTANA Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ CARY M. GROSSMAN Director December 2, 1997
CARY M. GROSSMAN
/s/ JEFFREY A. PUGH Director December 2, 1997
JEFFREY A. PUGH
II-5
- ------------------------------------------------------------------------------
AGREEMENT AND PLAN OF ORGANIZATION
dated as of the 1st day of December 1997
by and among
PENTACON, INC.
ALATEC PRODUCTS ACQUISITION COMPANY
(a subsidiary of Pentacon, Inc.)
ALATEC PRODUCTS, INC.
and
the STOCKHOLDERS named herein
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
RECITALS.....................................................................1
1. THE MERGER.............................................................5
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................5
1.2 EFFECTIVE TIME OF THE MERGER.....................................5
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION............................................6
1.4 EFFECT OF MERGER.................................................6
2. CONVERSION OF STOCK....................................................7
2.1 MANNER OF CONVERSION.............................................7
3. DELIVERY OF MERGER CONSIDERATION.......................................8
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8
4. CLOSING................................................................8
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
STOCKHOLDERS...........................................................9
5.1 DUE ORGANIZATION.................................................9
5.2 AUTHORIZATION...................................................10
5.3 CAPITAL STOCK OF THE COMPANY....................................10
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10
5.5 NO BONUS SHARES.................................................10
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................11
5.7 PREDECESSOR STATUS; ETC.........................................11
5.8 SPIN-OFF BY THE COMPANY.........................................11
5.9 FINANCIAL STATEMENTS............................................11
5.10 LIABILITIES AND OBLIGATIONS.....................................11
5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12
5.12 PERMITS AND INTANGIBLES.........................................12
5.13 ENVIRONMENTAL MATTERS...........................................13
5.14 PERSONAL PROPERTY...............................................14
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15
5.16 REAL PROPERTY...................................................16
5.17 INSURANCE.......................................................16
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............17
-i-
<PAGE>
5.19 EMPLOYEE PLANS..................................................17
5.20 COMPLIANCE WITH ERISA...........................................18
5.21 CONFORMITY WITH LAW; LITIGATION.................................19
5.22 TAXES...........................................................19
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21
5.25 ABSENCE OF CHANGES..............................................21
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................23
5.27 VALIDITY OF OBLIGATIONS.........................................23
5.28 RELATIONS WITH GOVERNMENTS......................................23
5.29 DISCLOSURE......................................................23
5.30 PROHIBITED ACTIVITIES...........................................24
5.31 NO WARRANTIES OR INSURANCE......................................24
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS....................................................24
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................24
5.34 PREEMPTIVE RIGHTS...............................................25
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................25
6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25
6.1 DUE ORGANIZATION................................................25
6.2 AUTHORIZATION...................................................25
6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................26
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26
6.5 SUBSIDIARIES....................................................26
6.6 FINANCIAL STATEMENTS............................................26
6.7 LIABILITIES AND OBLIGATIONS.....................................26
6.8 CONFORMITY WITH LAW; LITIGATION.................................27
6.9 NO VIOLATIONS...................................................27
6.10 VALIDITY OF OBLIGATIONS.........................................28
6.11 PENTACON STOCK..................................................28
6.12 NO SIDE AGREEMENTS..............................................28
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................28
6.14 DISCLOSURE......................................................29
6.15 NO INTEREST IN COMPETITORS......................................29
7. COVENANTS PRIOR TO CLOSING............................................29
7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29
7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................30
7.3 PROHIBITED ACTIVITIES...........................................31
7.4 NO SHOP.........................................................32
7.5 NOTICE TO BARGAINING AGENTS.....................................32
7.6 AGREEMENTS......................................................32
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDER AND THE
COMPANY.........................................................33
-ii-
<PAGE>
7.8 AMENDMENT OF SCHEDULES..........................................33
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............34
7.10 FINAL FINANCIAL STATEMENTS......................................35
7.11 FURTHER ASSURANCES..............................................35
7.12 AUTHORIZED CAPITAL..............................................35
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........35
7.14 PRE-CLOSING NOTIFICATIONS.......................................36
7.15 PAYMENT OF INDEBTEDNESS.........................................36
7.16 MINIMUM VALUE...................................................36
7.17 DIRECTORS.......................................................36
7.18 TRANSACTION REPORTING...........................................36
7.19 PERMITS.........................................................36
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND
COMPANY...............................................................36
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......37
8.2 SATISFACTION....................................................37
8.3 NO LITIGATION...................................................37
8.4 OPINION OF COUNSEL..............................................37
8.5 REGISTRATION STATEMENT..........................................38
8.6 CONSENTS AND APPROVALS..........................................38
8.7 GOOD STANDING CERTIFICATES......................................38
8.8 NO MATERIAL ADVERSE CHANGE......................................38
8.9 CLOSING OF IPO..................................................38
8.10 SECRETARY'S CERTIFICATE.........................................38
8.11 EMPLOYMENT AGREEMENTS...........................................38
8.12 TAX MATTERS.....................................................38
8.13 EXCHANGE LISTING................................................39
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO
.....................................................................39
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....39
9.2 NO LITIGATION...................................................39
9.3 SECRETARY'S CERTIFICATE.........................................39
9.4 NO MATERIAL ADVERSE EFFECT......................................40
9.5 STOCKHOLDER'S RELEASE...........................................40
9.6 SATISFACTION....................................................40
9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................40
9.8 OPINION OF COUNSEL..............................................40
9.9 CONSENTS AND APPROVALS..........................................40
9.10 GOOD STANDING CERTIFICATES......................................41
9.11 REGISTRATION STATEMENT..........................................41
-iii-
<PAGE>
9.12 EMPLOYMENT AGREEMENTS...........................................41
9.13 CLOSING OF IPO..................................................41
9.14 FIRPTA CERTIFICATE..............................................41
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING
.....................................................................41
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................41
10.2 PREPARATION AND FILING OF TAX RETURNS...........................41
10.3 DIRECTORS.......................................................42
11. INDEMNIFICATION.......................................................42
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDER......................42
11.2 INDEMNIFICATION BY PENTACON.....................................43
11.3 THIRD PERSON CLAIMS.............................................44
11.4 EXCLUSIVE REMEDY................................................45
11.5 LIMITATIONS ON INDEMNIFICATION..................................45
11.6 SPECIAL INDEMNITY ISSUES........................................47
12. TERMINATION OF AGREEMENT..............................................47
12.1 TERMINATION.....................................................47
12.2 LIABILITIES IN EVENT OF TERMINATION.............................48
13. NONCOMPETITION........................................................48
13.1 PROHIBITED ACTIVITIES...........................................48
13.2 DAMAGES.........................................................49
13.3 REASONABLE RESTRAINT............................................49
13.4 SEVERABILITY; REFORMATION.......................................49
13.5 INDEPENDENT COVENANT............................................50
13.6 MATERIALITY.....................................................50
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................50
14.1 STOCKHOLDER.....................................................50
14.2 PENTACON AND NEWCO..............................................51
14.3 DAMAGES.........................................................51
14.4 SURVIVAL........................................................51
15. TRANSFER RESTRICTIONS.................................................52
15.1 TRANSFER RESTRICTIONS...........................................52
16. FEDERAL SECURITIES ACT REPRESENTATIONS................................52
16.1 COMPLIANCE WITH LAW.............................................52
16.2 ECONOMIC RISK; SOPHISTICATION...................................53
-iv-
<PAGE>
17. REGISTRATION RIGHTS...................................................53
17.1 PIGGYBACK REGISTRATION RIGHTS...................................53
17.2 REGISTRATION PROCEDURES.........................................54
17.3 INDEMNIFICATION.................................................55
17.4 UNDERWRITING AGREEMENT..........................................56
17.5 RULE 144 REPORTING..............................................56
18. GENERAL...............................................................56
18.1 COOPERATION.....................................................56
18.2 SUCCESSORS AND ASSIGNS..........................................57
18.3 ENTIRE AGREEMENT................................................57
18.4 COUNTERPARTS....................................................57
18.5 BROKERS AND AGENTS..............................................57
18.6 EXPENSES........................................................57
18.7 NOTICES.........................................................58
18.8 GOVERNING LAW...................................................59
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................59
18.10 EXERCISE OF RIGHTS AND REMEDIES.................................59
18.11 TIME............................................................59
18.12 REFORMATION AND SEVERABILITY....................................59
18.13 REMEDIES CUMULATIVE.............................................59
18.14 CAPTIONS........................................................59
-v-
<PAGE>
ANNEXES
Annex I - Consideration to Be Paid to Stockholders
Annex II - Stockholders and Stock Ownership of the Company
Annex III - Certificate of Incorporation and By-Laws of Pentacon and
Newco
Annex IV - Form of Opinion of Counsel to Pentacon and Newco
Annex V - Form of Opinion of Counsel to Company and Stockholders
Annex VI - Form of Founder Employment Agreement
-vi-
<PAGE>
SCHEDULES
5.1 Due Organization
5.2 Authorization
5.3 Capital Stock of the Company
5.4 Transactions in Capital Stock, Organization Accounting
5.5 No Bonus Shares
5.6 Subsidiaries
5.7 Predecessor Status; etc
5.8 Spin-off by the Company
5.9 Financial Statements
5.10 Liabilities and Obligations
5.11 Accounts and Notes Receivable
5.12 Permits and Intangibles
5.13 Environmental Matters
5.14 Personal Property
5.15 Significant Customers; Material Contracts and Commitments
5.16 Real Property
5.17 Insurance
5.18 Compensation; Employment Agreements; Labor Matters
5.19 Employee Plans
5.20 Compliance with ERISA
5.21 Conformity with Law; Litigation
5.22 Taxes
5.23 No Violations, Consents, etc.
5.24 Government Contracts
5.25 Absence of Changes
5.26 Deposit Accounts; Powers of Attorney
5.30 Prohibited Activities
5.31 No Warranties or Insurance
5.32 Related Party Transactions
6.3 Capital Stock of Pentagon and Newco
6.4 Options, Warrants and Rights
6.8 Litigation
6.9 No Violations
6.12 Side Agreements
7.2 Conduct of Business Pending Closing
7.3 Prohibited Activities
7.5 Notice to Bargaining Agents
7.6 Termination Agreements
7.15 Obligations to be Paid at Closing
9.7 Continuing Related Party Agreements
9.12 Employment Agreements
13.1 Prohibited Activities
18.5 Brokers and Agents
-vii-
<PAGE>
AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of
the 1st day of December, 1997, by and among PENTACON, INC., a Delaware
corporation ("Pentacon"), ALATEC PRODUCTS ACQUISITION COMPANY, a Delaware
corporation ("Newco"), ALATEC PRODUCTS, INC., a California corporation (the
"Company"), and DON LIST, who is the sole stockholder of the Company (the
"Stockholder"), who herein agree as follows:
RECITALS
WHEREAS, Newco is a corporation duly organized and existing under the laws
of the State of Delaware, having been incorporated on November 26, 1997, solely
for the purpose of completing the transactions set forth herein, and is a wholly
owned subsidiary of Pentacon, a corporation organized and existing under the
laws of the State of Delaware;
WHEREAS, the respective boards of directors of Newco and the Company
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Newco merge with and into
the Company pursuant to this Agreement and the applicable provisions of the laws
of the States of Delaware and the State of Incorporation (as hereinafter
defined);
WHEREAS, Pentacon is entering into other separate agreements substantially
similar to this Agreement (the "Other Agreements"), each of which is entitled
"Agreement and Plan of Organization," with each of the Other Founding Companies
(as defined herein) and their respective stockholders in order to acquire
additional fasteners companies;
WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon
Plan of Organization;"
WHEREAS, the Stockholder and the boards of directors and the stockholders
of Pentacon, each of the Other Founding Companies and each of the subsidiaries
of Pentacon that are parties to the Other Agreements have approved and adopted
the Pentacon Plan of Organization as an integrated plan pursuant to which the
Stockholder and the stockholders of each of the other Founding Companies will
transfer the capital stock of each of the Founding Companies to Pentacon and the
stockholders of each of the other Founding Companies will acquire the stock of
Pentacon (but not cash or other property) as a tax-free transfer of property
under Section 351 of the Code;
WHEREAS, the Board of Directors of the Company has approved this Agreement
as part of the Pentacon Plan of Organization in order to transfer the capital
stock of the Company to Pentacon;
-1-
<PAGE>
WHEREAS, unless the context otherwise requires, capitalized terms used in
this Agreement or in any schedule attached hereto and not otherwise defined
shall have the following meanings for all purposes of this Agreement:
"1933 ACT" means the Securities Act of 1933, as amended.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"ACQUIRED PARTY" means the Company, any subsidiary and any member of a
Relevant Group.
"ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware
companies wholly-owned by Pentacon prior to the Consummation Date.
"AFFILIATES" shall mean with respect to any person or entity, any other
person or entity that directly or indirectly, controls, is controlled, or is
under common control with such person or entity. For purposes hereof, control
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger
with respect to the Merger in such forms as may be required by the laws of the
State of Delaware and the State of Incorporation.
"BALANCE SHEET DATE" means September 30, 1997.
"CHARTER DOCUMENTS" has the meaning set forth in Section 5.1.
"CLOSING" has the meaning set forth in Section 4.
"CLOSING DATE" has the meaning set forth in Section 4.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY STOCK" has the meaning set forth in Section 2.1.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital
of this Agreement.
"CONSUMMATION DATE" has the meaning set forth in Section 4.
"DELAWARE GCL" has the meaning set forth in Section 1.4.
-2-
<PAGE>
"DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of
the Registration Statement, and any corrections thereto and supplemental
information delivered by Pentacon to the Company for delivery to the Stockholder
prior to the time this Agreement is delivered by the Company and the Stockholder
to Pentacon.
"EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger
becomes effective, which shall occur on the Consummation Date.
"ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13.
"ERISA" has the meaning set forth in Section 5.19.
"EXPIRATION DATE" has the meaning set forth in Section 5(A).
"FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii).
"FOUNDING COMPANIES" means:
Alatec Products, Inc., a California corporation;
AXS Solutions, Inc., a Delaware corporation;
Capitol Bolt & Supply, Inc., a Texas corporation;
Maumee Industries, Inc., an Indiana corporation; and
Sales Systems, Limited, a Pennsylvania corporation.
"HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c).
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(ii).
"IPO" means the initial public offering of Pentacon Stock pursuant to the
Registration Statement described herein.
"LICENSES" has the meaning set forth in Section 5.12.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the business,
operations, properties, assets or condition (financial or otherwise), of the
subject entity and its subsidiaries taken as a whole.
-3-
<PAGE>
"MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a).
"MERGER" means the merger of Newco with and into the Company pursuant to
this Agreement and the applicable provisions of the laws of the State of
Delaware and the laws of the State of Incorporation.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"NEWCO STOCK" means the common stock, par value $.01 per share, of Newco.
"OTHER AGREEMENTS" has the meaning set forth in the third recital hereof.
"OTHER FOUNDING COMPANIES" means all of the Founding Companies other than
the Company.
"PBGC" has the meaning set forth in Section 5.19.
"PENTACON" has the meaning set forth in the first paragraph of this
Agreement.
"PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1
"PENTACON STOCK" means the common stock, par value $.01 per share, of
Pentacon.
"PERSON" means an individual, partnership, joint venture, corporation,
bank, trust, unincorporated organization or other entity.
"PRICING" means the date of determination by Pentacon and the Underwriters
of the public offering price of the shares of Pentacon Stock in the IPO; the
parties hereto contemplate that the Pricing shall take place on the Closing
Date.
"PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30.
"QUALIFIED PLANS" has the meaning set forth in Section 5.20.
"REGISTRATION STATEMENT" means that certain registration statement on Form
S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued
in the IPO and all amendments thereto.
"RELEVANT GROUP" means the Company and any affiliated, combined,
consolidated, unitary or similar group of which the Company is or was a member.
-4-
<PAGE>
"RETURNS" means any returns, reports or statements (including any
information returns) required to be filed for purposes of reporting, computing
or otherwise required in connection with a particular Tax.
"SCHEDULE" means each Schedule (including attachments) attached hereto,
which shall reference the relevant sections of this Agreement, on which parties
hereto disclose information as part of their respective representations,
warranties and covenants.
"SEC" means the United States Securities and Exchange Commission.
"STATE OF INCORPORATION" means the State of California.
"STOCKHOLDER" has the meaning set forth in the first paragraph of this
Agreement.
"SUBSIDIARIES" means with respect to a person or entity, any corporation
or other entity in which such person or entity owns a 5% or greater ownership
interest.
"SURVIVING CORPORATION" has the meaning set forth in Section 1.2.
"TAX" OR "TAXES" means all federal, state, local or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, withholding, employment, excise, property, deed, stamp, alternative
or add on minimum, or other taxes, assessments, duties, fees, levies or other
governmental charges, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"UNDERWRITERS" means the prospective underwriters identified in the Draft
Registration Statement.
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(i).
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and
delivered to Pentacon (to the attention of Pentacon's in-house counsel) to be
held for filing with the Secretary of State of the State of Delaware and the
Secretary of State (or other appropriate authority) of the State of
Incorporation on or effective as of the Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
Newco shall be merged with and into the Company in accordance with the Articles
of Merger and the separate existence of Newco shall cease. The Company shall be
the surviving party in the Merger and the Company is sometimes hereinafter
referred to as the "Surviving Corporation". As a result of the
-5-
<PAGE>
Merger, the outstanding shares of capital stock of Newco and the Company shall
be converted or canceled in the manner provided in Section 2.
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
(i) the Certificate of Incorporation of the Company then in effect
shall be the Certificate of Incorporation of the Surviving Corporation
until changed as provided by law;
(ii) the By-laws of Newco then in effect shall become the By-laws of
the Surviving Corporation; and subsequent to the Effective Time of the
Merger, such By-laws shall be the By-laws of the Surviving Corporation
until they shall thereafter be duly amended (and such By-laws shall be
amended, if necessary, to comply with applicable state law);
(iii) the Board of Directors of the Surviving Corporation shall
consist of the persons who are on the Board of Directors of the Company
immediately prior to the Effective Time of the Merger, provided that Bruce
Taten shall become an additional director of the Surviving Corporation
effective as of the Effective Time of the Merger, and the number of
directors constituting the entire Board of Directors of the Company shall
be increased, if necessary, to accommodate the addition of such additional
director; the Board of Directors of the Surviving Corporation shall hold
office subject to the provisions of the laws of the State of Incorporation
and of the Certificate of Incorporation and By-laws of the Surviving
Corporation; and
(iv) the officers of the Company immediately prior to the Effective
Time of the Merger shall continue as the officers of the Surviving
Corporation in the same capacity or capacities, and effective upon the
Effective Time of the Merger Brian Fontana shall become an additional Vice
President and Bruce Taten will become the Secretary of the Surviving
Corporation, such officers to serve, subject to the provisions of the
Certificate of Incorporation and By-laws of the Surviving Corporation,
until their respective successors are duly elected and qualified. The
Stockholder may cause to be changed the persons on the Board of the
Company at any time up until the Closing Date.
1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of
the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of
the State of Incorporation. Except as herein specifically set forth, the
identity, existence, purposes, powers, objects, franchises, privileges, rights
and immunities of the Company shall continue unaffected and unimpaired by the
Merger and the corporate franchises, existence and rights of Newco shall be
merged with and into the Company, and the Company, as the Surviving Corporation,
shall be fully vested therewith. At the Effective Time of the Merger, the
separate existence of Newco shall cease and, in accordance with the terms of
this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public, as well as of a private,
nature, and all property, real, personal and mixed, and
-6-
<PAGE>
all debts due on whatever account, including subscriptions to shares, and all
taxes, including those due and owing and those accrued, and all other choses in
action, and all and every other interest of or belonging to or due to the
Company or Newco shall be transferred to, and vested in, the Surviving
Corporation without further act or deed; and all property, rights and
privileges, powers and franchises and all and every other interest shall be
thereafter as effectually the property of the Surviving Corporation as they were
of the Company and Newco; and the title to any real estate, or interest therein,
whether by deed or otherwise, under the laws of the State of Incorporation
vested in the Company or Newco, shall not revert or be in any way impaired by
reason of the Merger. Except as otherwise provided herein, the Surviving
Corporation shall thenceforth be responsible and liable for all the liabilities
and obligations of the Company and Newco and any claim existing, or action or
proceeding pending, by or against the Company or Newco may be prosecuted as if
the Merger had not taken place, or the Surviving Corporation may be substituted
in their place. Neither the rights of creditors nor any liens upon the property
of the Company or Newco shall be impaired by the Merger, and all debts,
liabilities and duties of the Company and Newco shall attach to the Surviving
Corporation, and may be enforced against such Surviving Corporation to the same
extent as if said debts, liabilities and duties had been incurred or contracted
by such Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the Company ("Company Stock") into shares of
Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of
the Surviving Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of Company Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically shall be deemed to represent (1) the right to receive the
number of shares of Pentacon Stock set forth on Annex I hereto with
respect to such holder and (2) the right to receive the amount of cash set
forth on Annex I hereto with respect to such holder;
(ii) all shares of Company Stock that are held by the Company as
treasury stock or which are otherwise issued but not outstanding shall be
canceled and retired and shall cease to exist and no shares of Pentacon
Stock or other consideration shall be delivered or paid in exchange
therefor; and
(iii) each share of Newco Stock issued and outstanding immediately
prior to the Effective Time of the Merger, shall, by virtue of the Merger
and without any action on the part of Pentacon, automatically be converted
into one fully paid and non-assessable share of common stock of the
Surviving Corporation which shall constitute all of the issued and
-7-
<PAGE>
outstanding shares of common stock of the Surviving Corporation
immediately after the Effective Time of the Merger.
All Pentacon Stock received by the Stockholder pursuant to this Agreement
shall, except for restrictions on resale or transfer described in Sections 15
and 16 hereof, have the same rights as all the other shares of outstanding
Pentacon Stock by reason of the provisions of the Certificate of Incorporation
of Pentacon or as otherwise provided by the Delaware GCL. All Pentacon Stock
received by the Stockholder shall be issued and delivered to the Stockholder
free and clear of any liens, claims or encumbrances of any kind or nature. All
voting rights of such Pentacon Stock received by the Stockholder shall be fully
exercisable by the Stockholder and the Stockholder shall not be deprived nor
restricted in exercising those rights. At the Effective Time of the Merger,
Pentacon shall have no class of capital stock issued and outstanding other than
the Pentacon Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. Prior to the Closing,
Stockholder shall deliver to Pentacon (to the attention of Pentacon's in-house
counsel) to be held until the Closing Date all of the Stockholder's outstanding
capital stock of the Company. Such stock shall be deemed surrendered on the
Closing Date and Stockholder shall be entitled in accordance with terms of this
Agreement to receive the respective number of shares of Pentacon Stock and the
amount of cash described on Annex I hereto, said cash to be payable by certified
check, or if hereafter agreed by the Stockholder and Pentacon, by wire transfer.
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholder shall
deliver to Pentacon at the Closing the certificates representing Company Stock,
duly endorsed in blank by the Stockholder, or accompanied by blank stock powers,
and with all necessary transfer tax and other revenue stamps, acquired at the
Stockholder's expense, affixed and canceled. The Stockholder agrees promptly to
cure any deficiencies with respect to the endorsement of the stock certificates
or other documents of conveyance with respect to such Company Stock or with
respect to the stock powers accompanying any Company Stock.
4. CLOSING
At or prior to the Pricing, the parties shall take all actions reasonably
necessary to prepare to (i) effect the Merger (including the execution of the
Articles of Merger which shall be placed in escrow with Pentacon (to the
attention of Pentacon's in-house counsel) for filing with the appropriate
authorities effective on the Consummation Date, subject, however, to
satisfaction or waiver of all conditions precedent) and (ii) effect the
conversion and delivery of shares referred to in Section 3 hereof; provided,
that such actions shall not include the actual completion of the Merger or the
conversion and delivery of the shares and certified check(s) (or wire transfers)
referred to in Section 3 hereof, each of which actions shall only be taken upon
the Consummation Date as herein provided. In the event that there is no
Consummation Date and this Agreement automatically terminates as provided in
this Section 4 the Articles of Merger shall not be filed and shall be promptly
returned
-8-
<PAGE>
to the Stockholder. The taking of the actions described in clauses (i) and (ii)
above (the "Closing") shall take place on the closing date (the "Closing Date")
at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce Tower, 600 Travis,
Houston, Texas 77002 or such place as may be agreed between the Stockholder and
Pentacon. On the Consummation Date (x) the Articles of Merger shall be filed
with the appropriate state authorities so that they shall be, as early as
practicable on the Consummation Date, effective and the Merger shall thereby be
effected, (y) all transactions contemplated by this Agreement, including the
conversion and delivery of shares, the delivery of a certified check or checks
(or wire transfers) in an amount equal to the cash portion of the consideration
which the Stockholder shall be entitled to receive pursuant to Section 3 hereof
shall occur and be completed and (z) the closing with respect to the IPO shall
occur and be completed. The date on which the actions described in the preceding
clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date."
During the period from the Closing Date to the Consummation Date, this Agreement
may be terminated by the parties only as specifically set forth in this
Agreement or if the underwriting agreement in respect of the IPO is terminated
pursuant to the terms of such underwriting agreement. This Agreement shall also
in any event automatically terminate if the Consummation Date has not occurred
within 15 business days following the Closing Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
STOCKHOLDERS
(A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDER.
The Stockholder and the Company represent and warrant that all of the
following representations and warranties in this Section 5(A) are true at the
date of this Agreement, and that such representations and warranties shall
survive the Consummation Date for a period of twenty-four months (the last day
of such period being the "Expiration Date"), except that the warranties and
representations set forth in Sections 5.13 and 5.22 hereof shall survive until
such time as the applicable statute of limitations period has run or for five
(5) years if there is no applicable statute of limitations, which shall be
deemed to be the Expiration Date for Sections 5.13 and 5.22. For purposes of
this Section 5, the term "Company" shall mean and refer to the Company and all
of its Subsidiaries, if any.
5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and
organized, validly existing and in good standing under the laws of the State of
Incorporation, and has the requisite power and authority to carry on its
business as it is now being conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction in which failure to so
qualify would reasonably be expected to have a Material Adverse Effect on the
Company. Schedule 5.1 sets forth a list of all jurisdictions in which the
Company is authorized or qualified to do business. True, complete and correct
copies of (i) the Certificate of Incorporation and By-laws, each as amended, of
the Company (the "Charter Documents"), and (ii) the stock records of the Company
(including, without limitation, a copy of the Company's stock ledger), are all
attached to Schedule 5.1. The Company has delivered complete and correct copies
of all minutes of meetings,
-9-
<PAGE>
written consents and other written evidence, if any, of deliberations of or
actions taken by the Company's Board of Directors, any Committees of the Board
of Directors and stockholders during the last five years.
5.2 AUTHORIZATION. (i) The officers or other representatives of the
Company executing this Agreement have the authority to enter into and bind the
Company to the terms of this Agreement and (ii) the Company has the full legal
right, power and authority to enter into this Agreement and the Merger. The
directors and Stockholder have approved this Agreement and the transactions
contemplated hereby in all respects, and copies of all such resolutions,
certified by the Secretary or an Assistant Secretary of the Company as being in
full force and effect on the date hereof, are attached hereto as Schedule 5.2.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company is as set forth on Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the Company are owned by the Stockholder in the
amounts set forth in Annex II. Each Stockholder, severally, represents and
warrants that except as set forth on Schedule 5.3, the shares of capital stock
of the Company owned by such Stockholder are owned free and clear of all liens,
security interests, pledges, charges, voting trusts, restrictions, encumbrances
and claims of every kind. All of the issued and outstanding shares of the
capital stock of the Company have been duly authorized and validly issued, are
fully paid and nonassessable, are owned of record and beneficially by the
Stockholder and further, such shares were offered, issued, sold and delivered by
the Company in compliance with all applicable state and Federal laws concerning
the issuance of securities. Further, none of such shares were issued in
violation of any preemptive rights of any past or present stockholder.
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set
forth on Schedule 5.4, the Company has not acquired or redeemed any Company
Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option,
warrant, call, conversion right or commitment of any kind exists which obligates
the Company to issue any of its authorized but unissued capital stock; (ii) the
Company has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof; and (iii) neither
the voting stock structure of the Company nor the relative ownership of shares
among any of its respective Stockholders has been altered or changed in
contemplation of the Merger and/or the Pentacon Plan of Organization. Except as
set forth in Schedule 5.4, there are no voting trusts, proxies or other
agreements or understandings to which the Company or any of the Stockholder is a
party or is bound with respect to the voting of any shares of capital stock of
the Company.
5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the
shares of Company Stock was issued pursuant to awards, grants or bonuses in
contemplation of the Merger or the Pentacon Plan of Organization.
-10-
<PAGE>
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on
Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule
5.6, the Company does not presently own, of record or beneficially, or control,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity nor is the Company, directly or indirectly, a participant in any joint
venture, partnership or other non-corporate entity.
5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all
predecessor companies of the Company, including the names of any entities
acquired by the Company (by stock purchase, merger or otherwise) or owned by the
Company or from whom the Company previously acquired material assets, in any
case, from the earliest date upon which any Stockholder acquired his or her
stock in any Company. Except as disclosed on Schedule 5.7, the Company has not
been, within such period of time, a subsidiary or division of another
corporation or a part of an acquisition which was later rescinded.
5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
Company or any other person or entity that is an Affiliate of the Company since
January 1, 1995.
5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following
financial statements of the Company as audited by Ernst & Young and McGladdrey
and Pullen are attached hereto as Schedule 5.9:
(i) the balance sheets of the Company as of December 31, 1995 and
1996 and the related statements of operations, stockholder's equity and
cash flows for the two-year period ended December 31, 1996, together with
the related notes and schedules (such balance sheets, the related
statements of operations, stockholder's equity and cash flows and the
related notes and schedules are referred to herein as the "Year-end
Financial Statements"); and
(ii) the balance sheet of the Company as of September 30, 1997, (the
"Interim Balance Sheet") and the related statements of operations,
stockholder's equity and cash flows for the nine-month periods ended
September 30, 1997, together with the related notes and schedules (such
balance sheets, the related statements of operations, stockholder's equity
and cash flows and the related notes and schedules are referred to herein
as the "Interim Financial Statements"). The Year-end Financial Statements
and the Interim Financial Statements are collectively called the
"Financial Statements".
5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate
list as of the Balance Sheet Date of (i) all liabilities of the Company which
are not reflected on the Interim Balance Sheet of the Company at the Balance
Sheet Date or otherwise reflected in the Interim Financial Statements at the
Balance Sheet Date except for those liabilities not required to be reflected or
disclosed under generally accepted accounting principles or F.A.S.B. 5 and which
were not
-11-
<PAGE>
reflected or disclosed in the Interim Balance Sheet, and (ii) all loan
agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other
security agreements to which the Company is a party or by which its properties
may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet
Date, the Company has not incurred any liabilities or obligations of any kind,
character or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise, other than liabilities incurred in the ordinary course
of business and consistent with past practices. The Company has also delivered
to Pentacon on Schedule 5.10, in the case of those contingent liabilities
related to pending or threatened litigation, a good faith and reasonable
estimate (to the extent the Company can reasonably make an estimate) of the
maximum amount which the Company reasonably expects may be payable and the
amount, if any, accrued or reserved for each such potential liability on the
Company's Financial Statements. If no estimate is provided, the estimate shall
for purposes of this Agreement be deemed to be zero. For each such contingent
liability or liability for which the amount is not fixed or is contested, the
Company has provided to Pentacon the following information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation relating thereto;
(b) amounts claimed and any other action or relief sought; and
(c) name of claimant and all other parties to the claim, suit or
proceeding;
(ii) the name of each court or agency before which such claim, suit
or proceeding is pending; and
(iii) the date (if any) on which such claim, suit or proceeding was
instituted or the date (period) to which such claim relates.
5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate
list of the accounts and notes receivable of the Company, as of the Balance
Sheet Date, including any such amounts which are not reflected in the Interim
Balance Sheet as of the Balance Sheet Date, and including receivables from and
advances to employees and the Stockholder, which are identified as such. Except
to the extent reflected on Schedule 5.11, such accounts, notes and other
receivables are collectible in the amounts shown on Schedule 5.11, net of
reserves reflected in the Interim Balance Sheet of the Balance Sheet Date.
5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses,
franchises, permits and other governmental authorizations ("Licenses") necessary
to conduct the business of the Company and the Company has delivered to Pentacon
an accurate list and summary description (which is set forth on Schedule 5.12)
of all such material Licenses, including any material trademarks, trade names,
patents, patent applications and copyrights owned or held by the Company or any
of its employees (including interests in software or other technology systems,
programs and intellectual property). At or prior to the Closing, all rights to
such trademarks, trade names, patents,
-12-
<PAGE>
patent applications, copyrights and other intellectual property held by the
Stockholder or his Affiliates will be assigned or licensed to the Company for no
additional consideration. The Licenses and other rights listed on Schedule 5.12
are valid, and the Company has not received any notice that any person intends
to cancel, terminate or not renew any such License or other right. The Company
has conducted and is conducting its business in compliance with the
requirements, standards, criteria and conditions set forth in the Licenses and
other rights listed on Schedule 5.12 and is not in violation of any of the
foregoing. Except as specifically provided in Schedule 5.12, the transactions
contemplated by this Agreement will not result in a default under or a breach or
violation of, or adversely affect the rights and benefits afforded to the
Company by, any such Licenses or other rights.
5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached
hereto, (i) the Company has conducted its businesses in compliance with all
applicable Environmental Laws, including, without limitation, having all
environmental permits, licenses and other approvals and authorizations necessary
for the operation of its business as presently conducted, (ii) none of the
properties owned by the Company contain any Hazardous Substance as a result of
any activity of the Company in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) the Company has not received any notices,
demand letters or requests for information from any Federal, state, local or
foreign governmental entity or third party indicating that the Company may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of its business, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or to the knowledge of the Stockholder threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (vi) no Hazardous
Substance has been disposed of, released or transported in violation of any
applicable Environmental Law from any properties owned by the Company as a
result of any activity of the Company during the time such properties were
owned, leased or operated by the Company, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analysis regarding
compliance or non-compliance with any applicable Environmental Law conducted by
or which are in the possession of or readily available to the Company relating
to the activities of the Company which are not listed on Schedule 5.13 attached
hereto prior to the date hereof, (viii) there are no underground storage tanks
on, in or under any properties owned by the Company and no underground storage
tanks have been closed or removed from any of such properties during the time
such properties were owned, leased or operated by the Company, (ix) there is no
asbestos or asbestos containing material present in any of the properties owned
by the Company, and no asbestos has been removed from any of such properties
during the time such properties were owned, leased or operated by the Company,
and (x) neither the Company nor any of its respective properties are subject to
any material liabilities or expenditures (fixed or contingent) relating to any
suit, settlement, court order, administrative order, regulatory requirement,
judgment or claim asserted or arising under any Environmental Law.
-13-
<PAGE>
(b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity which is
applicable where the Company conducts or conducted business or owns or owned
property or is applicable to any disposal, transportation or release of
Hazardous Substances by or for the Company and, in each case, relates to (x) the
protection, preservation or restoration of the environment (including, without
limitation, air, water vapor, surface water, groundwater, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource) or to human health or safety or (y) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances, in each case
as amended and as in effect on the Closing Date. The term Environmental Law
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Federal Occupational Safety and Health Act of 1970, each as amended and as
in effect on the Closing Date, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of, effects of or exposure to any Hazardous Substance.
(c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive, or
dangerous, or otherwise regulated, under any Environmental Law. Hazardous
Substance includes any substance to which exposure is regulated by any
government authority or any Environmental Law including, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate
list (which is set forth on Schedule 5.14) of (x) all personal property material
to the operations of the Company included in "plant, property and equipment" on
the Interim Balance Sheet of the Company, (y) all other personal property owned
by the Company with an individual fair market value in excess of $5,000 (i) as
of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z)
all material leases and agreements in respect of personal property, including,
in the case of each of (x), (y) and (z), (1) true, complete and correct copies
of all such leases and (2) an indication as to which assets are currently owned,
or were formerly owned, by Stockholder, relatives of Stockholder, or Affiliates
of the Company. Except as set forth on Schedule 5.14, (i) all material personal
property used by the Company in its business is either owned by the Company or
leased by the Company pursuant to a lease included on Schedule 5.14, (ii) all of
the personal property listed on
-14-
<PAGE>
Schedule 5.14 is in working order and condition sufficient for the operation of
the Company's business, ordinary wear and tear excepted and (iii) all leases and
agreements included on Schedule 5.14 are in full force and effect and constitute
valid and binding agreements of the Company and of the other parties (and their
successors) thereto in accordance with their respective terms.
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.15) of all customers (persons or entities) representing 5%
or more of the Company's annual revenues for the period covered by any of the
most current Year-End Financial Statements. Except to the extent set forth on
Schedule 5.15, none of such customers have canceled or substantially reduced or,
to the knowledge of the Company and the Stockholder, are currently attempting or
threatening to cancel a contract or substantially reduce utilization of the
services provided by the Company.
(b) Except as set forth on Schedule 5.15, the Company has listed on
Schedule 5.15 all material contracts, commitments and similar agreements to
which the Company is a party or by which it or any of its properties are bound
(including, but not limited to, contracts with significant customers, joint
venture or partnership agreements, contracts with any labor organizations,
strategic alliances and options to purchase land), other than agreements listed
on Schedules 5.10, 5.14 or 5.16, (a) in existence as of the Balance Sheet Date
and (b) entered into since the Balance Sheet Date, and in each case has
delivered (or, in the case of supplier and distributor contracts and customer
contracts on standard purchase forms, has made available) true, complete and
correct copies of such agreements to Pentacon. The Company has also indicated on
Schedule 5.15 a summary description of all plans or projects commenced or
approved in the last six (6) months and involving the opening of new operations,
expansion of existing operations, the acquisition of any personal property,
business or assets (other than acquisitions of inventory and other assets used
in the business in the ordinary course of business) requiring, in any event, the
payment of more than $20,000 by the Company during any 12-month period.
(c) Except as set forth on Schedule 5.15, since January 1, 1995, the
Company has not experienced any difficulties in obtaining any inventory items
necessary to the operation of its business, and, to the knowledge of the Company
and the Stockholder, no such shortage of supply of inventory items is threatened
or pending. To the knowledge of the Company and the Stockholder, no customer or
supplier of the Company will cease to do business with, or substantially reduce
its purchases from, the Company after the consummation of the transactions
contemplated hereby.
(d) The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
(e) Except with respect to the Bausch and Firestone litigation, neither
the Company nor any of its Affiliates has entered into any agreements which
obligate the Company or any subsidiary
-15-
<PAGE>
of the Company to continue to use the services of specific accounting or legal
professionals following the Closing Date.
5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property
owned or leased by the Company at the date hereof and all other real property,
if any, used by the Company in the conduct of its business. Except as set forth
on Schedule 5.16, any such real property owned by the Company will be sold or
distributed by the Company on terms acceptable to Pentacon and leased back by
the Company on terms no less favorable to the Company than those available from
an unaffiliated party and otherwise reasonably acceptable to Pentacon at or
prior to the Closing Date. The Company has good and insurable title to any real
property owned by it that is shown on Schedule 5.16, other than property
intended to be sold or distributed prior to the Closing Date, subject to no
mortgage, pledge, lien, conditional sales agreement, encumbrance or charge,
except for:
(i) liens reflected on Schedules 5.10 or 5.16 as securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title which do not adversely affect the current use of the property.
True, complete and correct copies of all leases and agreements in respect
of such real property leased by the Company are attached to Schedule 5.16, and
an indication as to which such properties, if any, are currently owned, or were
formerly owned, by Stockholder or Affiliates of the Company or Stockholder is
included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such
leases included on Schedule 5.16 are in full force and effect and constitute
valid and binding agreements of the Company and of the other parties (and their
successors) thereto in accordance with their respective terms.
5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the
Balance Sheet Date of all insurance policies carried by the Company, (ii) an
accurate list of all insurance loss runs (to the extent available) or workers
compensation claims received for the past three policy years. True, complete and
correct copies of all insurance policies currently in effect have been delivered
or made available to Pentacon. Such insurance policies evidence all of the
insurance that the Company is required to carry pursuant to all of its contracts
and other agreements and pursuant to all applicable laws, and, in the reasonable
judgment of the Company's management, provide adequate coverage against the
risks involved in the Company's business. All of such insurance policies are
currently in full force and effect and are scheduled to remain in full force and
effect through the Consummation Date. Since January 1, 1995, no insurance
carried by the Company has been canceled by the insurer and the Company has not
been denied coverage.
-16-
<PAGE>
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS.
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.18) showing all officers, directors and key employees of the
Company, listing all current employment agreements with such officers, directors
and key employees and the rate of compensation (and the portions thereof
attributable to salary, bonus and other compensation, respectively) of each of
such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The
Company has provided to Pentacon true, complete and correct copies of any
existing employment agreements for persons listed on Schedule 5.18. Since the
Balance Sheet Date and except as described in Schedule 5.18, there have been no
increases in the compensation payable or any special bonuses to any officer,
director, key employee or other employee, except ordinary salary increases
implemented on a basis consistent with past practices and bonuses, approved in
writing by Pentacon.
(b) Except as set forth on Schedule 5.18, (i) the Company is not bound by
or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
Company are represented by any labor union or covered by any collective
bargaining agreement, (iii) to the best knowledge of the Company, no campaign to
establish such representation is in progress and (iv) there is no pending or, to
the knowledge of the Company and the Stockholder, threatened labor dispute
involving the Company and any group of its employees nor has the Company
experienced any labor interruptions over the past three years.
(c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no
significant controversies pending or, to the knowledge of the Company and the
Stockholder, threatened between the Company and any of its employees, (ii) the
Company has complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (iii) to the knowledge of the Company and the
Stockholder, no person has asserted that the Company is liable in any material
amount for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee
benefit plans of the Company, including all employment agreements and other
agreements or arrangements containing "golden parachute" or other similar
provisions, and deferred compensation agreements, together with true, complete
and correct copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19, the
Company does not sponsor, maintain or contribute to any plan program, fund or
arrangement that constitutes an "employee pension benefit plan", and neither the
Company nor any subsidiary has any obligation to contribute to or accrue or pay
any benefits under any deferred compensation or retirement funding arrangement
on behalf of any employee or employees (such as, for example, and without
limitation, any individual retirement account or annuity, any "excess benefit
plan" (within the meaning of Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred
compensation arrangement). For the purposes of this Agreement, the term
"employee pension
-17-
<PAGE>
benefit plan" shall have the same meaning as is given that term in Section 3(2)
of ERISA. The Company has not sponsored, maintained or contributed to any
employee pension benefit plan other than the plans set forth on Schedule 5.19,
and the Company is not or could not be required to contribute to any retirement
plan pursuant to the provisions of any collective bargaining agreement
establishing the terms and conditions or employment of any of the Company's
employees.
Except as set forth on Schedule 5.19, the Company is not now, or will not
as a result of its past activities become, liable to the Pension Benefit
Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit
plan under the provisions of Title IV of ERISA.
All employee benefit plans listed on Schedule 5.19 and the administration
thereof are in compliance with their terms and all applicable provisions of
ERISA and the regulations issued thereunder, as well as with all other
applicable federal, state and local statutes, ordinances and regulations.
All accrued contribution obligations of the Company with respect to any
plan listed on Schedule 5.19 as of the Balance Sheet Date have either been
fulfilled in their entirety or are fully reflected on the Interim Balance Sheet
as of the Balance Sheet Date.
5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedules 5.19 and
5.20, All such plans listed on Schedule 5.19 that are intended to qualify (the
"Qualified Plans") under Section 401 (a) of the Code are, and have been so
qualified and have been determined by the Internal Revenue Service to be so
qualified, and copies of the most recent determination letters with respect
thereto are attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all
reports and other documents required to be filed with any governmental agency or
distributed to plan participants or beneficiaries (including, but not limited
to, actuarial reports, audits or tax returns) have been timely filed or
distributed, and copies of the most recent reports and filing relating thereto
are included as part of Schedule 5.19 hereof. Neither Stockholder, any such plan
listed in Schedule 5.19, nor the Company has engaged in any transaction
prohibited under the provisions of Section 4975 of the Code or Section 406 of
ERISA. No such Plan listed in Schedule 5.19 has incurred an accumulated funding
deficiency, as defined in Section 412(a) of the Code and Section 302(l) of
ERISA; and the Company has not incurred any liability for excise tax or penalty
due to the Internal Revenue Service nor any liability to the PBGC. The
Stockholder further represents that except as set forth on Schedule 5.19 hereto:
(i) there have been no terminations, partial terminations or
discontinuations of contributions to any Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and approval by
the Internal Revenue Service;
(ii) no plan listed in Schedule 5.19 subject to the provisions of
Title IV of ERISA has been terminated;
-18-
<PAGE>
(iii) there have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such plan listed in
Schedule 5.19;
(iv) the Company (including any subsidiaries) has not incurred
liability under Section 4062 of ERISA; and
(v) to the knowledge of the Company and the Stockholder, no
circumstances exist pursuant to which the Company would be reasonably
likely to have any direct or indirect liability whatsoever (including, but
not limited to, any liability to any multiemployer plan or the PBGC under
Title IV of ERISA or to the Internal Revenue Service for any excise tax or
penalty, or being subject to any statutory lien to secure payment of any
such liability) with respect to any plan now or heretofore maintained or
contributed to by any entity other than the Company that is, or at any
time was, a member of a "controlled group" (as defined in Section
412(n)(6)(B) of the Code) that includes the Company.
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is
not in violation of any law or regulation or any order of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality having jurisdiction over it; and except to the extent
set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or
proceedings, pending (as opposed to threatened claims or other claims for which
there is not an actual proceeding pending or claim actually made) or, to the
knowledge of the Company and the Stockholder, threatened against or affecting,
the Company, at law or in equity, or before or by any Federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over any of them and no notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
the Company, and, to the knowledge of the Company and the Stockholder, there is
no basis for any such claim, action, suit or proceeding. The Company has
conducted and is now conducting its business in substantial compliance with the
requirements, standards, criteria and conditions set forth in applicable
Federal, state and local statutes, ordinances, orders, approvals, variances,
rules and regulations.
5.22 TAXES. Except as set forth in Schedule 5.22, the Company has timely
filed all requisite Federal, state and other Tax Returns or extension requests
for all fiscal periods ended on or before the Balance Sheet Date; and except as
set forth on Schedule 5.22, the Company has no notice that any examinations are
in progress or that any claims are pending against it for federal, state and
other Taxes (including penalties and interest) for any period or periods prior
to and including the Balance Sheet Date and no notice of any claim for Taxes,
whether pending or threatened, has been received. Except as set forth in
Schedule 5.22, all Tax, including interest and penalties (whether or not shown
on any Tax Return) owed by the Company has been paid or accrued in its financial
accounts. The amounts shown as accruals for Taxes on the Company Financial
Statements are sufficient for the payment of all Taxes of the kinds indicated
(including penalties and interest) for all fiscal periods ended on or before
that date. Copies of (i) any tax examinations, (ii) extensions of statutory
limitations and (iii) the federal and local income Tax Returns and
-19-
<PAGE>
franchise Tax Returns of Company for their last three (3) fiscal years, or such
shorter period of time as any of them shall have existed, are attached hereto as
Schedule 5.22 or have otherwise been delivered to Pentacon. The Company has a
taxable year ended December 31. Except as set forth on Schedule 5.22, Company
uses the accrual method of accounting for income tax purposes, and the Company's
methods of accounting have not changed in the past five years. The Company is
not an investment Company as defined in Section 351(e)(1) of the Code. Except as
set forth in Schedule 5.22, the Company is not and has not during the last five
years been a party to any tax sharing agreement or agreement of similar effect.
The Company is not and has not during the last five years been a member of any
consolidated group. Except as set forth on Schedule 5.22, the Company has not
received, been denied, or applied for any private letter ruling during the last
ten years.
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.
(a) The Company is not in violation of any Charter Document. Except as set
forth in Schedule 5.23, neither the Company nor, to the best knowledge of the
Company and the Stockholder, any other party thereto, is in default under any
lease, instrument, agreement, license, or permit set forth on Schedule 5.12,
5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party
or by which its properties are bound (the "Material Documents").
(b) Except as set forth in Schedule 5.23, the execution and delivery of
this Agreement by each of the Company and the Stockholder do not violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company under any of the terms,
conditions or provisions of (i) the Charter Documents (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Company or
any of its properties or assets, or (iii) any Material Document or other
material instrument, obligation or agreement of any kind to which the Company or
any of the Stockholder is now a party or by which the Stockholder or the Company
or any of its properties or assets may be bound or affected. The consummation by
the Company and the Stockholder of the transactions contemplated hereby will not
result in any violation, conflict, breach, right of termination or acceleration
or creation of liens under any of the terms, conditions or provisions of the
items described in clauses (i) through (iii) of the preceding sentence, subject,
in the case of the terms, conditions or provisions of the items described in
clause (iii) above, to obtaining (prior to the Effective Time of the Merger)
such consents as may be required from commercial lenders, lessors or other third
parties.
(c) Except as set forth on Schedule 5.23 and documents required to be
filed as specifically referenced in this Agreement, none of the Material
Documents requires notice to, or the consent or approval of, any governmental
agency or other third party with respect to any of the transactions contemplated
hereby in order to remain in full force and effect, and consummation of
-20-
<PAGE>
the transactions contemplated hereby will not give rise to any right to
termination, cancellation or acceleration or loss of any material right or
benefit.
(d) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
for the making of the merger filings with the Secretary of State of the State of
Delaware and the State of Incorporation in connection with the Merger, (iv) for
filings in connection with listing on the NASDAQ National Market System or New
York Stock Exchange or other nationally recognized securities exchange; (v) for
possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13
and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholder
are required to make any declaration, filing or registration with, or notice to,
or obtain any authorization, consent or approval of, any governmental or
regulatory body or authority is necessary for the execution and delivery of this
Agreement by the Company and the Stockholder or the consummation by the Company
and the Stockholder of the transactions contemplated hereby.
(e) Except as set forth on Schedule 5.23, none of the Material Documents
prohibits the use or publication by the Company, Pentacon or Newco of the name
of any other party to such Material Document, and none of the Material Documents
prohibits or restricts the Company from freely providing services or selling
products to any other customer or potential customer of the Company, Pentacon,
Newco or any Other Founding Company.
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth
on Schedule 5.24, the Company is not now a party to any governmental contract
that, by its express terms, is subject to price redetermination or renegotiation
or that is customarily subject to price redetermination or renegotiations in the
ordinary course of business. Except as set forth on Schedule 5.24, the Company
is not now a party to any material contract based on minority ownership which
would be canceled or otherwise materially adversely impacted by completion of
the Pentacon Plan of Organization.
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth
on Schedule 5.25 or on the other schedules hereto, or as otherwise contemplated
hereby, there has not been:
(i) any Material Adverse Effect with respect to the Company;
(ii) any damage, destruction or loss (whether or not covered by
insurance), alone or in the aggregate, materially adversely affecting the
properties or business of the Company;
(iii) any change in the authorized capital of the Company or its
outstanding securities or any change in its ownership interests or any
grant of any options, warrants, calls, conversion rights or commitments;
-21-
<PAGE>
(iv) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the Company
except for distributions that would have been permitted after the date
hereof under Section 7.3(iii) hereof,
(v) any increase in the compensation, bonus, sales commissions or
fee arrangement payable or to become payable by the Company to any of its
officers, directors, Stockholder, employees, consultants or agents, except
for ordinary and customary bonuses and salary increases for employees in
accordance with past practice;
(vi) any work interruptions, labor grievances or claims filed, or
any event or condition of any character, materially adversely affecting
the business or future prospects of the Company;
(vii) any sale or transfer, or any agreement to sell or transfer,
any material assets, property or rights of Company outside of the ordinary
course of business to any person, including, without limitation, the
Stockholder and his affiliates;
(viii)any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company, including without limitation any
indebtedness or obligation of any Stockholder or any affiliate thereof;
(ix) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside
of the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the Company;
(xii) any amendment or termination of any Material Document;
(xiii)any transaction by the Company outside the ordinary course of
its business;
(xiv) any cancellation or termination of a Material Document or
material customer contract with a customer or client prior to the
scheduled termination date; or
(xv) any other distribution of property or assets by the Company
other than in the ordinary course of business and other than distributions
of real estate and other assets as permitted by this Agreement.
-22-
<PAGE>
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an
accurate schedule as of the date of the Agreement of:
(i) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the Company and
a description of the terms of such power.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
by the Company and the performance of the transactions contemplated herein have
been duly and validly authorized by the Board of Directors of the Company and
this Agreement has been duly and validly authorized by all necessary corporate
action and is a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
5.28 RELATIONS WITH GOVERNMENTS. Neither the Company, the Stockholder, or
any Affiliate of any of them has given or offered anything of value to any
governmental official, political party or candidate for government office in
violation of any applicable laws, rules or regulations, nor has it or any of
them otherwise taken any action which would cause the Company to be in violation
of the Foreign Corrupt Practices Act of 1977, as amended or any applicable law
of similar effect.
5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules
hereto, furnished to Pentacon by the Company and the Stockholder in connection
herewith, do not contain an untrue statement of a material fact or omit to state
a material fact necessary to make the statements herein and therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that the foregoing does not apply to statements contained in or omitted from any
of such documents made or omitted in reliance upon information furnished in
writing by Pentacon or Newco.
(b) The Company and the Stockholder acknowledge and agree (i) that there
exists no firm commitment, binding agreement, or promise or other assurance of
any kind, whether express or implied, oral or written, that a Registration
Statement will become effective or that the IPO pursuant thereto will occur at a
particular price or within a particular range of prices or occur at all; (ii)
that neither Pentacon or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the Company, the
Stockholder or any other person affiliated or associated with the Company for
any failure of the Registration Statement to become effective, the IPO to occur
at
-23-
<PAGE>
a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of Stockholder to enter into this Agreement, or to
vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to Pentacon or the
prospective IPO.
5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the
Company has not, between the Balance Sheet Date and the date hereof, taken any
of the actions which are prohibited ("Prohibited Activities") in Section 7.3.
5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to
the knowledge of the Company or the Stockholder, the Company has no liability or
potential liability to any person under any product or service warranty and the
Company does not offer or sell insurance or consumer protection plans or other
similar arrangements that could result in the Company being required to make any
material payment to or perform any material service for any person thereunder.
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS.
Except as described on Schedule 5.32, no Stockholder, officer, director or
Affiliate of the Company (i) possesses, directly or indirectly, any financial
interest in, or is a director, officer, employee or affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a
party to an agreement or relationship, that involves the receipt by such person
of compensation or property from the Company other than through a customary
employment relationship.
(B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER.
The Stockholder represents and warrants that the representations and
warranties set forth below are true as of the date of this Agreement as they
relate to such Stockholder and that the representations and warranties set forth
in this Sections 5(B) shall survive the Consummation Date.
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Stockholder has the
full legal right, power and authority to enter into this Agreement. Stockholder
owns beneficially and of record all of the shares of the Company stock
identified on Annex II as being owned by Stockholder, and, except as set forth
on Schedule 5.3, such Company Stock is owned free and clear of all liens,
encumbrances and claims of every kind. This Agreement is a legal, valid, and
binding obligation of Stockholder.
5.34 PREEMPTIVE RIGHTS. Such Stockholder does not have, or hereby waives,
any preemptive or other right to acquire shares of Company Stock or Pentacon
Stock that such Stockholder has or may have had. Nothing herein, however, shall
limit or restrict the rights of any Stockholder to acquire Pentacon Stock
pursuant to (i) this Agreement or (ii) any option granted by Pentacon.
-24-
<PAGE>
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. Except for obligations
which could arise under the pledge agreement described on Schedule 5.3,
Stockholder is not under any binding commitment or contract to sell, exchange or
otherwise dispose of shares of Pentacon Stock received as described in Section
3.1.
6. REPRESENTATIONS OF PENTACON AND NEWCO
Pentacon and Newco, jointly and severally, represent and warrant to the
Stockholder that all of the following representations and warranties in this
Section 6 are true at the date of this Agreement and, subject to Section 7.8
hereof, shall be true at the time of Closing and the Consummation Date, and that
such representations and warranties shall survive the Consummation Date for a
period of twenty-four months (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Consummation Date, which shall be
deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes
of determining whether a claim for indemnification under Section 11.2(iv) hereof
has been made on a timely basis, and solely to the extent that in connection
with the IPO, any of the Stockholder actually incurs liability under the 1933
Act, the 1934 Act, or any other Federal or state securities laws, the
representations and warranties of Pentacon and Newco set forth herein shall
survive until the expiration of any applicable limitations period, which shall
be deemed to be the Expiration Date for such purposes.
6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly
incorporated and organized, validly existing and in good standing under the laws
of the State of Delaware, and each has the requisite power and authority to
carry on its business as it is now being conducted. Pentacon and Newco are each
qualified to do business and are each in good standing in each jurisdiction in
which the nature of its business makes such qualification necessary. True,
complete and correct copies of the Certificate of Incorporation and By-laws,
each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter
Documents") are all attached hereto as Annex III.
6.2 AUTHORIZATION. (i) The respective officers or other representatives of
Pentacon and Newco executing this Agreement have the authority to enter into and
bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and
Newco have the full legal right, power and authority to enter into this
Agreement and the Other Agreements and consummate the Merger. All corporate acts
and other proceedings required to have been taken by Pentacon and Newco to
authorize the execution, delivery and performance of this Agreement and the
consummation of the Merger have been duly and properly taken.
6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of
Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration
Statement. All of the issued and outstanding shares of the capital stock of
Newco are owned by Pentacon and all of the issued and outstanding shares of the
capital stock of Pentacon are owned by the persons set forth on Schedule 6.3
hereof, in each case, free and clear of all liens, security interests, pledges,
charges, voting trusts,
-25-
<PAGE>
restrictions, encumbrances and claims of every kind. All of the issued and
outstanding shares of the capital stock of Pentacon and Newco have been duly
authorized and validly issued, are fully paid and nonassessable, and further,
such shares were offered, issued, sold and delivered by Pentacon and Newco in
compliance with all applicable state and Federal laws concerning the issuance of
securities. Further, none of such shares were issued in violation of the
preemptive rights of any past or present stockholder of Pentacon or Newco.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the
Other Agreements and except as set forth in the Draft Registration Statement or
in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates Pentacon or Newco to issue any of
their respective authorized but unissued capital stock; (ii) no voting trust,
voting agreement, proxy or other agreements or understandings exist with respect
to the voting of any shares of capital stock of Pentacon; and (iii) neither
Pentacon nor Newco has any obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its equity securities or any interests
therein or to pay any dividend or make any distribution in respect thereof.
Schedule 6.4 also includes a list of all outstanding options, warrants or other
rights to acquire shares of the stock of Pentacon.
6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries
except for Newco and each of the companies identified as "Newco" in each of the
Other Agreements. Except as set forth in the preceding sentence, neither
Pentacon nor Newco presently owns, of record or beneficially, or controls,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity, and neither Pentacon nor Newco, directly or indirectly, is a participant
in any joint venture, partnership or other non-corporate entity.
6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in
the Draft Registration Statement (the "Pentacon Financial Statements") have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated (except as noted thereon),
and the balance sheet included therein presents fairly the financial position of
Pentacon as of its date.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft
Registration Statement, Pentacon and Newco have no material liabilities,
contingent or otherwise, except as set forth in or contemplated by this
Agreement and the Other Agreements and except for fees generally described in
Part II of the Draft Registration Statement and incurred in connection with the
transactions contemplated hereby and thereby.
6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the
Draft Registration Statement, neither Pentacon nor Newco is in violation of any
law or regulation or any order of any court or Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them and except to the extent
set forth in Schedule 6.8, there are no material claims, actions, suits or
proceedings, pending
-26-
<PAGE>
or, to the knowledge of Pentacon or Newco, threatened against or affecting,
Pentacon or Newco, at law or in equity, or before or by any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them and no notice of any
claim, action, suit or proceeding, whether pending or threatened, has been
received. Pentacon and Newco have conducted and are conducting their respective
businesses in substantial compliance with the requirements, standards, criteria
and conditions set forth in applicable Federal, state and local statutes,
ordinances, permits, licenses, orders, approvals, variances, rules and
regulations and are not in violation, in any material respect, of any of the
foregoing.
6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any
Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of
Pentacon and Newco, any other party thereto, is in default under any lease,
instrument, agreement, license, or permit to which Pentacon or Newco is a party,
or by which Pentacon or Newco, or any of their respective properties, are bound
(collectively, the "Pentacon Documents"); and (a) the rights and benefits of
Pentacon and Newco under the Pentacon Documents will not be adversely affected
by the transactions contemplated hereby and (b) the execution and delivery of
this Agreement and the Other Agreements by Pentacon and Newco and the
performance of their obligations hereunder and thereunder do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation or default (with or without notice or lapse of time, or both), under
or give rise to a right of termination, cancellation, or acceleration of any
obligation or to loss of a material benefit under, or result in the creation of
any lien upon any of the assets of Pentacon or Newco under, any provision of (i)
the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the
comparable governing instruments of Newco, (ii) any note, bond, mortgage,
indenture or deed of trust or any license, lease, contract, commitment,
agreement or arrangement to which Pentacon or Newco is a party or by which any
of their respective properties or assets are bound or (iii) any judgment, order,
decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or
their respective properties or assets.
(b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the
Pentacon Documents requires notice to, or the consent or approval of, any
governmental agency or other third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect and consummation
of the transactions contemplated hereby will not give rise to any right to
termination, cancellation or acceleration or loss of any right or benefit.
(c) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
filings with blue sky authorities in connection with the transactions
contemplated by this Agreement, (iv) for the making of the merger filings with
the Secretary of State of the State of Delaware and the State of Incorporation
in connection with the Merger, (v) for filings in consideration for listing on
the NASDAQ National Market System or the New York Stock Exchange or other
nationally recognized securities exchange; and (vi) for possible filings under
the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not
required make any declaration, filing or registration with, or notice to, or
obtain any authorization, consent or approval
-27-
<PAGE>
of, any governmental or regulatory body or authority is necessary for the
execution and delivery of this Agreement by NEWCO or Pentacon or the
consummation by the Newco and Pentacon of the transactions contemplated hereby.
6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
and the Other Agreements by Pentacon and Newco and the performance of the
transactions contemplated herein and therein have been duly and validly
authorized by the respective Boards of Directors and stockholders of Pentacon
and Newco and this Agreement and the Other Agreements have been duly and validly
authorized by all necessary corporate action and are legal, valid and binding
obligations of Pentacon and Newco, enforceable against them in accordance with
their respective terms.
6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the
Stockholder, the Pentacon Stock to be delivered to the Stockholder pursuant to
this Agreement will constitute valid and legally issued shares of Pentacon,
fully paid and nonassessable, and with the exception of restrictions upon resale
set forth in Sections 15 and 16 hereof, will be identical in all substantive
respects (which do not include the form of certificate upon which it is printed
or the presence or absence of a CUSIP number on any such certificate) to the
Pentacon Stock issued and outstanding as of the date hereof by reason of the
provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the
Stockholder shall at the time of such issuance and delivery be free and clear of
any liens, claims or encumbrances of any kind or character. The shares of
Pentacon Stock to be issued to the Stockholder pursuant to this Agreement will
not be registered under the 1933 Act, except as provided in Section 17 hereof.
6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither
Pentacon nor Newco has entered or will enter into any agreement with any of the
Founding Companies or any of the stockholders of the Founding Companies or
Pentacon other than the Other Agreements and the agreements contemplated by each
of the Other Agreements, including the employment agreements and real property
leases referred to herein or entered into in connection with the transactions
contemplated hereby and thereby. Pentacon has not entered into any agreements
which obligate Pentacon or any of its Affiliates to continue to use the services
of specific accounting or legal professionals following the Closing Date.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on
March 20, 1997 and has conducted only limited operations since that time.
Neither Pentacon nor Newco has conducted any material business since the date of
its inception, except in connection with this Agreement, the Other Agreements
and the IPO. Except as described in the Draft Registration Statement, neither
Pentacon nor Newco owns or has at any time owned any real property or any
material personal property or is a party to any other material agreement other
than the Other Agreements, the agreements contemplated thereby and such
agreements as will be filed as Exhibits to the Registration Statement.
-28-
<PAGE>
6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company
and the Stockholder, together with this Agreement and the information furnished
to the Company and the Stockholder in connection herewith, does not contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing does not apply
to statements contained in or omitted from any of such documents made or omitted
in reliance upon information furnished in writing by the Company or the
Stockholder or information pertaining to the Company or a Stockholder which is
confirmed in writing by the Company or such Stockholder.
6.15 NO INTEREST IN COMPETITORS. To the knowledge of Pentacon, neither
Pentacon, Newco or any of their directors, officers or affiliates (other than
stockholders of the Founding Companies) owns directly or indirectly any interest
in a competitor of the Company or any of the Founding Companies.
7. COVENANTS PRIOR TO CLOSING
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.
(a) Between the date of this Agreement and the Consummation Date, the
Company will afford to the officers and authorized representatives of Pentacon
access to all of the Company's sites, properties, books and records and will
furnish Pentacon with such additional financial and operating data and other
information as to the business and properties of the Company as Pentacon may
from time to time reasonably request; provided, however, that the Company shall
not prior to the Closing Date be required to disclose to the Other Founding
Companies, and Pentacon shall not without first obtaining the written approval
of the Company disclose to the Other Founding Companies, information relating to
pricing or profitability on an account-by-account basis or any pricing
information relating to the Company's suppliers on a supplier-by-supplier basis.
The Company will cooperate with Pentacon, its representatives, auditors and
counsel and the Other Founding Companies in the preparation of any documents or
other material which may be required in connection with any documents or
materials required by this Agreement. Pentacon, Newco, the Stockholder and the
Company will treat all information obtained in connection with the negotiation
and performance of this Agreement or the due diligence investigations conducted
with respect to the Other Founding Companies as confidential in accordance with
the provisions of Section 14 hereof. In addition, Pentacon will cause each of
the Other Founding Companies to enter into a provision similar to this Section
7.1(a) requiring each such Other Founding Company, its stockholders, directors,
officers, representatives, employees and agents to keep confidential any
information obtained by such Other Founding Company.
(b) Between the date of this Agreement and the Consummation Date, Pentacon
will afford to the officers and authorized representatives of the Company and
the Stockholder access to all of Pentacon's and Newco's sites, properties, books
and records and will furnish the Company with such additional financial and
operating data and other information as to the business and properties of
Pentacon and Newco as the Company may from time to time reasonably request.
-29-
<PAGE>
Pentacon and Newco will cooperate with the Company, its representatives,
auditors and counsel in the preparation of any documents or other material which
may be required in connection with any documents or materials required by this
Agreement. The Company will cause all information obtained in connection with
the negotiation and performance of this Agreement to be treated as confidential
in accordance with the provisions of Section 14 hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Consummation Date, the Company will, except as set forth on
Schedule 7.2 or as otherwise expressly contemplated by this Agreement:
(i) carry on its respective businesses in substantially the same
manner as it has heretofore and not introduce any material new method of
management, operation or accounting;
(ii) use commercially reasonable efforts to maintain its respective
properties and facilities, including those held under leases, in as good
working order and condition as at present, ordinary wear and tear
excepted;
(iii) perform in all material respects all of its respective
obligations under agreements relating to or affecting its respective
assets, properties or rights;
(iv) use commercially reasonable efforts to keep in full force and
effect present insurance policies or other comparable insurance coverage;
(v) use commercially reasonable efforts to maintain and preserve its
business organization intact, retain its respective present key employees
and maintain its respective relationships with material suppliers,
customers and others having business relations with the Company;
(vi) use commercially reasonable efforts to maintain compliance with
all material permits, laws, rules and regulations, consent orders, and all
other orders of applicable courts, regulatory agencies and similar
governmental authorities;
(vii) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments without the knowledge and consent
of Pentacon (which consent shall not be unreasonably withheld, delayed or
conditioned), provided that debt and/or lease instruments may be replaced
without the consent of Pentacon if such replacement instruments are on
terms at least as favorable to the Company as the instruments being
replaced; and
(viii)maintain or reduce present salaries and commission levels for
all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with the
Company's past practices.
-30-
<PAGE>
7.3 PROHIBITED ACTIVITIES. Except as disclosed in Section 5 or set forth
on Schedule 7.3 or as otherwise expressly contemplated by this Agreement,
between the date hereof and the Consummation Date, the Company will not, without
prior written consent of Pentacon:
(i) make any change in its Articles of Incorporation or By-laws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed in Schedule
5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures, except if it is in
the normal course of business (consistent with past practice) or involves
an amount not in excess of $25,000;
(v) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens
incurred in connection with the acquisition of equipment with an aggregate
cost not in excess of $25,000 necessary or desirable for the conduct of
the businesses of the Company, (2) (A) liens for Taxes either not yet due
or being contested in good faith and by appropriate proceedings (and for
which contested Taxes adequate reserves have been established and are
being maintained) or (B) materialmen's, mechanics', workers', repairmen's,
employees' or other like liens arising in the ordinary course of business
(the liens set forth in clause (2) being referred to herein as "Statutory
Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16
hereto;
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the normal course of business and other
than distributions of real estate and other assets as permitted in this
Agreement (including the Schedules hereto);
(vii) negotiate for the acquisition of any business or the start-up
of any new business;
(viii)merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(ix) waive any material rights or claims of the Company, provided
that the Company may negotiate and adjust bills and accounts in the course
of good faith disputes with customers in a manner consistent with past
practice, provided, further, that such
-31-
<PAGE>
adjustments shall not be deemed to be included in Schedule 5.11 to the
extent they exceed the reserves, if any, established therefor, or unless
specifically listed thereon;
(x) amend or terminate any material agreement, permit, license or
other right of the Company provided that the Company may continue to
administer vendor and supplier contracts in the ordinary course of
business provided written notice of any such material amendments or
terminations is provided to Pentacon as soon as possible following such
action and in any event prior to the Closing; or
(xi) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
7.4 NO SHOP. Except as contemplated hereby, the Stockholder, the Company,
nor any agent, officer, director, trustee or any representative of any of the
foregoing will, during the period commencing on the date of this Agreement and
ending with the earlier to occur of the Consummation Date or the termination of
this Agreement in accordance with its terms, directly or indirectly:
(i) solicit or initiate the submission of proposals or offers from
any person for,
(ii) participate in any discussions pertaining to, or
(iii) furnish any information to any person other than Pentacon,
Newco or their authorized agents relating to, any acquisition or purchase
of all or a material amount of the assets of, or any equity interest in,
the Company or a merger, consolidation or business combination of the
Company.
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide Pentacon on Schedule 7.5 with proof that any required notice has been
sent.
7.6 AGREEMENTS. The Stockholder and the Company shall terminate (i) any
stockholders agreements, voting agreements, voting trusts, options, warrants and
employment agreements between the Company and any employee listed on Schedule
9.12 hereto and (ii) any existing agreement between the Company and any
Stockholder, on or prior to the Consummation Date provided that nothing herein
shall prohibit or prevent the Company from paying (either prior to or on the
Closing Date) notes or other obligations from the Company to the Stockholder in
accordance with the terms thereof, which terms have been disclosed to Pentacon.
Such termination agreements are listed on Schedule 7.6 and copies thereof shall
be attached thereto.
-32-
<PAGE>
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDER AND THE COMPANY.
The Stockholder and the Company shall give prompt notice to Pentacon of (i) the
occurrence or non-occurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty of the Company or
the Stockholder contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of any
Stockholder or the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such person hereunder. Pentacon
and Newco shall give prompt notice to the Company of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of Pentacon or Newco contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of Pentacon or Newco to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder. The delivery or deemed delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
If, prior to the Closing Date, the Chief Executive Officer, the Chief
Financial Officer or the General Counsel of Pentacon shall determine that any of
Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder
for indemnification against any Stockholder(s) (whether or not such claim might
exceed the Indemnification Threshold), then Pentacon shall promptly advise the
affected Stockholder(s), in writing, of such potential claim and provide
information supporting the basis and potential amount of such claim (a
"Potential Claim Notice"). This procedure with respect to Potential Claim
Notices is intended to afford the affected Stockholder(s) notice so that it may
attempt to cure or otherwise address the claim prior to Closing; provided,
however, that (i) this procedure shall not affect or delay Closing and (ii)
neither the failure or delay by Pentacon to give a Potential Claim Notice nor
the information included or omitted from a Potential Claim Notice shall
constitute a waiver of, or shall otherwise adversely affect the right to receive
indemnification for, any such claim paid by Pentacon, Newco, the Surviving
Corporation or the Company hereunder after the Closing Date.
7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until 24 hours prior to the
anticipated effectiveness of the Registration Statement to supplement or amend
promptly the Schedules hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules, provided however,
that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall
only have to be delivered at the Closing Date, unless such Schedule is to be
amended to reflect an event occurring other than in the ordinary course of
business. Notwithstanding the foregoing sentence, no amendment or supplement to
a Schedule prepared by the Company that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect with respect to the Company
may be made unless Pentacon and a majority of the Founding Companies other than
the Company consent to such amendment or
-33-
<PAGE>
supplement; and provided further, that no amendment or supplement to a Schedule
prepared by Pentacon or Newco that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect with respect to Pentacon or
Newco may be made unless a majority of the Founding Companies consent to such
amendment or supplement. For all purposes of this Agreement, including without
limitation for purposes of determining whether the conditions set forth in
Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed
to be the Schedules as amended or supplemented pursuant to this Section 7.8. In
the event that one of the Other Founding Companies seeks to amend or supplement
a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such
amendment or supplement constitutes or reflects an event or occurrence that
would have a Material Adverse Effect on such Other Founding Company, Pentacon
shall give the Company written notice promptly after it has knowledge thereof.
If Pentacon and a majority of the Founding Companies consent to such amendment
or supplement, which consent shall have been deemed given by Pentacon or any
Founding Company if no response is received within 24 hours following receipt of
written notice of such amendment or supplement (or sooner if reasonable and if
required by the circumstances under which such consent is requested), but the
Company does not give its consent, the Company may terminate this Agreement
pursuant to Section 12.1(iv) hereof. In the event that the Company seeks to
amend or supplement a Schedule pursuant to this Section 7.8, and Pentacon and a
majority of the Other Founding Companies do not consent to such amendment or
supplement, this Agreement shall be deemed terminated by mutual consent as set
forth in Section 12.1(i) hereof. In the event that Pentacon or Newco seeks to
amend or supplement a Schedule pursuant to this Section 7.8 and a majority of
the Founding Companies do not consent to such amendment or supplement, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. No party to this Agreement shall be liable to any other party if
this Agreement shall be terminated pursuant to the provisions of this Section
7.8. No amendment of or supplement to a Schedule shall be made later than 24
hours prior to the anticipated effectiveness of the Registration Statement.
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and
Stockholder shall furnish or cause to be furnished to Pentacon and the
Underwriters all of the information concerning the Company and the Stockholder
reasonably required for inclusion in, and will cooperate with Pentacon and the
Underwriters in the preparation of, the Registration Statement and the
prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement, except
that the cost of the preparation of any such audited and unaudited Financial
Statements shall be borne by Pentacon). The Company and the Stockholder agree
promptly to advise Pentacon if at any time during the period in which a
prospectus relating to the IPO is required to be delivered under the Securities
Act, any information contained in the prospectus concerning the Company or the
Stockholder becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy. Insofar as the
information relates solely to the Company or the Stockholder, the Company
represents and warrants as to such information with respect to itself, and each
Stockholder represents and warrants, as to such information with respect to the
Company and himself or herself, severally, but not jointly, that the information
expressly provided for inclusion in the Registration Statement or otherwise
confirmed
-34-
<PAGE>
in writing by such Stockholder will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7.10 FINAL FINANCIAL STATEMENTS. If at least 20 days have elapsed since
the end of a fiscal quarter, the Company shall provide prior to the Consummation
Date, and Pentacon shall have had sufficient time to review the unaudited
consolidated balance sheets of the Company as of the end of all fiscal quarters
following the Balance Sheet Date, and the unaudited consolidated statement of
income, cash flows and retained earnings of the Company for all fiscal quarters
ended after the Balance Sheet Date. Such financial statements shall have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated (except as noted therein).
Except as noted in such financial statements, all of such financial statements
will present fairly the results of operations of the Company for the periods
indicated therein, subject to adjustments based upon normal review.
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver,
or cause to be executed and delivered, such further instruments or documents or
take such other action as may be reasonably necessary or convenient to carry out
the transactions contemplated hereby.
7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall
maintain its authorized capital stock as set forth in the Registration Statement
filed with the SEC except for such changes in authorized capital stock as are
made to respond to comments made by the SEC or requirements of any exchange or
automated trading system for which application is made to register the Pentacon
Stock and any changes necessary or advisable in order to permit the delivery of
the opinion contemplated by Section 8.12 hereof.
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS
ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby
recognize that one or more filings under the Hart-Scott-Rodino Act may be
required in connection with the transactions contemplated herein. If it is
determined by the parties to this Agreement that filings under the
Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees
to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act,
(ii) such compliance by the Stockholder and the Company shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
9 of this Agreement, and (iii) the parties agree to cooperate and use their best
efforts to cause all filings required under the Hart-Scott-Rodino Act to be
made. If filings under the Hart-Scott-Rodino Act are required, the costs and
expenses thereof (including filing fees) shall be borne by Pentacon. The
obligation of each party to consummate the transactions contemplated by this
Agreement is subject to the expiration or termination of the waiting period
under the Hart-Scott-Rodino Act, if applicable.
-35-
<PAGE>
7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date
of the final prospectus of Pentacon utilized in connection with the IPO, the
Company or the Stockholder becomes aware of any fact or circumstance which would
materially affect the accuracy of a representation or warranty of Company or
Stockholder in this Agreement, the Company and the Stockholder shall promptly
give notice of such fact or circumstance to Pentacon. However, subject to the
provisions of Section 7.8, such notification shall not relieve either the
Company or the Stockholder of their respective obligations under this Agreement,
and, subject to the provisions of Section 7.8, at the sole option of Pentacon,
the truth and accuracy of any and all warranties and representations of the
Company, or on behalf of the Company and of Stockholder at the date of this
Agreement and on the Closing Date and on the Consummation Date, shall be a
precondition to the consummation of this transaction.
7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately
following the Effective Time of the Merger, Pentacon will pay, or cause to be
paid, all of the outstanding liabilities, obligations and indebtedness of
Company to the lenders identified on Schedule 7.15 hereto. In connection with
such repayment of indebtedness, all associated guaranties of Founder Stockholder
shall be terminated and cancelled.
7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that
one of the conditions to the Stockholder consummating the transactions
contemplated herein is that the IPO shall be closed and the Stockholder shall be
entitled to receive consideration not less than the Minimum Value set forth on
Annex I attached hereto.
7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon
shall not exceed nine members immediately following the IPO unless the Founding
Stockholder representatives to serve on such board agree in writing to a larger
number of directors. Don List will initially be provided the opportunity to
serve in the longest initial term for directors.
7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise
required by applicable law, Pentacon will describe or report the transaction in
any required tax reports of Pentacon as a tax-free transaction (insofar as its
relates to the delivery of Pentacon Stock for Company Stock) in a manner
consistent with the tax opinion referenced in Section 8.12.
7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain
all material Licenses necessary for Pentacon to commence the conduct of business
on the Consummation Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND
COMPANY
The obligations of Stockholder and the Company with respect to actions to
be taken on the Closing Date are subject to the satisfaction or waiver on or
prior to the Closing Date of all of the following conditions. The obligations of
the Stockholder and the Company with respect to actions to be taken on the
Consummation Date are subject to the satisfaction or waiver on or prior to the
-36-
<PAGE>
Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and
8.12. As of the Closing Date or, with respect to the conditions set forth in
Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such
conditions have not been satisfied, the Stockholder (acting in unison) shall
have the right to terminate this Agreement, or in the alternative, waive any
condition not so satisfied. The delivery of certificates representing Company
Stock to Pentacon as of the Consummation Date shall constitute a waiver of any
conditions not so satisfied. However, no such waiver shall be deemed to affect
the survival of the representations and warranties of Pentacon and Newco
contained in Section 6 hereof or the rights of the Stockholder pursuant to
Section 11 hereof.
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All
representations and warranties of Pentacon and Newco contained in Section 6
shall be true and correct in all material respects as of the Closing Date and
the Consummation Date as though such representations and warranties had been
made as of that time; all of the terms, covenants and conditions of this
Agreement to be complied with and performed by Pentacon and Newco on or before
the Closing Date and the Consummation Date shall have been duly complied with
and performed in all material respects; and certificates to the foregoing effect
dated the Closing Date and the Consummation Date, respectively, and signed by
the President or any Vice President of Pentacon shall have been delivered to the
Stockholder.
8.2 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be reasonably satisfactory to the Company and its counsel.
The Stockholder and the Company shall be satisfied that the Registration
Statement and the prospectus forming a part thereof, including any amendments
thereof or supplements thereto, shall not contain any untrue statement of a
material fact, or omit to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that, subject to the provisions set forth in the introductory paragraph of this
Section 8, the condition contained in this sentence shall be deemed waived if
the Company or Stockholder shall have failed to inform Pentacon in writing prior
to the effectiveness of the Registration Statement of the existence of an untrue
statement of a material fact or the omission of such a statement of a material
fact.
8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the Company as a result of which
the management of the Company deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion
from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed
hereto as Annex IV.
-37-
<PAGE>
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis, subject to the conditions set
forth in the underwriting agreement, on terms such that the aggregate value of
the cash and the number of shares of Pentacon Stock to be received by the
Stockholder is not less than the Minimum Value set forth on Annex I.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency or any third party relating to the consummation
of the transactions contemplated herein or set forth in Schedule 5.23 hereto
shall have been obtained and made and no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger and no governmental
agency or body shall have taken any other action or made any request of Company
as a result of which Company deems it inadvisable to proceed with the
transactions hereunder.
8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have
delivered to the Company a certificate, dated as of a date no later than ten
days prior to the Closing Date, duly issued by the Delaware Secretary of State
and in each state in which Pentacon or Newco is authorized to do business,
showing that each of Pentacon and Newco is in good standing and authorized to do
business and that all state franchise and/or income tax returns and taxes for
Pentacon and Newco, respectively, for all periods prior to the Closing have been
filed and paid.
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to Pentacon or Newco which would constitute a Material
Adverse Effect.
8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a
certificate or certificates, dated the Closing Date and signed by the secretary
of Pentacon and of Newco, certifying the truth and correctness of attached
copies of the Pentacon's and Newco's respective Certificates of Incorporation
(including amendments thereto), By-Laws (including amendments thereto), and
resolutions of the boards of directors and, if required, the Stockholders of
Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement
and the consummation of the transactions contemplated hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VI hereto.
8.12 TAX MATTERS. The shall have received an opinion of Ernst & Young,
L.L.P. or other tax advisor of national recognition reasonably acceptable to the
Stockholder that the Pentacon Plan of Organization will qualify as a tax-free
transfer of property under Section 351 of the Code and that the Stockholder will
not recognize gain to the extent the Stockholder exchanges stock of the
-38-
<PAGE>
Company for Pentacon stock (but not cash or other property) pursuant to the
Pentacon Plan of Organization.
8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for
listing on the New York Stock Exchange, NASDAQ National Market System or the
American Stock Exchange.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO
The obligations of Pentacon and Newco with respect to actions to be taken
on the Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of all of the following conditions. The obligations of Pentacon and
Newco with respect to actions to be taken on the Consummation Date are subject
to the satisfaction or waiver on or prior to the Consummation Date of the
conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or,
with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of
the Consummation Date, if any such conditions have not been satisfied, Pentacon
and Newco shall have the right to terminate this Agreement, or waive any such
condition, but no such waiver shall be deemed to affect the survival of the
representations and warranties contained in Section 5 hereof.
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the
representations and warranties of the Stockholder and the Company contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date and the Consummation Date with the same effect as though such
representations and warranties had been made on and as of such date; all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by the Stockholder and the Company on or before the Closing Date or
the Consummation Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the Stockholder shall have delivered
to Pentacon certificates dated the Closing Date and the Consummation Date,
respectively, and signed by them to such effect.
9.2 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of Pentacon as a result of which the
management of Pentacon deems it inadvisable to proceed with the transactions
hereunder.
9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate,
dated the Closing Date and signed by the secretary of the Company, certifying
the truth and correctness of attached copies of the Company's Certificate of
Incorporation (including amendments thereto), ByLaws (including amendments
thereto), and resolutions of the board of directors and the Stockholder
approving the Company's entering into this Agreement and the consummation of the
transactions contemplated hereby.
-39-
<PAGE>
9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have
occurred with respect to the Company which would constitute a Material Adverse
Effect, and the Company shall not have suffered any material loss or damages to
any of its properties or assets, whether or not covered by insurance, which
change, loss or damage materially affects or impairs the ability of the Company
to conduct its business.
9.5 STOCKHOLDER'S RELEASE. The Stockholder shall have delivered to
Pentacon (to the attention of Pentacon's in-house counsel) an instrument dated
the Closing Date, which shall be effective only upon the occurrence of the
Consummation Date and shall relate only to matters accruing on or prior to the
Consummation Date, releasing the Company and Pentacon from (i) any and all
claims of the Stockholder against the Company and Pentacon and (ii) obligations
of the Company and Pentacon to the Stockholder, except for (w) items
specifically identified on Schedules 5.10 and 5.15 as being claims of or
obligations to the Stockholder, (x) continuing obligations to Stockholder
relating to their employment by the Company or Pentacon, (y) any obligations or
liabilities arising under this Agreement or the transactions contemplated hereby
and (z) real estate lease agreements between the Company and Stockholder, as
amended which have been accepted or approved by Pentacon as set forth on Exhibit
9.5. In the event that the Consummation Date does not occur, then the release
instrument referenced herein shall be void and of no further force or effect.
9.6 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to Pentacon.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, all existing agreements between the Company and the Stockholder
(and entities controlled by the Stockholder) shall have been canceled effective
prior to or as of the Consummation Date.
9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from
Counsel to the Company and the Stockholder, dated the Closing Date,
substantially in the form annexed hereto as Annex V.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; all consents
and approvals of third parties listed on Schedule 5.23 shall have been obtained;
and no action or proceeding shall have been instituted or threatened to restrain
or prohibit the Merger and no governmental agency or body shall have taken any
other action or made any request of Pentacon as a result of which Pentacon deems
it inadvisable to proceed with the transactions hereunder.
-40-
<PAGE>
9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to
Pentacon a certificate, dated as of a date no earlier than ten days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's state of incorporation and, unless waived by Pentacon, in each state
in which the Company is authorized to do business, showing the Company is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for the Company for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall enter into an employment agreement substantially in the form of Annex VI
hereto.
9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon
a certificate to the effect that he is not a foreign person pursuant to Section
1.1445-2(b) of the Treasury regulations.
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated
by this Agreement or the Registration Statement, after the Consummation Date,
Pentacon shall not and shall not permit any of its subsidiaries to undertake any
act that would jeopardize the tax-free status of the organization, including
without limitation:
(a) the retirement or reacquisition, directly or indirectly, of all
or part of the Pentacon Stock issued in connection with the transactions
contemplated hereby; or
(b) the entering into of financial arrangements for the benefit of
the Stockholder.
10.2 PREPARATION AND FILING OF TAX RETURNS.
(i) The Company, if possible, or otherwise the Stockholder shall
file or cause to be filed all Tax Returns (federal, state, local or
otherwise) of any Acquired Party for all taxable periods that end on or
before the Consummation Date, and shall permit Pentacon to review all such
Returns prior to such filings. Unless the Company is a C corporation, the
Stockholder shall pay or cause to be paid all Tax liabilities (in excess
of all amounts already paid with respect thereto or properly accrued or
reserved with respect thereto on the Financial Statements) shown by such
Returns to be due.
-41-
<PAGE>
(ii) Pentacon shall file or cause to be filed all separate Returns
of, or that include, any Acquired Party for all taxable periods ending
after the Consummation Date.
(iii) Each party hereto shall, and shall cause its Subsidiaries and
Affiliates to, provide to each of the other parties hereto such
cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any
audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies, at the expense of the
requesting party, of all relevant portions of relevant Returns, together
with relevant accompanying schedules and relevant work papers, relevant
documents relating to rulings or other determinations by Taxing
Authorities and relevant records concerning the ownership and Tax basis of
property, which such party may possess. Each party shall make its
employees reasonably available on a mutually convenient basis at its cost
to provide explanation of any documents or information so provided.
Subject to the preceding sentence, each party required to file Returns
pursuant to this Agreement shall bear all costs of filing such Returns.
(iv) Each of the Company, Newco, Pentacon and each Stockholder shall
comply with the tax reporting requirements of Section 1.351-3 of the
Treasury Regulations promulgated under the Code, and treat the transaction
as a tax-free contribution under Section 351(a) of the Code subject to
gain, if any, recognized on the receipt of cash or other property under
Section 351(b) of the Code subject to gain, if any, recognized on the
receipt of cash or other property under Section 351(b) of the Code.
10.3 DIRECTORS. The persons named in the Draft Registration Statement
shall be appointed as directors and elected as officers of Pentacon, as and to
the extent set forth in the Draft Registration Statement, promptly following the
Consummation Date.
11. INDEMNIFICATION
The Stockholder, Pentacon and Newco each make the following covenants that
are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDER. Subject to the
limitations set forth in Section 11.5, the Stockholder covenants and agrees that
he will indemnify, defend, protect and hold harmless Pentacon, Newco, the
Company and the Surviving Corporation at all times, from and after the date of
this Agreement until the Expiration Date (provided that for purposes of Section
11.1(iii) below, the Expiration Date shall be the date on which the applicable
statute of limitations expires), from and against all claims, damages, actions,
suits, proceedings, demands, assessments, adjustments, costs and expenses
(including specifically, but without limitation, reasonable attorneys' fees and
expenses of investigation) incurred by Pentacon, Newco, the Company or the
Surviving Corporation as a result of or arising from (i) any breach of the
representations and warranties of the Stockholder or the Company set forth
herein or on the definitive, final schedules or certificates
-42-
<PAGE>
delivered by them in connection herewith, (ii) any breach of any agreement on
the part of the Stockholder or, prior to Closing, the Company under this
Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or other
Federal or state law or regulation, at common law or otherwise, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact relating to the Company or the Stockholder, and provided in writing to
Pentacon or its counsel by the Company or the Stockholder for inclusion in the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to the
Company or the Stockholder required to be stated therein or necessary to make
the statements therein not misleading, provided, however, that such indemnity
shall not inure to the benefit of Pentacon, Newco, the Company or the Surviving
Corporation to the extent that such untrue statement (or alleged untrue
statement) was made in, or omission (or alleged omission) occurred in, any
preliminary prospectus and the Stockholder provided, in writing, corrected
information to Pentacon counsel and to Pentacon for inclusion in the final
prospectus, and such information was not so included or properly delivered, and
provided further, that no Stockholder shall be liable for any indemnification
obligation pursuant to this Section 11.1(iii) to the extent attributable to a
breach of any representation, warranty or agreement made herein individually by
any other Stockholder.
Pentacon and Newco acknowledge and agree that other than the
representations and warranties of Company or Stockholder specifically contained
in this Agreement, there are no representations or warranties of Company or
Stockholder, either express or implied, with respect to the transactions
contemplated by this Agreement, the Company or its assets, liabilities and
business.
Pentacon, Newco and the Company further acknowledge and agree that, should
the Closing occur, their sole and exclusive remedy with respect to any and all
claims relating to this Agreement and the transactions contemplated in this
Agreement, shall be pursuant to the indemnification provisions set forth in this
Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the
Closing, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action they or any indemnified person may have
against the Company or any Stockholder relating to this Agreement or the
transactions contemplated hereby arising under or based upon any federal, state,
local or foreign statute, law, rule, regulation or otherwise (and other than
pursuant to the terms of this Agreement).
11.2 INDEMNIFICATION BY PENTACON. Subject to the limitations set forth in
Section 11.5, Pentacon covenants and agrees that it will indemnify, defend,
protect and hold harmless the Stockholder at all times from and after the date
of this Agreement until the Expiration Date, from and against all claims,
damages, actions, suits, proceedings, demands, assessments, adjustments, costs
and expenses (including specifically, but without limitation, reasonable
attorneys' fees and expenses of investigation) incurred by the Stockholder as a
result of or arising from (i) any breach by Pentacon or Newco of their
representations and warranties set forth herein or on the definitive, final
schedules or certificates attached delivered by them pursuant hereto, (ii) any
breach of any agreement on the part of Pentacon or Newco under this Agreement or
any other agreement delivered pursuant hereto, (iii) any liabilities which the
Stockholder may incur due to Pentacon's or Newco's
-43-
<PAGE>
or the Surviving Corporation's failure to pay, perform or discharge when due any
of the liabilities and obligations of the Company for which Pentacon, Newco or
the Surviving Corporation is responsible pursuant to this Agreement (except to
the extent that Pentacon or Newco has bona fide claims hereunder against the
Stockholder by reason of such liabilities); or (iv) any liability under the 1933
Act, the 1934 Act or other Federal or state law or regulation, at common law or
otherwise, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact relating to Pentacon, Newco or any of the Other
Founding Companies contained in any preliminary prospectus, the Registration
Statement or any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or arising out of or based upon any omission or alleged
omission to state therein a material fact relating to Pentacon or Newco or any
of the Other Founding Companies required to be stated therein or necessary to
make the statements therein not misleading.
11.3 THIRD PERSON CLAIMS. Subject to the limitations set forth in Section
11.5, promptly after any party hereto (hereinafter the "Indemnified Party") has
received notice of or has actual knowledge of any claim by a Person (including a
governmental agency) not a party to this Agreement ("Third Person"), or the
commencement of any action or proceeding by a Third Person, with respect to
which the Indemnified Person would be entitled to receive indemnification
pursuant to Section 11, the Indemnified Party shall, as a condition precedent to
a claim with respect thereto being made against any party obligated to provide
indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the
"Indemnifying Party"), give the Indemnifying Party written notice of such claim
or the commencement of such action or proceeding. Such notice shall state the
nature and the basis of such claim and a reasonable estimate of the amount
thereof. The Indemnifying Party shall have the right to defend and settle, at
its own expense and by its own counsel, any such matter so long as the
Indemnifying Party pursues the same in good faith and diligently, provided that
the Indemnifying Party shall not settle any criminal proceeding without the
written consent of the Indemnified Party. If the Indemnifying Party undertakes
to defend or settle, it shall promptly notify the Indemnified Party of its
intention to do so, and the Indemnified Party shall cooperate with the
Indemnifying Party and its counsel in the defense thereof and in any settlement
thereof. Such cooperation shall include, but shall not be limited to, furnishing
the Indemnifying Party with any books, records or information reasonably
requested by the Indemnifying Party that are in the Indemnified Party's
possession or control. All Indemnified Parties shall use the same counsel, which
shall be the counsel selected by Indemnifying Party, provided that if counsel to
the Indemnifying Party shall have a conflict of interest that prevents counsel
for the Indemnifying Party from representing Indemnified Party, Indemnified
Party shall have the right to participate in such matter through counsel of its
own choosing and Indemnifying Party will reimburse the Indemnified Party for the
reasonable expenses of its counsel. After the Indemnifying Party has notified
the Indemnified Party of its intention to undertake to defend or settle any such
asserted liability, and for so long as the Indemnifying Party diligently pursues
such defense through appropriate proceedings, the Indemnifying Party shall not
be liable for any additional legal expenses incurred by the Indemnified Party in
connection with any defense or settlement of such asserted liability, except (i)
as set forth in the preceding sentence and (ii) to the extent such participation
is requested by the Indemnifying Party, in which event the Indemnified Party
shall be reimbursed by the Indemnifying Party for reasonable additional legal
expenses and out-of-pocket expenses. If the Indemnifying Party desires
-44-
<PAGE>
to accept a final and complete settlement of any such Third Person claim and the
Indemnified Party refuses to consent to such settlement, then the Indemnifying
Party's liability under this Section with respect to such Third Person claim
shall be limited to the amount so offered in settlement by said Third Person.
Upon agreement as to such settlement between said Third Person and the
Indemnifying Party, the Indemnifying Party shall, in exchange for a complete
release from the Indemnified Party, promptly pay to the Indemnified Party the
amount agreed to in such settlement and the Indemnified Party shall, from that
moment on, bear full responsibility for any additional costs of defense which it
subsequently incurs with respect to such claim and all additional costs of
settlement or judgment. If the Indemnifying Party does not undertake to defend
such matter to which the Indemnified Party is entitled to indemnification
hereunder, or fails diligently to pursue such defense, the Indemnified Party may
undertake such defense through counsel of its choice, at the cost and expense of
the Indemnifying Party, and the Indemnified Party may settle such matter, and
the Indemnifying Party shall reimburse the Indemnified Party for the amount paid
in such settlement and any other liabilities or expenses incurred by the
Indemnified Party in connection therewith, provided, however, that under no
circumstances shall the Indemnified Party settle any Third Person claim without
the written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed. All settlements hereunder shall effect a
complete release of the Indemnified Party, unless the Indemnified Party
otherwise agrees in writing. The parties hereto will make appropriate
adjustments for insurance proceeds in determining the amount of any
indemnification obligation under this Section.
11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this
Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any
action seeking damages or any other form of monetary relief brought by any party
to this Agreement against another party, provided that, nothing herein shall be
construed to limit the right of a party, in a proper case pursuant to Section
14.3 or otherwise, to seek injunctive or other equitable relief (except for
rescission which shall not be available) for a breach or threatened breach of
this Agreement. Any indemnity payment under this Section 11 shall, to the extent
permitted by law and if not adverse to the Company or Pentacon, be treated as a
recomputation of or an adjustment to the exchange consideration for tax purposes
unless a final determination (which shall include the execution of a Form 870-AD
or successor form) with respect to the indemnified party or any of its affiliate
causes any such payment not to be treated as an adjustment to the exchange
consideration for U.S. Federal Income Tax purposes.
(b) Nothing in this Article 11 shall restrict the Stockholder from
subrogation or seeking reimbursement from third parties other than the Company.
11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim for indemnification hereunder against
the Stockholder after the applicable Expiration Date and in no event until such
time as, and solely to the extent that, the aggregate of all claims which such
persons may have against the Stockholder shall exceed the greater of 1% of the
value of the total consideration (including stock and cash) received by the
Stockholder from the Merger or $100,000
-45-
<PAGE>
(the "Indemnification Threshold"), and then only to the extent of the excess
over the Indemnification Threshold. Stockholder shall not assert any claim for
indemnification hereunder against Pentacon or Newco after the applicable
Expiration Date and in no event until such time as, and solely to the extent
that, the aggregate of all claims which Stockholder may have against Pentacon or
Newco shall exceed the Indemnification Threshold, and then only to the extent of
the excess over the Indemnification Threshold.
The Indemnification Threshold and the other limitations contained in this
Section 11.5 shall not be applicable to any breach of covenants made by the
Stockholders in this Agreement which require an action or inaction by such
Stockholders from and after the Closing Date (i.e., Article 10, Article 11,
Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall
be entitled to indemnification under this Section 11 if, and only to the extent
that such person's claim for indemnification is directly related to a breach by
such person of any representation, warranty, covenant or other agreement set
forth in this Agreement.
The pursuit by Pentacon, the Surviving Corporation, Newco or the Company,
of any claim for indemnification hereunder against a Stockholder shall require a
majority vote of the board of directors of Pentacon excluding for the purposes
of such acts any directors who was previously a stockholder of the Company or is
a representative of the stockholders of the Company as existing prior to the
closing of the transactions contemplated at this Agreement.
Notwithstanding any other term of this Agreement, no Stockholder shall be
liable (in the aggregate from time to time taking into account all
indemnification payments made hereunder) under this Section 11 (i) for any
amount which is less than or equal to the Indemnification Threshold (and then
only to the extent of the excess over the Indemnification Threshold) or (ii) for
any amount which exceeds the amount of proceeds (including cash and stock)
received by such Stockholder in connection with the Merger. Each Stockholder
shall have the option of satisfying his indemnity obligation in cash and/or by
returning shares of Pentacon Stock to Pentacon or any other Indemnified Party
which shall, to the extent permitted by law and if not adverse to the Company or
Pentacon, be considered as a recomputation of the purchase consideration. For
purposes of calculating the value of the Pentacon Stock received by a
Stockholder and satisfying any indemnity claim by returning or transferring
Pentacon Stock, Pentacon Stock shall be valued at its initial public offering
price as set forth in the Registration Statement.
Notwithstanding any of the foregoing provisions of this Section 11 that
might be read to the contrary, it is the agreement of the parties that the
Indemnification Threshold be given full effect under all circumstances.
Accordingly, insofar as any of the foregoing provisions of this Section 11 may
hold harmless an Indemnified Party before the Indemnification Threshold has been
met, then Pentacon and the Stockholder shall cooperate in good faith to
establish an equitable procedure pursuant to which Pentacon reimburses or causes
the reimbursement to the affected Stockholder(s) of all expenditures and
payments by Stockholder that are intended to be absorbed and borne by any
Indemnified Parties as a result of the prior application of the Indemnification
Threshold or otherwise takes such action as may be reasonably necessary to give
effect to the Indemnification Threshold.
-46-
<PAGE>
11.6 SPECIAL INDEMNITY ISSUES.
(a) Stockholder covenants and agrees that he will pay, indemnify,
defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving
Corporation at all times, from and after the date of this Agreement, from the
following: (i) any interest payable, or alleged to be payable, by any such
indemnified parties to the Internal Revenue Service or any other federal, state
or other governmental or regulatory authority for the period of October 1, 1996
through September 30, 1997 as a result of or in connection with the filing of
amended and restated tax returns for 1995 and 1996 to reflect the addition of
certain inventories which were not included in such Tax Returns, (ii) any
penalties, assessments, charges or other punitive amounts imposed by the
Internal Revenue Service upon any of the indemnified parties as a result of or
in connection with the filing of amended and restated tax returns for 1995 and
1996 to reflect the addition of certain inventories which were not included in
such financial reports, (iii) any Taxes or Tax liability incurred by any of the
indemnified parties as a result of or in connection with any expenses of the
Company being reclassified by the Internal Revenue Service or other federal,
state or other governmental or regulatory authority as a dividend or
constructive dividend to Don List or any of his affiliates for tax years 1995
and 1996, and (iv) any damages, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses of investigation) arising
out of or in connection with the matters set forth in subsections (i) through
(iii) above. The indemnification obligations contained in this Section 11.6
shall not be subject to the limitations contained in Section 11.5.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION. This Agreement may be terminated at any time prior to
the Consummation Date solely:
(i) by mutual consent of the boards of directors of Pentacon and
the Company;
(ii) by the Stockholder or the Company (acting through its board of
directors), on the one hand, or by Pentacon (acting through its board of
directors), on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated by
February 28, 1998, unless the failure of such transactions to be
consummated is due to the willful failure of the party seeking to
terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Consummation Date;
(iii) by the Stockholder or Company, on the one hand, or by
Pentacon, on the other hand, if a material breach or default shall be made
by the other party in the observance or in the due and timely performance
of any of the covenants or agreements contained herein, and the curing of
such default shall not have been made on or before the Consummation Date
or by the Stockholder or the Company, if the conditions set forth in
Section 8 hereof have not been satisfied or waived as of the Closing Date
or the Consummation Date, as
-47-
<PAGE>
applicable, or by Pentacon, if the conditions set forth in Section 9
hereof have not been satisfied or waived as of the Closing Date or the
Consummation Date, as applicable;
(iv) pursuant to Section 7.8 hereof;
(v) pursuant to the termination provisions contained in Section 4
hereof; or
(vi) pursuant to the other express terms of this Agreement.
12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The Stockholder will not, for a period of five
(5) years following the Consummation Date, for any reason whatsoever, directly
or indirectly, for themselves or on behalf of or in conjunction with any other
person, persons, company, partnership, corporation or business of whatever
nature:
(i) except as disclosed in Schedule 13.1, engage, as an officer,
director, shareholder, owner, partner, joint venturer, or in a managerial
capacity, whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any fastener business or
operation or related services business in direct competition with Pentacon
or any of the subsidiaries thereof, within 100 miles of where the Company
or any of its subsidiaries conducted business prior to the effectiveness
of the Merger (the "Territory");
(ii) except with the prior written consent of Pentacon, call upon
any person who is, at that time, within the Territory, an employee of
Pentacon or any subsidiary thereof for the purpose or with the intent of
enticing such employee away from or out of the employ of Pentacon or any
subsidiary thereof;
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to the Consummation Date, a
customer of Pentacon or any subsidiary thereof, of the Company or of any
of the Other Founding Companies within the Territory for the purpose of
soliciting or selling products or services that are in direct competition
with Pentacon within the Territory;
(iv) call upon any prospective acquisition candidate, on any
Stockholder's own behalf or on behalf of any competitor in the fastener
business, which candidate, to the actual
-48-
<PAGE>
knowledge of such Stockholder after due inquiry, was called upon by
Pentacon or any subsidiary thereof or for which, to the actual knowledge
of such Stockholder after due inquiry, Pentacon or any subsidiary thereof
made an acquisition analysis, for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of the
Company to any person, firm, partnership, corporation or business for any
reason or purpose relating to the fastener business except to the extent
that the Company has in the past disclosed such information to the public
for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit any Stockholder from acquiring as a passive investment not more than
one percent (1%) of the capital stock of a competing business whose stock is
traded on a national securities exchange or over-the counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
Pentacon as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to Pentacon for which it
would have no other adequate remedy, each Stockholder agrees that the foregoing
covenant may be enforced by Pentacon in the event of breach by such Stockholder,
by injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
Stockholder in light of the activities and business of Pentacon and the
subsidiaries thereof on the date of the execution of this Agreement and the
current plans of Pentacon; but it is also the intent of Pentacon and the
Stockholder that such covenants be construed and enforced in accordance with the
changing activities; business and locations of Pentacon and its subsidiaries
throughout the term of this covenant. During the term of this covenant, if
Pentacon or one of its subsidiaries engages in new and different activities,
enters a new business or establishes new locations for its current activities or
business in addition to or other than the activities or business it is currently
conducting in the locations currently established therefor, then the Stockholder
will be precluded from soliciting the customers or employees of such new
activities or business or from such new location and from directly competing
with such new activities or business within 100 miles of its then-established
operating location(s) through the term of this covenant.
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
-49-
<PAGE>
13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any Stockholder
against Pentacon or any subsidiary thereof, whether predicated on this Agreement
or otherwise (except for a claim or cause of action based upon Pentacon's
failure to pay or otherwise tender any of the consideration due to the
Stockholder hereunder), shall not constitute a defense to the enforcement by
Pentacon of such covenants. It is specifically agreed that the period of five
(5) years stated at the beginning of this Section 13, during which the
agreements and covenants of each Stockholder made in this Section 13 shall be
effective, shall be computed by excluding from such computation any time during
which such Stockholder is in violation of any provision of this Section 13. The
covenants contained in Section 13 shall not be affected by any breach of any
other provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The Company and the Stockholder hereby agree that this
covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDER. The Stockholder recognizes and acknowledges that he has
in the past, currently has, and in the future may possibly have, access to
certain confidential information of the Company, the Other Founding Companies,
and/or Pentacon, such as operational policies, and pricing and cost policies
that are valuable, special and unique assets of the Company's, the Other
Founding Companies' and/or Pentacon's respective businesses. The Stockholder
agrees that he will not disclose such confidential information to any person,
firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of Pentacon, (b) following
the Closing, such information may be disclosed by the Stockholder as is required
in the course of performing his duties for Pentacon or the Surviving Corporation
and (c) to counsel and other advisers, provided that such advisers (other than
counsel) agree to the confidentiality provisions of this Section 14.1, unless
(i) such information becomes known to the public generally through no fault of
the Stockholder, (ii) disclosure is required by law or the order of any
governmental authority under color of law, provided, that prior to disclosing
any information pursuant to this clause (ii), the Stockholder shall, if
possible, give prior written notice thereof to Pentacon and provide Pentacon
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any of the Stockholder of the provisions of this Section,
Pentacon shall be entitled to an injunction restraining such Stockholder from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting Pentacon from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
In the event the transactions contemplated by this Agreement are not
consummated, Stockholder shall have none of the above-mentioned restrictions on
their ability to disseminate confidential information with respect to the
Company.
-50-
<PAGE>
14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that
they had in the past and currently have access to certain confidential
information of the Company, including, but not limited to, customer and prospect
lists, financial information, operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company's business.
Pentacon and Newco agree that, prior to the Consummation Date, or if the
transactions contemplated by this Agreement are not consummated, they will not,
appropriate or make use of any such information, whether for its own benefit or
the benefit of any other person or entity, for any purpose whatsoever (except
pending the Consummation Date, effecting the transactions contemplated hereby)
disclose such confidential information to any person, firm, corporation,
association or other entity for any purpose or reason whatsoever, except (a) to
authorized representatives of the Company, (b) to counsel and other advisers,
provided that such advisers (other than counsel) agree to the confidentiality
provisions of this Section 14.2, (c) to the Other Founding Companies and their
representatives pursuant to Section 7.1(a), unless (i) such information becomes
known to the public generally through no fault of Pentacon or Newco, (ii)
disclosure is required by law or the order of any governmental authority under
color of law, provided, that prior to disclosing any information pursuant to
this clause (ii), Pentacon and Newco shall, if possible, give prior written
notice thereof to the Company and the Stockholder and provide the Company and
the Stockholder with the opportunity to contest such disclosure, or (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party, and (d)
to the public to the extent necessary or advisable in connection with the filing
of the Registration Statement and the IPO and the securities laws applicable
thereto and to the operation of Pentacon as a publicly held entity after the
IPO. In the event of a breach or threatened breach by Pentacon or Newco of the
provisions of this Section, the Company and the Stockholder shall be entitled to
an injunction restraining Pentacon and Newco from disclosing, in whole or in
part, such confidential information. Nothing herein shall be construed as
prohibiting the Company and the Stockholder from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
The foregoing shall not be construed as restricting the last sentence of Section
5 of the Founders Employment Agreement to be entered into between the
Stockholder and the Company effective as of the IPO.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach or threatened breach by any of them of the foregoing
covenants, the covenant may be enforced against the other parties by injunctions
and restraining orders or other appropriate equitable relief, without posting
any bond or other security or having to prove irreparable harm or injury.
14.4 SURVIVAL. The obligations of the parties under this Article 14 shall
survive the termination of this Agreement for a period of five years from the
Consummation Date, or without limitation if the transactions contemplated hereby
are not consummated.
-51-
<PAGE>
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except
for transfers to immediate family members who agree to be bound by the
restrictions set forth in this Section 15.1 (or trusts or partnerships for the
benefit of charities, the Stockholder, family members, the trustees or partners
of which so agree), for a period of one year from the Closing, except pursuant
to Section 17 hereof, none of the Stockholder shall sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any
shares of Pentacon Stock received by the Stockholder in the Merger. The
certificates evidencing the Pentacon Stock delivered to the Stockholder pursuant
to Section 3 of this Agreement will bear a legend substantially in the form set
forth below and containing such other information as Pentacon may deem necessary
or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE
WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT)
AFTER THE DATE SPECIFIED ABOVE.
16. FEDERAL SECURITIES ACT REPRESENTATIONS
16.1 COMPLIANCE WITH LAW. The Stockholder acknowledge that the shares of
Pentacon Stock to be delivered to the Stockholder pursuant to this Agreement
have not been and will not be registered under the 1933 Act (except as provided
in Section 17 hereof) and therefore may not be resold without compliance with
the 1933 Act. The Pentacon Stock to be acquired by such Stockholder pursuant to
this Agreement is being acquired solely for his own respective account, for
investment purposes only, and with no present intention of distributing, selling
or otherwise disposing of it in connection with a distribution. The Stockholder
covenants, warrants and represents that none of the shares of Pentacon Stock
issued to such Stockholder will be offered, sold, assigned, pledged,
hypothecated, transferred or otherwise disposed of except after full compliance
with all of the applicable provisions of the 1933 Act and the rules and
regulations of the SEC. All the Pentacon Stock shall bear the following legend
in addition to the legend required under Section 15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER
HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW.
-52-
<PAGE>
16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholder is able to bear the
economic risk of an investment in the Pentacon Stock to be acquired pursuant to
this Agreement and can afford to sustain a total loss of such investment and
have such knowledge and experience in financial and business matters that they
are capable of evaluating the merits and risks of the proposed investment in the
Pentacon Stock. The Stockholder has had an adequate opportunity to ask questions
and receive answers from the officers of Pentacon concerning any and all matters
relating to the transactions described herein including, without limitation, the
background and experience of the current and proposed officers and directors of
Pentacon, the plans for the operations of the business of Pentacon, the
business, operations and financial condition of the Founding Companies other
than the Company, and any plans for additional acquisitions and the like. The
Stockholder has asked any and all questions in the nature described in the
preceding sentence and all questions have been answered to their satisfaction.
17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing,
whenever Pentacon proposes to register any Pentacon Stock for its own or others
account under the 1933 Act for a public offering, other than (i) any shelf or
other registration of shares to be used as consideration for acquisitions of
additional businesses by Pentacon and (ii) registrations relating to employee
benefit plans, Pentacon shall give each of the Stockholder prompt written notice
of its intent to do so. Upon the written request of any of the Stockholder given
within 30 days after receipt of such notice, Pentacon shall cause to be included
in such registration all of the Pentacon Stock issued to the Stockholder
pursuant to this Agreement (including any stock issued as (or issuable upon the
conversion or exchange of any convertible security, warrant, right or other
security which is issued by Pentacon as) a dividend or other distribution with
respect to, or in exchange for, or in replacement of such Pentacon Stock) which
any such Stockholder requests, provided that Pentacon shall have the right to
reduce the number of shares included in such registration to the extent that
inclusion of such shares would, in the written opinion of tax counsel to
Pentacon or its independent auditors, reasonably be likely to jeopardize the
status of the transactions contemplated hereby and by the Registration Statement
as a tax-free organization under Section 351 of the Code. In addition, if
Pentacon is advised in writing in good faith by any managing underwriter of an
underwritten offering of the securities being offered pursuant to any
registration statement under this Section 17.1 that the number of shares to be
sold by persons other than Pentacon is greater than the number of such shares
which can be offered without adversely affecting the offering, Pentacon may
reduce pro rata the number of shares offered for the accounts of such persons
(based upon the number of shares held by such person) to a number deemed
satisfactory by such managing underwriter, provided, that, for each such
offering made by Pentacon after the IPO, such reduction shall be made first by
reducing the number of shares to be sold by persons other than Pentacon, the
Stockholder and the Stockholder of the Other Founding Companies (collectively,
the Stockholder and the Stockholder of the other Founding Companies being
referred to herein as the "Founding Stockholder"), and thereafter, if a further
reduction is required, by reducing the number of shares to be sold by the
Founding Stockholder.
-53-
<PAGE>
17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register
shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements or term sheets
thereto, Pentacon will furnish a representative of the Stockholder with
copies of all such documents proposed to be filed) as promptly as
practical;
(ii) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 120 days;
(iii) Furnish to each Stockholder who so requests such number of
copies of such registration statement, each amendment and supplement
thereto and the prospectus included in such registration statement
(including each preliminary prospectus and any term sheet associated
therewith), and such other documents as such Stockholder may reasonably
request in order to facilitate the disposition of the relevant shares;
(iv) Use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Stockholder, and to keep such registration or qualification effective
during the period such registration statement is to be kept effective,
provided that Pentacon shall not be required to become subject to
taxation, to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;
(v) Cause all such shares of Pentacon Stock to be listed or included
on any securities exchanges or trading systems on which similar securities
issued by Pentacon are then listed or included;
(vi) Notify each Stockholder at any time when a prospectus relating
thereto is required to be delivered under the 1933 Act within the period
that Pentacon is required to keep the registration statement effective of
the happening of any event as a result of which the prospectus included in
such registration statement, together with any associated term sheet,
contains an untrue statement of a material fact or omits any fact
necessary to make the statement therein not misleading, and, at the
request of such Stockholder, Pentacon will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the
purchasers of the covered shares, such prospectus will not contain an
untrue statement of material fact or omit to state any fact necessary to
make the statements therein not misleading.
-54-
<PAGE>
All expenses incurred in connection with the registration under this
Article 17 (including all registration, filing, qualification, legal, printer
and accounting fees, but excluding underwriting commissions and discounts),
shall be borne by Pentacon.
17.3 INDEMNIFICATION.
(a) In connection with any registration hereunder, Pentacon shall
indemnify, to the extent permitted by law, each Stockholder against all losses,
claims, damages, liabilities and expenses arising out of or resulting from any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or associated term
sheet or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading except insofar as the same are caused by or contained in or omitted
from any information furnished in writing to Pentacon by such indemnified party
expressly for use therein or by any indemnified parties' failure to deliver a
copy of the registration statement or prospectus or any amendment or supplements
thereto after Pentacon has furnished such Indemnified Party with a sufficient
number of copies of the same.
(b) In connection with any registration hereunder, each Stockholder
shall furnish to Pentacon in writing such information as is reasonably requested
by Pentacon for use in any such registration statement or prospectus and will
indemnify, to the extent permitted by law, Pentacon, its directors and officers
and each person who controls Pentacon (within the meaning of the 1933 Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement or material fact or any omission or alleged
omission of a material fact required to be stated in the registration statement
or prospectus or any amendment thereof or supplement thereto necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in information so furnished in writing by
such Stockholder specifically for use in preparing the registration statement.
Notwithstanding the foregoing, the liability of a Stockholder under this Section
17.3 shall be limited to an amount equal to the net proceeds actually received
by such Stockholder from the sale of the relevant shares covered by the
registration statement.
(c) Any person entitled to indemnification under this Section will
(i) give prompt notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified parties'
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. Any failure to give prompt notice shall
deprive a party of its right to indemnification hereunder only to the extent
that such failure shall have adversely affected the indemnifying party. If the
defense of any claim is assumed, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
or elects not to assume the defense of a claim, will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the
-55-
<PAGE>
reasonable judgment of any indemnified party, a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.
17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant
to Section 17.1 covering an underwritten registered offering, Pentacon and each
participating holder agree to enter into a written agreement with the managing
underwriters in such form and containing such provisions as are customary in the
securities business for such an arrangement between such managing underwriters
and companies of Pentacon's size and investment stature, including
indemnification.
17.5 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of Pentacon
stock to the public without registration, Pentacon agrees to use its
commercially reasonable efforts to:
(i) make and keep public information regarding Pentacon available as
those terms are understood and defined in Rule 144 under the 1933 Act for
a period of four years beginning 90 days following the effective date of
the Registration Statement;
(ii) file with the SEC in a timely manner all reports and other
documents required of Pentacon under the 1933 Act and the 1934 Act at any
time after it has become subject to such reporting requirements; and
(iii) so long as a Stockholder owns any restricted Pentacon Common
Stock, furnish to each Stockholder forthwith upon written request a
written statement by Pentacon as to its compliance with the reporting
requirements of Rule 144 (at any time from and after 90 days following the
effective date of the Registration Statement, and of the 1933 Act and the
1934 Act (any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of
Pentacon, and such other reports and documents so filed as a Stockholder
may reasonably request in availing itself of any rule or regulation of the
SEC allowing a Stockholder to sell any such shares without registration.
18. GENERAL
18.1 COOPERATION. The Company, Stockholder, Pentacon and Newco shall each
deliver or cause to be delivered to the other on the Consummation Date, and at
such other times and places as shall be reasonably agreed to, such additional
instruments as the other may reasonably request for the purpose of carrying out
this Agreement. The Company will cooperate and use its reasonable efforts to
have the present officers, directors and employees of the Company cooperate with
Pentacon on and after the Consummation Date in furnishing information, evidence,
testimony and other assistance in connection with any tax return filing
obligations, actions, proceedings, arrangements or disputes of any nature with
respect to matters pertaining to all periods prior to the Consummation Date.
-56-
<PAGE>
18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
Pentacon, and the heirs and legal representatives of the Stockholder.
18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits
and annexes attached hereto) and the documents and letters delivered pursuant
hereto constitute the entire agreement and understanding among the Stockholder,
the Company, Newco and Pentacon and supersede any prior agreement and
understanding relating to the subject matter of this Agreement. This Agreement,
upon execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only (i)
pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a
written instrument executed by the Stockholder, the Company, Newco and Pentacon,
acting through their respective officers or trustees, duly authorized by their
respective Boards of Directors. Any disclosure made on any Schedule delivered
pursuant hereto shall be deemed to have been disclosed for purposes of any other
Schedule required hereby, provided that the Company shall make a good faith
effort to cross reference disclosure, as necessary or advisable, between related
Schedules, and provided further that the failure to do so will not affect the
validity of such disclosure.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other parties hereto against all
loss, cost, damages or expense arising out of claims for fees or commission of
brokers employed or alleged to have been employed by such indemnifying party.
18.6 EXPENSES. Whether or not the transactions herein contemplated shall
be consummated, Pentacon will pay the fees, expenses and disbursements of
Pentacon and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by Pentacon under this Agreement, including the
fees and expenses of Ernst & Young, L.L.P., Andrews & Kurth L.L.P., a $50,000
payment to McGladdrey & Pullen and any other person or entity retained by
Pentacon or by McFarland, Grossman Capital Ventures II, L.C., and the costs of
preparing the Registration Statement. Except as otherwise agreed in writing by
Pentacon, each Stockholder shall pay their respective fees, expenses and
disbursements of counsel and other professionals in connection with this
transaction and shall pay all sales, use, transfer, real property transfer,
recording, gains, stock transfer and other similar taxes and fees ("Transfer
Taxes") imposed in connection with the Merger, other than Transfer Taxes, if
any, imposed by the State of Delaware. Each Stockholder shall file all necessary
documentation and Returns with respect to such Transfer Taxes. In addition, each
-57-
<PAGE>
Stockholder acknowledges that he, and not the Company or Pentacon, will pay all
taxes due upon receipt of the consideration payable pursuant to Section 2
hereof. The Stockholder acknowledge that the risks of the transactions
contemplated hereby include tax risks, with respect to which the Stockholder are
relying solely on the opinion contemplated by Section 8.12 hereof.
18.7 NOTICES. All notices of communication required or permitted hereunder
shall be in writing and may be given by depositing the same in United States
mail, addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person to
an officer or agent of such party, and if hand delivered to an individual
obtaining a receipt.
(a) If to Pentacon, or Newco, addressed to them at:
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
with copies to:
Bruce M. Taten, Esquire
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
and
Christopher S. Collins, Esquire
Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
(b) If to the Stockholder, addressed to them at their addresses set
forth on Annex II, with copies to:
Robert Rosenstein
27450 Ynez Road, Suite 222
Temecula, California 92591
(c) If to the Company, addressed to it at:
Don List, President
Alatec Products, Inc.
21123 Nordhoff Street
-58-
<PAGE>
Chatsworth, California 91311
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware.
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties made herein and at the time
of the Closing or in writing delivered pursuant to the provisions of this
Agreement shall survive the consummation of the transactions contemplated hereby
and any examination on behalf of the parties until the applicable Expiration
Date.
18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 TIME. Time is of the essence with respect to this Agreement.
18.12 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4,
no right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
-59-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PENTACON, INC.
By:_______________________
Mark E. Baldwin
Chief Executive Officer
ALATEC PRODUCTS ACQUISITION COMPANY
By:_______________________
Name: Mark E. Baldwin
Title: President
ALATEC PRODUCTS, INC.
By:_______________________
Name: Donald List
Title: President
__________________________
DONALD LIST, INDIVIDUALLY
STOCKHOLDER
-60-
<PAGE>
ANNEX I (Alatec Products, Inc.)
CONSIDERATION TO BE PAID TO THE STOCKHOLDERS
Stockholder Shares of Common Stock of Merger Cash
PENTACON, INC.
- ----------------------- -------------------------- -----------------
Donald List 2,969,493 $12,665,581
-------------------------- -----------------
2,969,493 $12,665,581
========================== =================
MINIMUM VALUE: $ 43,043,484
<PAGE>
ANNEX II
Alatec Products, Inc. Stock Ownership
Don List 93,650 shares
For address of Stockholder, see attached hereto.
EXHIBIT 10.2
AGREEMENT AND PLAN OF ORGANIZATION
dated as of the 1st day of December 1997
by and among
PENTACON, INC.
AXS SOLUTIONS ACQUISITION COMPANY
(a subsidiary of Pentacon, Inc.)
AXS SOLUTIONS, INC.
and
the STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
Page
RECITALS ......................................................................1
1. THE MERGER............................................................5
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER....................5
1.2 EFFECTIVE TIME OF THE MERGER.................................5
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF
DIRECTORS OF SURVIVING CORPORATION...........................6
1.4 EFFECT OF MERGER.............................................6
2. CONVERSION OF STOCK...................................................7
2.1 MANNER OF CONVERSION.........................................7
3. DELIVERY OF MERGER CONSIDERATION......................................8
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.................8
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED....................8
4. CLOSING...............................................................8
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE STOCKHOLDERS..................................................9
5.1 DUE ORGANIZATION.............................................9
5.2 AUTHORIZATION...............................................10
5.3 CAPITAL STOCK OF THE COMPANY................................10
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING......10
5.5 NO BONUS SHARES.............................................10
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES...................10
5.7 PREDECESSOR STATUS; ETC.....................................11
5.8 SPIN-OFF BY THE COMPANY.....................................11
5.9 FINANCIAL STATEMENTS........................................11
5.10 LIABILITIES AND OBLIGATIONS.................................11
5.11 ACCOUNTS AND NOTES RECEIVABLE...............................12
5.12 PERMITS AND INTANGIBLES.....................................12
5.13 ENVIRONMENTAL MATTERS.......................................13
5.14 PERSONAL PROPERTY...........................................14
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS...15
5.16 REAL PROPERTY...............................................15
5.17 INSURANCE...................................................16
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..........16
-i-
<PAGE>
5.19 EMPLOYEE PLANS..............................................17
5.20 COMPLIANCE WITH ERISA.......................................18
5.21 CONFORMITY WITH LAW; LITIGATION.............................19
5.22 TAXES.......................................................19
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.....................20
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..............21
5.25 ABSENCE OF CHANGES..........................................21
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY........................22
5.27 VALIDITY OF OBLIGATIONS.....................................23
5.28 RELATIONS WITH GOVERNMENTS..................................23
5.29 DISCLOSURE..................................................23
5.30 PROHIBITED ACTIVITIES.......................................24
5.31 NO WARRANTIES OR INSURANCE..................................24
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS................................................24
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...............24
5.34 PREEMPTIVE RIGHTS...........................................24
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK...................24
6. REPRESENTATIONS OF PENTACON AND NEWCO................................25
6.1 DUE ORGANIZATION............................................25
6.2 AUTHORIZATION...............................................25
6.3 CAPITAL STOCK OF PENTACON AND NEWCO.........................25
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING......26
6.5 SUBSIDIARIES................................................26
6.6 FINANCIAL STATEMENTS........................................26
6.7 LIABILITIES AND OBLIGATIONS.................................26
6.8 CONFORMITY WITH LAW; LITIGATION.............................26
6.9 NO VIOLATIONS...............................................27
6.10 VALIDITY OF OBLIGATIONS.....................................28
6.11 PENTACON STOCK..............................................28
6.12 NO SIDE AGREEMENTS..........................................28
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS................28
6.14 DISCLOSURE..................................................28
7. COVENANTS PRIOR TO CLOSING...........................................29
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.......................29
7.2 CONDUCT OF BUSINESS PENDING CLOSING.........................29
7.3 PROHIBITED ACTIVITIES.......................................30
7.4 NO SHOP.....................................................32
7.5 NOTICE TO BARGAINING AGENTS.................................32
7.6 AGREEMENTS..................................................32
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS
AND THE COMPANY.............................................32
7.8 AMENDMENT OF SCHEDULES......................................33
-ii-
<PAGE>
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT........34
7.10 FINAL FINANCIAL STATEMENTS..................................34
7.11 FURTHER ASSURANCES..........................................35
7.12 AUTHORIZED CAPITAL..........................................35
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")......35
7.14 PRE-CLOSING NOTIFICATIONS...................................35
7.15 PAYMENT OF INDEBTEDNESS.....................................36
7.16 MINIMUM VALUE...............................................36
7.17 DIRECTORS. ................................................36
7.18 TRANSACTION REPORTING.......................................36
7.19 PERMITS.....................................................36
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS
AND COMPANY..........................................................36
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS..37
8.2 SATISFACTION................................................37
8.3 NO LITIGATION...............................................37
8.4 OPINION OF COUNSEL..........................................37
8.5 REGISTRATION STATEMENT......................................37
8.6 CONSENTS AND APPROVALS......................................37
8.7 GOOD STANDING CERTIFICATES..................................38
8.8 NO MATERIAL ADVERSE CHANGE..................................38
8.9 CLOSING OF IPO..............................................38
8.10 SECRETARY'S CERTIFICATE.....................................38
8.11 EMPLOYMENT AGREEMENTS.......................................38
8.12 TAX MATTERS.................................................38
8.13 EXCHANGE LISTING............................................38
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON
AND NEWCO............................................................38
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.39
9.2 NO LITIGATION...............................................39
9.3 SECRETARY'S CERTIFICATE.....................................39
9.4 NO MATERIAL ADVERSE EFFECT..................................39
9.5 STOCKHOLDERS' RELEASE.......................................39
9.6 SATISFACTION................................................40
9.7 TERMINATION OF RELATED PARTY AGREEMENTS.....................40
9.8 OPINION OF COUNSEL..........................................40
9.9 CONSENTS AND APPROVALS......................................40
9.10 GOOD STANDING CERTIFICATES..................................40
9.11 REGISTRATION STATEMENT......................................40
9.12 EMPLOYMENT AGREEMENTS.......................................40
-iii-
<PAGE>
9.13 CLOSING OF IPO..............................................40
9.14 FIRPTA CERTIFICATE..........................................41
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER
CLOSING..............................................................41
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT................41
10.2 PREPARATION AND FILING OF TAX RETURNS.......................41
10.3 DIRECTORS...................................................42
11. INDEMNIFICATION......................................................42
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.................42
11.2 INDEMNIFICATION BY PENTACON.................................43
11.3 THIRD PERSON CLAIMS.........................................44
11.4 EXCLUSIVE REMEDY............................................45
11.5 LIMITATIONS ON INDEMNIFICATION..............................45
12. TERMINATION OF AGREEMENT.............................................46
12.1 TERMINATION.................................................46
12.2 LIABILITIES IN EVENT OF TERMINATION.........................47
13. NONCOMPETITION.......................................................47
13.1 PROHIBITED ACTIVITIES.......................................47
13.2 DAMAGES.....................................................48
13.3 REASONABLE RESTRAINT........................................48
13.4 SEVERABILITY; REFORMATION...................................49
13.5 INDEPENDENT COVENANT........................................49
13.6 MATERIALITY.................................................49
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION............................49
14.1 STOCKHOLDERS................................................49
14.2 PENTACON AND NEWCO..........................................50
14.3 DAMAGES.....................................................50
14.4 SURVIVAL....................................................51
15. TRANSFER RESTRICTIONS................................................51
15.1 TRANSFER RESTRICTIONS.......................................51
16. FEDERAL SECURITIES ACT REPRESENTATIONS...............................51
16.1 COMPLIANCE WITH LAW.........................................51
16.2 ECONOMIC RISK; SOPHISTICATION...............................52
17. REGISTRATION RIGHTS..................................................52
17.1 PIGGYBACK REGISTRATION RIGHTS...............................52
-iv-
<PAGE>
17.2 REGISTRATION PROCEDURES.....................................53
17.3 INDEMNIFICATION.............................................54
17.4 UNDERWRITING AGREEMENT......................................55
17.5 RULE 144 REPORTING..........................................55
18. GENERAL..............................................................55
18.1 COOPERATION.................................................55
18.2 SUCCESSORS AND ASSIGNS......................................56
18.3 ENTIRE AGREEMENT............................................56
18.4 COUNTERPARTS................................................56
18.5 BROKERS AND AGENTS..........................................56
18.6 EXPENSES....................................................56
18.7 NOTICES.....................................................57
18.8 GOVERNING LAW...............................................58
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES..................58
18.10 EXERCISE OF RIGHTS AND REMEDIES.............................58
18.11 TIME........................................................58
18.12 REFORMATION AND SEVERABILITY................................58
18.13 REMEDIES CUMULATIVE.........................................58
18.14 CAPTIONS....................................................58
-v-
<PAGE>
ANNEXES
Annex I - Consideration to Be Paid to Stockholders
Annex II - Stockholders and Stock Ownership of the Company
Annex III - Certificate of Incorporation and By-Laws of Pentacon
and Newco
Annex IV - Form of Opinion of Counsel to Pentacon and Newco
Annex V - Form of Opinion of Counsel to Company and Stockholders
Annex VI - Form of Founder Employment Agreement
-vi-
<PAGE>
SCHEDULES
5.1 Due Organization
5.2 Authorization
5.3 Capital Stock of the Company
5.4 Transactions in Capital Stock, Organization Accounting
5.5 No Bonus Shares
5.6 Subsidiaries
5.7 Predecessor Status; etc
5.8 Spin-off by the Company
5.9 Financial Statements
5.10 Liabilities and Obligations
5.11 Accounts and Notes Receivable
5.12 Permits and Intangibles
5.13 Environmental Matters
5.14 Personal Property
5.15 Significant Customers; Material Contracts and Commitments
5.16 Real Property
5.17 Insurance
5.18 Compensation; Employment Agreements; Labor Matters
5.19 Employee Plans
5.20 Compliance with ERISA
5.21 Conformity with Law; Litigation
5.22 Taxes
5.23 No Violations, Consents, etc.
5.24 Government Contracts
5.25 Absence of Changes
5.26 Deposit Accounts; Powers of Attorney
5.30 Prohibited Activities
5.31 No Warranties or Insurance
5.32 Related Party Transactions
6.3 Capital Stock of Pentacon and Newco
6.4 Options, Warrants and Rights
6.8 Litigation
6.9 No Violations
6.12 Side Agreements
7.2 Conduct of Business Pending Closing
7.3 Prohibited Activities
7.5 Notice to Bargaining Agents
7.6 Termination Agreements
7.15 Obligations to be Paid At Closing
9.7 Continuing Related Party Agreements
9.12 Employment Agreements
13.1 Prohibited Activities
18.5 Brokers and Agents
-vii-
<PAGE>
AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as
of the 1st day of December, 1997, by and among PENTACON, INC., a Delaware
corporation ("Pentacon"), AXS SOLUTIONS ACQUISITION COMPANY, a Delaware
corporation ("Newco"), AXS SOLUTIONS, INC., a Delaware corporation (the
"Company"), and JACK FATICA, JEFFREY P. FATICA, ROBERT HOYT, NATALIE L. RANUS,
JACK C. FATICA TRUST, JUSTIN P. FATICA TRUST, JASON P. FATICA TRUST, RYAN A.
FATICA TRUST, and OAKRIDGE TRUST (the "Stockholders"), who are all the
stockholders of the Company, who herein agree as follows:
RECITALS
WHEREAS, Newco is a corporation duly organized and existing under the
laws of the State of Delaware, having been incorporated on November 26, 1997,
solely for the purpose of completing the transactions set forth herein, and is a
wholly owned subsidiary of Pentacon, a corporation organized and existing under
the laws of the State of Delaware;
WHEREAS, the respective boards of directors of Newco and the Company
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Newco merge with and into
the Company pursuant to this Agreement and the applicable provisions of the laws
of the States of Delaware and the State of Incorporation (as hereinafter
defined);
WHEREAS, Pentacon is entering into other separate agreements
substantially similar to this Agreement (the "Other Agreements"), each of which
is entitled "Agreement and Plan of Organization," with each of the Other
Founding Companies (as defined herein) and their respective stockholders in
order to acquire additional fasteners companies;
WHEREAS, this Agreement and the Other Agreements constitute the
"Pentacon Plan of Organization;"
WHEREAS, the Stockholders and the boards of directors and the
stockholders of Pentacon, each of the Other Founding Companies and each of the
subsidiaries of Pentacon that are parties to the Other Agreements have approved
and adopted the Pentacon Plan of Organization as an integrated plan pursuant to
which the Stockholders and the stockholders of each of the other Founding
Companies will transfer the capital stock of each of the Founding Companies to
Pentacon and the Stockholders of each of the other Founding Companies will
acquire the stock of Pentacon (but not cash or other property) as a tax-free
transfer of property under Section 351 of the Code;
WHEREAS, the Board of Directors of the Company has approved this
Agreement as part of the Pentacon Plan of Organization in order to transfer the
capital stock of the Company to Pentacon;
-1-
<PAGE>
WHEREAS, unless the context otherwise requires, capitalized terms used
in this Agreement or in any schedule attached hereto and not otherwise defined
shall have the following meanings for all purposes of this Agreement:
"1933 ACT" means the Securities Act of 1933, as amended.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"ACQUIRED PARTY" means the Company, any subsidiary and any member of a
Relevant Group.
"ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware
companies wholly-owned by Pentacon prior to the Consummation Date.
"AFFILIATES" shall mean with respect to any person or entity, any other
person or entity that directly or indirectly, controls, is controlled, or is
under common control with such person or entity. For purposes hereof, control
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"ARTICLES OF MERGER" shall mean those Articles or Certificates of
Merger with respect to the Merger in such forms as may be required by the laws
of the State of Delaware and the State of Incorporation.
"BALANCE SHEET DATE" has means September 30, 1997.
"CHARTER DOCUMENTS" has the meaning set forth in Section 5.1.
"CLOSING" has the meaning set forth in Section 4.
"CLOSING DATE" has the meaning set forth in Section 4.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY STOCK" has the meaning set forth in Section 2.1.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second
recital of this Agreement.
"CONSUMMATION DATE" has the meaning set forth in Section 4.
"DELAWARE GCL" has the meaning set forth in Section 1.4.
-2-
<PAGE>
"DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997,
of the Registration Statement, and any corrections thereto and supplemental
information delivered by Pentacon to the Company for delivery to the
Stockholders prior to the time this Agreement is delivered by the Company and
the Stockholders to Pentacon.
"EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the
Merger becomes effective, which shall occur on the Consummation Date.
"ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13.
"ERISA" has the meaning set forth in Section 5.19.
"EXPIRATION DATE" has the meaning set forth in Section 5(A).
"FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii).
"FOUNDING COMPANIES" means:
Alatec Products, Inc., a California corporation;
AXS Solutions, Inc., a Delaware corporation;
Capitol Bolt & Supply, Inc., a Texas corporation;
Maumee Industries, Inc., an Indiana corporation; and
Sales Systems, Limited, a Pennsylvania corporation.
"HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c).
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(ii).
"IPO" means the initial public offering of Pentacon Stock pursuant to
the Registration Statement described herein.
"LICENSES" has the meaning set forth in Section 5.12.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, operations, properties, assets or condition (financial or otherwise),
of the subject entity and its subsidiaries taken as a whole.
-3-
<PAGE>
"MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a).
"MERGER" means the merger of Newco with and into the Company pursuant
to this Agreement and the applicable provisions of the laws of the State of
Delaware and the laws of the State of Incorporation.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"NEWCO STOCK" means the common stock, par value $.0l per share, of
Newco.
"OTHER AGREEMENTS" has the meaning set forth in the third recital
hereof.
"OTHER FOUNDING COMPANIES" means all of the Founding Companies other
than the Company.
"PBGC" has the meaning set forth in Section 5.19.
"PENTACON" has the meaning set forth in the first paragraph of this
Agreement.
"PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1
"PENTACON STOCK" means the common stock, par value $.01 per share, of
Pentacon.
"PERSON" means an individual, partnership, joint venture, corporation,
bank, trust, unincorporated organization or other entity.
"PRICING" means the date of determination by Pentacon and the
Underwriters of the public offering price of the shares of Pentacon Stock in the
IPO; the parties hereto contemplate that the Pricing shall take place on the
Closing Date.
"PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30.
"QUALIFIED PLANS" has the meaning set forth in Section 5.20.
"REGISTRATION STATEMENT" means that certain registration statement on
Form S-1 to be filed with the SEC covering the shares of Pentacon Stock to be
issued in the IPO and all amendments thereto.
"RELEVANT GROUP" means the Company and any affiliated, combined,
consolidated, unitary or similar group of which the Company is or was a member.
-4-
<PAGE>
"RETURNS" means any returns, reports or statements (including any
information returns) required to be filed for purposes of reporting, computing
or otherwise required in connection with a particular Tax.
"SCHEDULE" means each Schedule attached hereto, which shall reference
the relevant sections of this Agreement, on which parties hereto disclose
information as part of their respective representations, warranties and
covenants.
"SEC" means the United States Securities and Exchange Commission.
"STATE OF INCORPORATION" means the State of Delaware.
"STOCKHOLDERS" has the meaning set forth in the first paragraph of this
Agreement.
"SUBSIDIARIES" means with respect to a person or entity, any
corporation or other entity in which such person or entity owns a 5% or greater
ownership interest.
"SURVIVING CORPORATION" has the meaning set forth in Section 1.2.
"TAX" OR "TAXES" means all federal, state, local or foreign net or
gross income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, withholding, employment, excise, property, deed, stamp, alternative
or add on minimum, or other taxes, assessments, duties, fees, levies or other
governmental charges, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"UNDERWRITERS" means the prospective underwriters identified in the
Draft Registration Statement.
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(i).
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and
delivered to Pentacon to be held for filing with the Secretary of State of the
State of Delaware and the Secretary of State (or other appropriate authority) of
the State of Incorporation on or effective as of the Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
Newco shall be merged with and into the Company in accordance with the Articles
of Merger and the separate existence of Newco shall cease. The Company shall be
the surviving party in the Merger and the Company is sometimes hereinafter
referred to as the "Surviving Corporation". As a result of the Merger, the
outstanding shares of capital stock of Newco and the Company shall be converted
or canceled in the manner provided in Section 2.
-5-
<PAGE>
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
(i) the Certificate of Incorporation of the Company then in
effect shall be the Certificate of Incorporation of the Surviving
Corporation until changed as provided by law;
(ii) the By-laws of Newco then in effect shall become the
By-laws of the Surviving Corporation; and subsequent to the Effective
Time of the Merger, such By-laws shall be the By-laws of the Surviving
Corporation until they shall thereafter be duly amended (and such
By-laws shall be amended, if necessary, to comply with applicable state
law);
(iii) the Board of Directors of the Surviving Corporation
shall consist of the persons who are on the Board of Directors of the
Company immediately prior to the Effective Time of the Merger, provided
that Bruce Taten shall become an additional director of the Surviving
Corporation effective as of the Effective Time of the Merger, and the
number of directors constituting the entire Board of Directors of the
Company shall be increased, if necessary, to accommodate the addition
of such additional director; the Board of Directors of the Surviving
Corporation shall hold office subject to the provisions of the laws of
the State of Incorporation and of the Certificate of Incorporation and
By-laws of the Surviving Corporation; and
(iv) the officers of the Company immediately prior to the
Effective Time of the Merger shall continue as the officers of the
Surviving Corporation in the same capacity or capacities, and effective
upon the Effective Time of the Merger Brian Fontana shall become an
additional Vice President and Bruce Taten will become the Secretary of
the Surviving Corporation, such officers to serve, subject to the
provisions of the Certificate of Incorporation and By-laws of the
Surviving Corporation, until their respective successors are duly
elected and qualified.
1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect
of the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of
the State of Incorporation. Except as herein specifically set forth, the
identity, existence, purposes, powers, objects, franchises, privileges, rights
and immunities of the Company shall continue unaffected and unimpaired by the
Merger and the corporate franchises, existence and rights of Newco shall be
merged with and into the Company, and the Company, as the Surviving Corporation,
shall be fully vested therewith. At the Effective Time of the Merger, the
separate existence of Newco shall cease and, in accordance with the terms of
this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public, as well as of a private,
nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all taxes, including
those due and owing and those accrued, and all other choses in action, and all
and every other interest of or belonging to or due to the Company or Newco shall
be transferred to, and vested in, the Surviving Corporation without further act
or deed; and all property, rights and privileges, powers and
-6-
<PAGE>
franchises and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the Company and Newco;
and the title to any real estate, or interest therein, whether by deed or
otherwise, under the laws of the State of Incorporation vested in the Company or
Newco, shall not revert or be in any way impaired by reason of the Merger.
Except as otherwise provided herein, the Surviving Corporation shall thenceforth
be responsible and liable for all the liabilities and obligations of the Company
and Newco and any claim existing, or action or proceeding pending, by or against
the Company or Newco may be prosecuted as if the Merger had not taken place, or
the Surviving Corporation may be substituted in their place. Neither the rights
of creditors nor any liens upon the property of the Company or Newco shall be
impaired by the Merger, and all debts, liabilities and duties of the Company and
Newco shall attach to the Surviving Corporation, and may be enforced against
such Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the Company ("Company Stock") into shares of
Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of
the Surviving Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of Company Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically shall be deemed to represent (1) the right to receive the
number of shares of Pentacon Stock set forth on Annex I hereto with
respect to such holder and (2) the right to receive the amount of cash
set forth on Annex I hereto with respect to such holder;
(ii) all shares of Company Stock that are held by the Company
as treasury stock or which are otherwise issued but not outstanding
shall be canceled and retired and shall cease to exist and no shares of
Pentacon Stock or other consideration shall be delivered or paid in
exchange therefor; and
(iii) each share of Newco Stock issued and outstanding
immediately prior to the Effective Time of the Merger, shall, by virtue
of the Merger and without any action on the part of Pentacon,
automatically be converted into one fully paid and non-assessable share
of common stock of the Surviving Corporation which shall constitute all
of the issued and outstanding shares of common stock of the Surviving
Corporation immediately after the Effective Time of the Merger.
All Pentacon Stock received by the Stockholders pursuant to this
Agreement shall, except for restrictions on resale or transfer described in
Sections 15 and 16 hereof, have the same rights as
-7-
<PAGE>
all the other shares of outstanding Pentacon Stock by reason of the provisions
of the Certificate of Incorporation of Pentacon or as otherwise provided by the
Delaware GCL. All Pentacon Stock received by the Stockholders shall be issued
and delivered to the Stockholders free and clear of any liens, claims or
encumbrances of any kind or nature. All voting rights of such Pentacon Stock
received by the Stockholders shall be fully exercisable by the Stockholders and
the Stockholders shall not be deprived nor restricted in exercising those
rights. At the Effective Time of the Merger, Pentacon shall have no class of
capital stock issued and outstanding other than the Pentacon Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation
Date the Stockholders, who are the holders of all of the outstanding capital
stock of the Company, shall, upon surrender of their certificates, receive the
respective number of shares of Pentacon Stock and the amount of cash described
on Annex I hereto, said cash to be payable by certified check, or if hereafter
agreed by the Stockholder and Pentacon, by wire transfer.
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders shall
deliver to Pentacon at the Closing the certificates representing Company Stock,
duly endorsed in blank by the Stockholders, or accompanied by blank stock
powers, and with all necessary transfer tax and other revenue stamps, acquired
at the Stockholders' expense, affixed and canceled. The Stockholders agree
promptly to cure any deficiencies with respect to the endorsement of the stock
certificates or other documents of conveyance with respect to such Company Stock
or with respect to the stock powers accompanying any Company Stock.
4. CLOSING
At or prior to the Pricing, the parties shall take all actions
reasonably necessary to prepare to (i) effect the Merger (including the
execution of the Articles of Merger which shall be placed in escrow with
Pentacon for filing with the appropriate authorities effective on the
Consummation Date, subject, however, to satisfaction or waiver of all conditions
precedent) and (ii) effect the conversion and delivery of shares referred to in
Section 3 hereof; provided, that such actions shall not include the actual
completion of the Merger or the conversion and delivery of the shares and
certified check(s) (or wire transfers) referred to in Section 3 hereof, each of
which actions shall only be taken upon the Consummation Date as herein provided.
In the event that there is no Consummation Date and this Agreement automatically
terminates as provided in this Section 4 the Articles of Merger shall not be
filed and shall be promptly returned to the Stockholders. The taking of the
actions described in clauses (i) and (ii) above (the "Closing") shall take place
on the closing date (the "Closing Date") at the offices of Andrews & Kurth
L.L.P, 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 77002 or such place
as may be agreed between the Stockholders and Pentacon. On the Consummation Date
(x) the Articles of Merger shall be filed with the appropriate state authorities
so that they shall be, as early as practicable on the Consummation Date,
effective and the Merger shall thereby be effected, (y) all transactions
contemplated by this Agreement, including the conversion and delivery of shares,
the delivery of a certified check or checks (or wire
-8-
<PAGE>
transfers) in an amount equal to the cash portion of the consideration which the
Stockholders shall be entitled to receive pursuant to Section 3 hereof shall
occur and be completed and (z) the closing with respect to the IPO shall occur
and be completed. The date on which the actions described in the preceding
clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date."
During the period from the Closing Date to the Consummation Date, this Agreement
shall be terminated by the parties only if the underwriting agreement in respect
of the IPO is terminated pursuant to the terms of such underwriting agreement.
This Agreement shall also in any event automatically terminate if the
Consummation Date has not occurred within 15 business days following the Closing
Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
STOCKHOLDERS
(A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.
Each of the Stockholders, jointly and severally, and the Company
represent and warrant that all of the following representations and warranties
in this Section 5(A) are true at the date of this Agreement, and that such
representations and warranties shall survive the Consummation Date for a period
of twenty-four months (the last day of such period being the "Expiration Date"),
except that the warranties and representations set forth in Sections 5.13 and
5.22 hereof shall survive until such time as the applicable statute of
limitations period has run or for five (5) years if there is no applicable
statute of limitations, which shall be deemed to be the Expiration Date for
Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall
mean and refer to the Company and all of its Subsidiaries, if any.
5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated
and organized, validly existing and in good standing under the laws of the State
of Incorporation, and has the requisite power and authority to carry on its
business as it is now being conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction in which failure to so
qualify would reasonably be expected to have a Material Adverse Effect on the
Company. Schedule 5.1 sets forth a list of all jurisdictions in which the
Company is authorized or qualified to do business. True, complete and correct
copies of (i) the Certificate of Incorporation and By-laws, each as amended, of
the Company (the "Charter Documents"), and (ii) the stock records of the Company
(including, without limitation, a copy of the Company's stock ledger), are all
attached to Schedule 5.1. The Company has delivered complete and correct copies
of all minutes of meetings, written consents and other written evidence, if any,
of deliberations of or actions taken by the Company's Board of Directors, any
Committees of the Board of Directors and stockholders during the last five
years.
-9-
<PAGE>
5.2 AUTHORIZATION. (i) The officers or other representatives of the
Company executing this Agreement have the authority to enter into and bind the
Company to the terms of this Agreement and (ii) the Company has the full legal
right, power and authority to enter into this Agreement and the Merger. The
directors and Stockholders have approved this Agreement and the transactions
contemplated hereby in all respects, and copies of all such resolutions,
certified by the Secretary or an Assistant Secretary of the Company as being in
full force and effect on the date hereof, are attached hereto as Schedule 5.2.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company is as set forth on Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the Company are owned by the Stockholders in the
amounts set forth in Annex II. Each Stockholder, severally, represents and
warrants that except as set forth on Schedule 5.3, the shares of capital stock
of the Company owned by such Stockholder are owned free and clear of all liens,
security interests, pledges, charges, voting trusts, restrictions, encumbrances
and claims of every kind. All of the issued and outstanding shares of the
capital stock of the Company have been duly authorized and validly issued, are
fully paid and nonassessable, are owned of record and beneficially by the
Stockholders and further, such shares were offered, issued, sold and delivered
by the Company in compliance with all applicable state and Federal laws
concerning the issuance of securities. Further, none of such shares were issued
in violation of any preemptive rights of any past or present stockholder.
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as
set forth on Schedule 5.4, the Company has not acquired or redeemed any Company
Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option,
warrant, call, conversion right or commitment of any kind exists which obligates
the Company to issue any of its authorized but unissued capital stock; (ii) the
Company has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof; and (iii) neither
the voting stock structure of the Company nor the relative ownership of shares
among any of its respective Stockholders has been altered or changed in
contemplation of the Merger and/or the Pentacon Plan of Organization. Except as
set forth in Schedule 5.4, there are no voting trusts, proxies or other
agreements or understandings to which the Company or any of the Stockholders is
a party or is bound with respect to the voting of any shares of capital stock of
the Company.
5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the
shares of Company Stock was issued pursuant to awards, grants or bonuses in
contemplation of the Merger or the Pentacon Plan of Organization.
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on
Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule
5.6, the Company does not presently own, of record or beneficially, or control,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
-10-
<PAGE>
entity nor is the Company, directly or indirectly, a participant in any joint
venture, partnership or other non-corporate entity.
5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of
all predecessor companies of the Company, including the names of any entities
acquired by the Company (by stock purchase, merger or otherwise) or owned by the
Company or from whom the Company previously acquired material assets, in any
case, from the earliest date upon which any Stockholder acquired his or her
stock in any Company. Except as disclosed on Schedule 5.7, the Company has not
been, within such period of time, a subsidiary or division of another
corporation or a part of an acquisition which was later rescinded.
5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
Company or any other person or entity that is an Affiliate of the Company since
January 1, 1995.
5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following
financial statements are attached hereto as Schedule 5.9:
(i) the balance sheets of the Company as of December 31, 1995
and 1996 and the related statements of operations, stockholder's equity
and cash flows for the two-year period ended December 31, 1996,
together with the related notes and schedules (such balance sheets, the
related statements of operations, stockholder's equity and cash flows
and the related notes and schedules are referred to herein as the
"Year-end Financial Statements"); and
(ii) the balance sheet of the Company as of September 30,
1997, (the "Interim Balance Sheet") and the related statements of
operations, stockholder's equity and cash flows for the nine-month
periods ended September 30, 1997, together with the related notes and
schedules (such balance sheets, the related statements of operations,
stockholder's equity and cash flows and the related notes and schedules
are referred to herein as the "Interim Financial Statements"). The
Year-end Financial Statements and the Interim Financial Statements are
collectively called the "Financial Statements".
5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate
list as of the Balance Sheet Date of (i) all liabilities of the Company which
are not reflected on the Interim Balance Sheet of the Company at the Balance
Sheet Date or otherwise reflected in the Interim Financial Statements at the
Balance Sheet Date except for those liabilities not required to be reflected or
disclosed under generally accepted accounting principles or F.A.S.B. 5 and which
were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan
agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other
security agreements to which the Company is a party or by which its properties
may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet
Date, the Company has not incurred any liabilities or obligations of any kind,
character or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise,
-11-
<PAGE>
other than liabilities incurred in the ordinary course of business and
consistent with past practices. The Company has also delivered to Pentacon on
Schedule 5.10, in the case of those contingent liabilities related to pending or
threatened litigation, a good faith and reasonable estimate (to the extent the
Company can reasonably make an estimate) of the maximum amount which the Company
reasonably expects may be payable and the amount, if any, accrued or reserved
for each such potential liability on the Company's Financial Statements. If no
estimate is provided, the estimate shall for purposes of this Agreement be
deemed to be zero. For each such contingent liability or liability for which the
amount is not fixed or is contested, the Company has provided to Pentacon the
following information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation
relating thereto;
(b) amounts claimed and any other action or
relief sought; and
(c) name of claimant and all other parties to
the claim, suit or proceeding;
(ii) the name of each court or agency before which such claim,
suit or proceeding is pending; and
(iii) the date (if any) on which such claim, suit or
proceeding was instituted or the date (period) to which such claim
relates.
5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an
accurate list of the accounts and notes receivable of the Company, as of the
Balance Sheet Date, including any such amounts which are not reflected in the
Interim Balance Sheet as of the Balance Sheet Date, and including receivables
from and advances to employees and the Stockholders, which are identified as
such. Except to the extent reflected on Schedule 5.11, such accounts, notes and
other receivables are collectible in the amounts shown on Schedule 5.11, net of
reserves reflected in the Interim Balance Sheet of the Balance Sheet Date.
5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses,
franchises, permits and other governmental authorizations ("Licenses") necessary
to conduct the business of the Company and the Company has delivered to Pentacon
an accurate list and summary description (which is set forth on Schedule 5.12)
of all such material Licenses, including any material trademarks, trade names,
patents, patent applications and copyrights owned or held by the Company or any
of its employees (including interests in software or other technology systems,
programs and intellectual property). At or prior to the Closing, all rights to
such trademarks, trade names, patents, patent applications, copyrights and other
intellectual property held by the Stockholders or their Affiliates will be
assigned or licensed to the Company for no additional consideration. The
Licenses and other rights listed on Schedule 5.12 are valid, and the Company has
not received any notice that any person intends to cancel, terminate or not
renew any such License or other right. The Company has conducted and is
conducting its business in compliance with the requirements, standards, criteria
-12-
<PAGE>
and conditions set forth in the Licenses and other rights listed on Schedule
5.12 and is not in violation of any of the foregoing. Except as specifically
provided in Schedule 5.12, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded to the Company by, any such Licenses or other
rights.
5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13
attached hereto, (i) the Company has conducted its businesses in compliance with
all applicable Environmental Laws, including, without limitation, having all
environmental permits, licenses and other approvals and authorizations necessary
for the operation of its business as presently conducted, (ii) none of the
properties owned by the Company contain any Hazardous Substance as a result of
any activity of the Company in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) the Company has not received any notices,
demand letters or requests for information from any Federal, state, local or
foreign governmental entity or third party indicating that the Company may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of its business, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or to the knowledge of the Stockholders threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (vi) no Hazardous
Substance has been disposed of, released or transported in violation of any
applicable Environmental Law from any properties owned by the Company as a
result of any activity of the Company during the time such properties were
owned, leased or operated by the Company, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analysis regarding
compliance or non-compliance with any applicable Environmental Law conducted by
or which are in the possession of or readily available to the Company relating
to the activities of the Company which are not listed on Schedule 5.13 attached
hereto prior to the date hereof, (viii) there are no underground storage tanks
on, in or under any properties owned by the Company and no underground storage
tanks have been closed or removed from any of such properties during the time
such properties were owned, leased or operated by the Company, (ix) there is no
asbestos or asbestos containing material present in any of the properties owned
by the Company, and no asbestos has been removed from any of such properties
during the time such properties were owned, leased or operated by the Company,
and (x) neither the Company nor any of its respective properties are subject to
any material liabilities or expenditures (fixed or contingent) relating to any
suit, settlement, court order, administrative order, regulatory requirement,
judgment or claim asserted or arising under any Environmental Law.
(b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local
or foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity which is
applicable where the Company conducts or conducted business or owns or owned
property or is applicable to any disposal, transportation or release of
Hazardous Substances by or for the Company and, in each case, relates to (x) the
protection, preservation or restoration of the
-13-
<PAGE>
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, plant and
animal life or any other natural resource) or to human health or safety or (y)
the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of Hazardous Substances, in each case as amended and as in effect on the Closing
Date. The term Environmental Law includes, without limitation, (i) the Federal
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the
Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous
and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as
amended and as in effect on the Closing Date, and (ii) any common law or
equitable doctrine (including, without limitation, injunctive relief and tort
doctrines such as negligence, nuisance, trespass and strict liability) that may
impose liability or obligations for injuries or damages due to, or threatened as
a result of, the presence of, effects of or exposure to any Hazardous Substance.
(c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive, or
dangerous, or otherwise regulated, under any Environmental Law. Hazardous
Substance includes any substance to which exposure is regulated by any
government authority or any Environmental Law including, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an
accurate list (which is set forth on Schedule 5.14) of (x) all personal property
material to the operations of the Company included in "plant, property and
equipment" on the Interim Balance Sheet of the Company, (y) all other personal
property owned by the Company with an individual fair market value in excess of
$5,000 (i) as of the Balance Sheet Date and (ii) acquired since the Balance
Sheet Date and (z) all material leases and agreements in respect of personal
property, including, in the case of each of (x), (y) and (z), (1) true, complete
and correct copies of all such leases and (2) an indication as to which assets
are currently owned, or were formerly owned, by Stockholders, relatives of
Stockholders, or Affiliates of the Company. Except as set forth on Schedule
5.14, (i) all material personal property used by the Company in its business is
either owned by the Company or leased by the Company pursuant to a lease
included on Schedule 5.14, (ii) all of the personal property listed on Schedule
5.14 is in working order and condition sufficient for the operation of the
Company's business, ordinary wear and tear excepted and (iii) all leases and
agreements included on Schedule 5.14 are in full force and effect and constitute
valid and binding agreements of the Company and of the other parties (and their
successors) thereto in accordance with their respective terms.
-14-
<PAGE>
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS
(a) The Company has delivered to Pentacon an accurate list (which is
set forth on Schedule 5.15) of all customers (persons or entities) representing
5% or more of the Company's annual revenues for the period covered by any of the
most current Year-End Financial Statements. Except to the extent set forth on
Schedule 5.15, none of such customers have canceled or substantially reduced or,
to the knowledge of the Company and the Stockholders, are currently attempting
or threatening to cancel a contract or substantially reduce utilization of the
services provided by the Company.
(b) The Company has listed on Schedule 5.15 all material contracts,
commitments and similar agreements to which the Company is a party or by which
it or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, strategic alliances and options to purchase land),
other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence
as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date,
and in each case has delivered (or, in the case of supplier and distributor
contracts and customer contracts on standard purchase forms, has made available)
true, complete and correct copies of such agreements to Pentacon. The Company
has also indicated on Schedule 5.15 a summary description of all plans or
projects commenced or approved in the last six (6) months and involving the
opening of new operations, expansion of existing operations, the acquisition of
any personal property, business or assets requiring, in any event, the payment
of more than $20,000 by the Company during any 12-month period.
(c) Except as set forth on Schedule 5.15, since January 1, 1995, the
Company has not experienced any difficulties in obtaining any inventory items
necessary to the operation of its business, and, to the knowledge of the Company
and the Stockholders, no such shortage of supply of inventory items is
threatened or pending. To the knowledge of the Company and the Stockholders, no
customer or supplier of the Company will cease to do business with, or
substantially reduce its purchases from, the Company after the consummation of
the transactions contemplated hereby.
(d) The Company is not required to provide any bonding or other
financial security arrangements in any material amount in connection with any
transactions with any of its customers or suppliers.
5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property
owned or leased by the Company at the date hereof and all other real property,
if any, used by the Company in the conduct of its business. The Company has good
and insurable title to any real property owned by it that is shown on Schedule
5.16, other than property intended to be sold or distributed prior to the
Closing Date, subject to no mortgage, pledge, lien, conditional sales agreement,
encumbrance or charge, except for:
-15-
<PAGE>
(i) liens reflected on Schedules 5.10 or 5.16 as securing
specified liabilities (with respect to which no material default
exists);
(ii) liens for current taxes not yet payable and assessments
not in default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other
exceptions to title which do not adversely affect the current use of
the property.
True, complete and correct copies of all leases and agreements in
respect of such real property leased by the Company are attached to Schedule
5.16, and an indication as to which such properties, if any, are currently
owned, or were formerly owned, by Stockholders or Affiliates of the Company or
Stockholders is included in Schedule 5.16. Except as set forth on Schedule 5.16,
all of such leases included on Schedule 5.16 are in full force and effect and
constitute valid and binding agreements of the Company and of the other parties
(and their successors) thereto in accordance with their respective terms.
5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of
the Balance Sheet Date of all insurance policies carried by the Company, (ii) an
accurate list of all insurance loss runs (to the extent available) or workers
compensation claims received for the past three policy years. True, complete and
correct copies of all insurance policies currently in effect have been delivered
or made available to Pentacon. Such insurance policies evidence all of the
insurance that the Company is required to carry pursuant to all of its contracts
and other agreements and pursuant to all applicable laws, and, in the reasonable
judgment of the Company's management, provide adequate coverage against the
risks involved in the Company's business. All of such insurance policies are
currently in full force and effect and are scheduled to remain in full force and
effect through the Consummation Date. Since January 1, 1995, no insurance
carried by the Company has been canceled by the insurer and the Company has not
been denied coverage.
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS.
(a) The Company has delivered to Pentacon an accurate list (which is
set forth on Schedule 5.18) showing all officers, directors and key employees of
the Company, listing all employment agreements with such officers, directors and
key employees and the rate of compensation (and the portions thereof
attributable to salary, bonus and other compensation, respectively) of each of
such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The
Company has provided to Pentacon true, complete and correct copies of any
existing employment agreements for persons listed on Schedule 5.18. Since the
Balance Sheet Date and except as described in Schedule 5.18, there have been no
increases in the compensation payable or any special bonuses to any officer,
director, key employee or other employee, except ordinary salary increases
implemented on a basis consistent with past practices and bonuses, as described
in Schedule 5.18.
-16-
<PAGE>
(b) Except as set forth on Schedule 5.18, (i) the Company is not bound
by or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
Company are represented by any labor union or covered by any collective
bargaining agreement, (iii) to the best knowledge of the Company, no campaign to
establish such representation is in progress and (iv) there is no pending or, to
the knowledge of the Company and the Stockholders, threatened labor dispute
involving the Company and any group of its employees nor has the Company
experienced any labor interruptions over the past three years.
(c) Except as set forth in Schedule 5.18 attached hereto, (i) there are
no significant controversies pending or, to the knowledge of the Company and the
Stockholders, threatened between the Company and any of its employees, (ii) the
Company has complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (iii) to the knowledge of the Company and the
Stockholders, no person has asserted that the Company is liable in any material
amount for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee
benefit plans of the Company, including all employment agreements and other
agreements or arrangements containing "golden parachute" or other similar
provisions, and deferred compensation agreements, together with true, complete
and correct copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19, the
Company does not sponsor, maintain or contribute to any plan program, fund or
arrangement that constitutes an "employee pension benefit plan", and neither the
Company nor any subsidiary has any obligation to contribute to or accrue or pay
any benefits under any deferred compensation or retirement funding arrangement
on behalf of any employee or employees (such as, for example, and without
limitation, any individual retirement account or annuity, any "excess benefit
plan" (within the meaning of Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred
compensation arrangement). For the purposes of this Agreement, the term
"employee pension benefit plan" shall have the same meaning as is given that
term in Section 3(2) of ERISA. The Company has not sponsored, maintained or
contributed to any employee pension benefit plan other than the plans set forth
on Schedule 5.19, and the Company is not or could not be required to contribute
to any retirement plan pursuant to the provisions of any collective bargaining
agreement establishing the terms and conditions or employment of any of the
Company's employees.
Except as set forth on Schedule 5.19, the Company is not now, or will
not as a result of its past activities become, liable to the Pension Benefit
Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit
plan under the provisions of Title IV of ERISA.
All employee benefit plans listed on Schedule 5.19 and the
administration thereof are in compliance with their terms and all applicable
provisions of ERISA and the regulations issued
-17-
<PAGE>
thereunder, as well as with all other applicable federal, state and local
statutes, ordinances and regulations.
All accrued contribution obligations of the Company with respect to any
plan listed on Schedule 5.19 as of the Balance Sheet Date have either been
fulfilled in their entirety or are fully reflected on the Interim Balance Sheet
as of the Balance Sheet Date.
5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, All
such plans listed on Schedule 5.19 that are intended to qualify (the "Qualified
Plans") under Section 401 (a) of the Code are, and have been so qualified and
have been determined by the Internal Revenue Service to be so qualified, and
copies of the most recent determination letters with respect thereto are
attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and
other documents required to be filed with any governmental agency or distributed
to plan participants or beneficiaries (including, but not limited to, actuarial
reports, audits or tax returns) have been timely filed or distributed, and
copies of the most recent reports and filing relating thereto are included as
part of Schedule 5.19 hereof. Neither Stockholders, any such plan listed in
Schedule 5.19, nor the Company has engaged in any transaction prohibited under
the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan
listed in Schedule 5.19 has incurred an accumulated funding deficiency, as
defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the
Company has not incurred any liability for excise tax or penalty due to the
Internal Revenue Service nor any liability to the PBGC. The Stockholders further
represent that except as set forth on Schedule 5.19 hereto:
(i) there have been no terminations, partial terminations or
discontinuations of contributions to any Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and approval
by the Internal Revenue Service;
(ii) no plan listed in Schedule 5.19 subject to the provisions
of Title IV of ERISA has been terminated;
(iii) there have been no "reportable events" (as that phrase
is defined in Section 4043 of ERISA) with respect to any such plan
listed in Schedule 5.19;
(iv) the Company (including any subsidiaries) has not incurred
liability under Section 4062 of ERISA; and
(v) to the knowledge of the Company and the Stockholders, no
circumstances exist pursuant to which the Company would be reasonably
likely to have any direct or indirect liability whatsoever (including,
but not limited to, any liability to any multiemployer plan or the PBGC
under Title IV of ERISA or to the Internal Revenue Service for any
excise tax or penalty, or being subject to any statutory lien to secure
payment of any such liability) with respect to any plan now or
heretofore maintained or contributed to by any entity other
-18-
<PAGE>
than the Company that is, or at any time was, a member of a "controlled
group" (as defined in Section 412(n)(6)(B) of the Code) that includes
the Company.
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is
not in violation of any law or regulation or any order of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality having jurisdiction over it; and except to the extent
set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or
proceedings, pending or, to the knowledge of the Company and the Stockholders,
threatened against or affecting, the Company, at law or in equity, or before or
by any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received by the Company, and, to the knowledge of the
Company and the Stockholders, there is no basis for any such claim, action, suit
or proceeding. The Company has conducted and is now conducting its business in
substantial compliance with the requirements, standards, criteria and conditions
set forth in applicable Federal, state and local statutes, ordinances, orders,
approvals, variances, rules and regulations.
5.22 TAXES.
(a) Except as set forth in Schedule 5.22, the Company has timely filed
all requisite Federal, state and other Tax Returns or extension requests for all
fiscal periods ended on or before the Balance Sheet Date; and except as set
forth on Schedule 5.22, the Company has no notice that any examinations are in
progress or that any claims are pending against it for federal, state and other
Taxes (including penalties and interest) for any period or periods prior to and
including the Balance Sheet Date and no notice of any claim for Taxes, whether
pending or threatened, has been received. Except as set forth in Schedule 5.22,
all Tax, including interest and penalties (whether or not shown on any Tax
Return) owed by the Company has been paid or accrued in its financial accounts.
The amounts shown as accruals for Taxes on the Company Financial Statements are
sufficient for the payment of all Taxes of the kinds indicated (including
penalties and interest) for all fiscal periods ended on or before that date.
Copies of (i) any tax examinations, (ii) extensions of statutory limitations and
(iii) the federal and local income Tax Returns and franchise Tax Returns of
Company for their last three (3) fiscal years, or such shorter period of time as
any of them shall have existed, are attached hereto as Schedule 5.22 or have
otherwise been delivered to Pentacon. The Company has a taxable year ended
December 31. Except as set forth on Schedule 5.22, Company uses the accrual
method of accounting for income tax purposes, and the Company's methods of
accounting have not changed in the past five years. The Company is not an
investment Company as defined in Section 351(e)(1) of the Code. Except as set
forth in Schedule 5.22, the Company is not and has not during the last five
years been a party to any tax sharing agreement or agreement of similar effect.
The Company is not and has not during the last five years been a member of any
consolidated group. Except as set forth on Schedule 5.22, the Company has not
received, been denied, or applied for any private letter ruling during the last
ten years.
-19-
<PAGE>
(b) The Stockholders made a valid election under the provisions of
Subchapter S of the Code and the Company has not, within the past twelve (12)
months, been taxed under the provisions of Subchapter C of the Code. The
Stockholders shall pay all income taxes with respect to the Company payable for
all periods through and including the Closing Date which are not reflected on
the Company's financial statements as being obligations owing by the Company.
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.
(a) The Company is not in violation of any Charter Document. Except as
set forth in Schedule 5.23, neither the Company nor, to the best knowledge of
the Company and the Stockholders, any other party thereto, is in default under
any lease, instrument, agreement, license, or permit set forth on Schedule 5.12,
5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party
or by which its properties are bound (the "Material Documents").
(b) Except as set forth in Schedule 5.23, the execution and delivery of
this Agreement by each of the Company and the Stockholders do not violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company under any of the terms,
conditions or provisions of (i) the Charter Documents (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Company or
any of its properties or assets, or (iii) any Material Document or other
material instrument, obligation or agreement of any kind to which the Company or
any of the Stockholders is now a party or by which any of the Stockholders or
the Company or any of its properties or assets may be bound or affected. The
consummation by the Company and the Stockholders of the transactions
contemplated hereby will not result in any violation, conflict, breach, right of
termination or acceleration or creation of liens under any of the terms,
conditions or provisions of the items described in clauses (i) through (iii) of
the preceding sentence, subject, in the case of the terms, conditions or
provisions of the items described in clause (iii) above, to obtaining (prior to
the Effective Time of the Merger) such consents as may be required from
commercial lenders, lessors or other third parties.
(c) Except as set forth on Schedule 5.23, none of the Material
Documents requires notice to, or the consent or approval of, any governmental
agency or other third party with respect to any of the transactions contemplated
hereby in order to remain in full force and effect, and consummation of the
transactions contemplated hereby will not give rise to any right to termination,
cancellation or acceleration or loss of any material right or benefit.
(d) Except (i) for the filings by Pentacon in connection with the IPO
of the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
for the making of the merger filings with the Secretary of State of the State of
Delaware and the State of Incorporation in connection with the Merger, (iv) for
filings in
-20-
<PAGE>
connection with listing on the NASDAQ National Market System or New York Stock
Exchange or other nationally recognized securities exchange; (v) for possible
filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13 and (vi)
as set forth in Schedule 5.23, neither the Company nor the Stockholders are
required to make any declaration, filing or registration with, or notice to, or
obtain any authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by the Company and the Stockholders or the consummation by the Company and the
Stockholders of the transactions contemplated hereby.
(e) Except as set forth on Schedule 5.23, none of the Material
Documents prohibits the use or publication by the Company, Pentacon or Newco of
the name of any other party to such Material Document, and none of the Material
Documents prohibits or restricts the Company from freely providing services or
selling products to any other customer or potential customer of the Company,
Pentacon, Newco or any Other Founding Company.
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set
forth on Schedule 5.24, the Company is not now a party to any governmental
contract that, by its express terms, is subject to price redetermination or
renegotiation or that is customarily subject to price redetermination or
renegotiations in the ordinary course of business. Except as set forth on
Schedule 5.24, the Company is not now a party to any material contract based on
minority ownership which would be canceled or otherwise materially adversely
impacted by completion of the Pentacon Plan of Organization.
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set
forth on Schedule 5.25 or as otherwise contemplated hereby, there has not been:
(i) any Material Adverse Effect with respect to the Company;
(ii) any damage, destruction or loss (whether or not covered
by insurance), alone or in the aggregate, materially adversely
affecting the properties or business of the Company;
(iii) any change in the authorized capital of the Company or
its outstanding securities or any change in its ownership interests or
any grant of any options, warrants, calls, conversion rights or
commitments;
(iv) any declaration or payment of any dividend or
distribution in respect of the capital stock or any direct or indirect
redemption, purchase or other acquisition of any of the capital stock
of the Company except for distributions that would have been permitted
after the date hereof under Section 7.3(iii) hereof,
(v) any increase in the compensation, bonus, sales commissions
or fee arrangement payable or to become payable by the Company to any
of its officers, directors, Stockholders, employees, consultants or
agents, except for ordinary and customary bonuses and salary increases
for employees in accordance with past practice;
-21-
<PAGE>
(vi) any work interruptions, labor grievances or claims filed,
or any event or condition of any character, materially adversely
affecting the business or future prospects of the Company;
(vii) any sale or transfer, or any agreement to sell or
transfer, any material assets, property or rights of Company outside of
the ordinary course of business to any person, including, without
limitation, the Stockholders and their affiliates;
(viii) any cancellation, or agreement to cancel, any
indebtedness or other obligation owing to the Company, including
without limitation any indebtedness or obligation of any Stockholders
or any affiliate thereof;
(ix) any plan, agreement or arrangement granting any
preferential rights to purchase or acquire any interest in any of the
assets, property or rights of the Company or requiring consent of any
party to the transfer and assignment of any such assets, property or
rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets
outside of the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the
Company;
(xii) any amendment or termination of any Material Document;
(xiii) any transaction by the Company outside the ordinary
course of its business;
(xiv) any cancellation or termination of a Material Document
or material customer contract with a customer or client prior to the
scheduled termination date; or
(xv) any other distribution of property or assets by the
Company other than in the ordinary course of business and other than
distributions of real estate and other assets as permitted by this
Agreement.
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an
accurate schedule as of the date of the Agreement of:
(i) the name of each financial institution in which the
Company has accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
-22-
<PAGE>
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or
have access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the Company and
a description of the terms of such power.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this
Agreement by the Company and the performance of the transactions contemplated
herein have been duly and validly authorized by the Board of Directors of the
Company and this Agreement has been duly and validly authorized by all necessary
corporate action and is a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms.
5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the
Stockholders, or any Affiliate of any of them has given or offered anything of
value to any governmental official, political party or candidate for government
office in violation of any applicable laws, rules or regulations, nor has it or
any of them otherwise taken any action which would cause the Company to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended or any
applicable law of similar effect.
5.29 DISCLOSURE. (a) This Agreement, including the Annexes and
Schedules hereto, furnished to Pentacon by the Company and the Stockholders in
connection herewith, do not contain an untrue statement of a material fact or
omit to state a material fact necessary to make the statements herein and
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the foregoing does not apply to statements
contained in or omitted from any of such documents made or omitted in reliance
upon information furnished in writing by Pentacon or Newco.
(b) The Company and the Stockholders acknowledge and agree (i) that
there exists no firm commitment, binding agreement, or promise or other
assurance of any kind, whether express or implied, oral or written, that a
Registration Statement will become effective or that the IPO pursuant thereto
will occur at a particular price or within a particular range of prices or occur
at all; (ii) that neither Pentacon or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the Company, the
Stockholders or any other person affiliated or associated with the Company for
any failure of the Registration Statement to become effective, the IPO to occur
at a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of Stockholders to enter into this Agreement, or to
vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to Pentacon or the
prospective IPO.
-23-
<PAGE>
5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the
Company has not, between the Balance Sheet Date and the date hereof, taken any
of the actions which are prohibited ("Prohibited Activities") in Section 7.3.
5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31,
to the knowledge of the Company or the Stockholders, the Company has no
liability or potential liability to any person under any product or service
warranty and the Company does not offer or sell insurance or consumer protection
plans or other similar arrangements that could result in the Company being
required to make any material payment to or perform any material service for any
person thereunder.
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS. Except as described on Schedule 5.32, no Stockholder, officer,
director or Affiliate of the Company (i) possesses, directly or indirectly, any
financial interest in, or is a director, officer, employee or affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a
party to an agreement or relationship, that involves the receipt by such person
of compensation or property from the Company other than through a customary
employment relationship.
(B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS.
Each Stockholder severally, but not jointly, represents and
warrants that the representations and warranties set forth below are true as of
the date of this Agreement as they relate to such Stockholder and that the
representations and warranties set forth in this Sections 5(B) shall survive the
Consummation Date.
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Such Stockholder
has the full legal right, power and authority to enter into this Agreement. Such
Stockholder owns beneficially and of record all of the shares of the Company
stock identified on Annex II as being owned by such Stockholder, and, such
Company Stock is owned free and clear of all liens, encumbrances and claims of
every kind. This Agreement is a legal, valid, and binding obligation of each
Stockholder.
5.34 PREEMPTIVE RIGHTS. Such Stockholder does not have, or hereby
waives, any preemptive or other right to acquire shares of Company Stock or
Pentacon Stock that such Stockholder has or may have had. Nothing herein,
however, shall limit or restrict the rights of any Stockholder to acquire
Pentacon Stock pursuant to (i) this Agreement or (ii) any option granted by
Pentacon.
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. No Stockholder is under
any binding commitment or contract to sell, exchange or otherwise dispose of
shares of Pentacon Stock received as described in Section 3.1.
-24-
<PAGE>
6. REPRESENTATIONS OF PENTACON AND NEWCO
Pentacon and Newco, jointly and severally, represent and warrant to the
Stockholders that all of the following representations and warranties in this
Section 6 are true at the date of this Agreement and, subject to Section 7.8
hereof, shall be true at the time of Closing and the Consummation Date, and that
such representations and warranties shall survive the Consummation Date for a
period of twenty-four months (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Consummation Date, which shall be
deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes
of determining whether a claim for indemnification under Section 11.2(iv) hereof
has been made on a timely basis, and solely to the extent that in connection
with the IPO, any of the Stockholders actually incurs liability under the 1933
Act, the 1934 Act, or any other Federal or state securities laws, the
representations and warranties of Pentacon and Newco set forth herein shall
survive until the expiration of any applicable limitations period, which shall
be deemed to be the Expiration Date for such purposes.
6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly
incorporated and organized, validly existing and in good standing under the laws
of the State of Delaware, and each has the requisite power and authority to
carry on its business as it is now being conducted. Pentacon and Newco are each
qualified to do business and are each in good standing in each jurisdiction in
which the nature of its business makes such qualification necessary. True,
complete and correct copies of the Certificate of Incorporation and By-laws,
each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter
Documents") are all attached hereto as Annex III.
6.2 AUTHORIZATION. (i) The respective officers or other representatives
of Pentacon and Newco executing this Agreement have the authority to enter into
and bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and
Newco have the full legal right, power and authority to enter into this
Agreement and the Other Agreements and consummate the Merger. All corporate acts
and other proceedings required to have been taken by Pentacon and Newco to
authorize the execution, delivery and performance of this Agreement and the
consummation of the Merger have been duly and properly taken.
6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock
of Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration
Statement. All of the issued and outstanding shares of the capital stock of
Newco are owned by Pentacon and all of the issued and outstanding shares of the
capital stock of Pentacon are owned by the persons set forth on Schedule 6.3
hereof, in each case, free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of Pentacon and Newco
have been duly authorized and validly issued, are fully paid and nonassessable,
and further, such shares were offered, issued, sold and delivered by Pentacon
and Newco in compliance with all applicable state and Federal laws concerning
the issuance of
-25-
<PAGE>
securities. Further, none of such shares were issued in violation of the
preemptive rights of any past or present stockholder of Pentacon or Newco.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for
the Other Agreements and except as set forth in the Draft Registration Statement
or in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates Pentacon or Newco to issue any of
their respective authorized but unissued capital stock; (ii) no voting trust,
voting agreement, proxy or other agreements or understandings exist with respect
to the voting of any shares of capital stock of Pentacon; and (iii) neither
Pentacon nor Newco has any obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its equity securities or any interests
therein or to pay any dividend or make any distribution in respect thereof.
Schedule 6.4 also includes a list of all outstanding options, warrants or other
rights to acquire shares of the stock of Pentacon.
6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no
subsidiaries except for Newco and each of the companies identified as "Newco" in
each of the Other Agreements. Except as set forth in the preceding sentence,
neither Pentacon nor Newco presently owns, of record or beneficially, or
controls, directly or indirectly, any capital stock, securities convertible into
capital stock or any other equity interest in any corporation, association or
business entity, and neither Pentacon nor Newco, directly or indirectly, is a
participant in any joint venture, partnership or other non-corporate entity.
6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included
in the Draft Registration Statement (the "Pentacon Financial Statements") have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated (except as noted
thereon), and the balance sheet included therein presents fairly the financial
position of Pentacon as of its date.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft
Registration Statement, Pentacon and Newco have no material liabilities,
contingent or otherwise, except as set forth in or contemplated by this
Agreement and the Other Agreements and except for fees generally described in
Part II of the Draft Registration Statement and incurred in connection with the
transactions contemplated hereby and thereby.
6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in
the Draft Registration Statement, neither Pentacon nor Newco is in violation of
any law or regulation or any order of any court or Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them and except to the extent
set forth in Schedule 6.8, there are no material claims, actions, suits or
proceedings, pending or, to the knowledge of Pentacon or Newco, threatened
against or affecting, Pentacon or Newco, at law or in equity, or before or by
any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over either of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received.
-26-
<PAGE>
Pentacon and Newco have conducted and are conducting their respective businesses
in substantial compliance with the requirements, standards, criteria and
conditions set forth in applicable Federal, state and local statutes,
ordinances, permits, licenses, orders, approvals, variances, rules and
regulations and are not in violation, in any material respect, of any of the
foregoing.
6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of
any Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of
Pentacon and Newco, any other party thereto, is in default under any lease,
instrument, agreement, license, or permit to which Pentacon or Newco is a party,
or by which Pentacon or Newco, or any of their respective properties, are bound
(collectively, the "Pentacon Documents"); and (a) the rights and benefits of
Pentacon and Newco under the Pentacon Documents will not be adversely affected
by the transactions contemplated hereby and (b) the execution and delivery of
this Agreement and the Other Agreements by Pentacon and Newco and the
performance of their obligations hereunder and thereunder do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation or default (with or without notice or lapse of time, or both), under
or give rise to a right of termination, cancellation, or acceleration of any
obligation or to loss of a material benefit under, or result in the creation of
any lien upon any of the assets of Pentacon or Newco under, any provision of (i)
the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the
comparable governing instruments of Newco, (ii) any note, bond, mortgage,
indenture or deed of trust or any license, lease, contract, commitment,
agreement or arrangement to which Pentacon or Newco is a party or by which any
of their respective properties or assets are bound or (iii) any judgment, order,
decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or
their respective properties or assets.
(b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of
the Pentacon Documents requires notice to, or the consent or approval of, any
governmental agency or other third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect and consummation
of the transactions contemplated hereby will not give rise to any right to
termination, cancellation or acceleration or loss of any right or benefit.
(c) Except (i) for the filings by Pentacon in connection with the IPO
of the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
filings with blue sky authorities in connection with the transactions
contemplated by this Agreement, (iv) for the making of the merger filings with
the Secretary of State of the State of Delaware and the State of Incorporation
in connection with the Merger, (v) for filings in consideration for listing on
the NASDAQ National Market System or the New York Stock Exchange or other
nationally recognized securities exchange; and (vi) for possible filings under
the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not
required make any declaration, filing or registration with, or notice to, or
obtain any authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the
transactions contemplated hereby.
-27-
<PAGE>
6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this
Agreement and the Other Agreements by Pentacon and Newco and the performance of
the transactions contemplated herein and therein have been duly and validly
authorized by the respective Boards of Directors and stockholders of Pentacon
and Newco and this Agreement and the Other Agreements have been duly and validly
authorized by all necessary corporate action and are legal, valid and binding
obligations of Pentacon and Newco, enforceable against them in accordance with
their respective terms.
6.11 PENTACON STOCK. At the time of issuance thereof and delivery to
the Stockholders, the Pentacon Stock to be delivered to the Stockholders
pursuant to this Agreement will constitute valid and legally issued shares of
Pentacon, fully paid and nonassessable, and with the exception of restrictions
upon resale set forth in Sections 15 and 16 hereof, will be identical in all
substantive respects (which do not include the form of certificate upon which it
is printed or the presence or absence of a CUSIP number on any such certificate)
to the Pentacon Stock issued and outstanding as of the date hereof by reason of
the provisions of the Delaware GCL. The Pentacon Stock issued and delivered to
the Stockholders shall at the time of such issuance and delivery be free and
clear of any liens, claims or encumbrances of any kind or character. The shares
of Pentacon Stock to be issued to the Stockholders pursuant to this Agreement
will not be registered under the 1933 Act, except as provided in Section 17
hereof.
6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither
Pentacon nor Newco has entered or will enter into any agreement with any of the
Founding Companies or any of the Stockholders of the Founding Companies or
Pentacon other than the Other Agreements and the agreements contemplated by each
of the Other Agreements, including the employment agreements and real property
leases referred to herein or entered into in connection with the transactions
contemplated hereby and thereby.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed
on March 20, 1997 and has conducted only limited operations since that time.
Neither Pentacon nor Newco has conducted any material business since the date of
its inception, except in connection with this Agreement, the Other Agreements
and the IPO. Except as described in the Draft Registration Statement, neither
Pentacon nor Newco owns or has at any time owned any real property or any
material personal property or is a party to any other material agreement other
than the Other Agreements, the agreements contemplated thereby and such
agreements as will be filed as Exhibits to the Registration Statement.
6.14 DISCLOSURE. The Draft Registration Statement delivered to the
Company and the Stockholders, together with this Agreement and the information
furnished to the Company and the Stockholders in connection herewith, does not
contain an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the foregoing does
not apply to statements contained in or omitted from any of such documents made
or omitted in reliance upon information furnished in writing by the Company or
the Stockholders or information pertaining to the Company or a Stockholder which
is confirmed in writing by the Company or such Stockholder.
-28-
<PAGE>
7. COVENANTS PRIOR TO CLOSING
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.
(a) Between the date of this Agreement and the Consummation Date, the
Company will afford to the officers and authorized representatives of Pentacon
and the Other Founding Companies access to all of the Company's sites,
properties, books and records and will furnish Pentacon with such additional
financial and operating data and other information as to the business and
properties of the Company as Pentacon or the Other Founding Companies may from
time to time reasonably request; provided, however, that the Company shall not
prior to the Closing Date be required to disclose to the Other Founding
Companies, and Pentacon shall not without first obtaining the written approval
of the Company disclose to the Other Founding Companies, information relating to
pricing or profitability on an account-by-account basis or any pricing
information relating to the Company's suppliers on a supplier-by-supplier basis.
The Company will cooperate with Pentacon, its representatives, auditors and
counsel and the Other Founding Companies in the preparation of any documents or
other material which may be required in connection with any documents or
materials required by this Agreement. Pentacon, Newco, the Stockholders and the
Company will treat all information obtained in connection with the negotiation
and performance of this Agreement or the due diligence investigations conducted
with respect to the Other Founding Companies as confidential in accordance with
the provisions of Section 14 hereof. In addition, Pentacon will cause each of
the Other Founding Companies to enter into a provision similar to this Section
7.1(a) requiring each such Other Founding Company, its stockholders, directors,
officers, representatives, employees and agents to keep confidential any
information obtained by such Other Founding Company.
(b) Between the date of this Agreement and the Consummation Date,
Pentacon will afford to the officers and authorized representatives of the
Company and the Stockholders access to all of Pentacon's and Newco's sites,
properties, books and records and will furnish the Company with such additional
financial and operating data and other information as to the business and
properties of Pentacon and Newco as the Company may from time to time reasonably
request. Pentacon and Newco will cooperate with the Company, its
representatives, auditors and counsel in the preparation of any documents or
other material which may be required in connection with any documents or
materials required by this Agreement. The Company will cause all information
obtained in connection with the negotiation and performance of this Agreement to
be treated as confidential in accordance with the provisions of Section 14
hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Consummation Date, the Company will, except as set forth on
Schedule 7.2 or as otherwise expressly contemplated by this Agreement:
(i) carry on its respective businesses in substantially the
same manner as it has heretofore and not introduce any material new
method of management, operation or accounting;
-29-
<PAGE>
(ii) use commercially reasonable efforts to maintain its
respective properties and facilities, including those held under
leases, in as good working order and condition as at present, ordinary
wear and tear excepted;
(iii) perform in all material respects all of its respective
obligations under agreements relating to or affecting its respective
assets, properties or rights;
(iv) use commercially reasonable efforts to keep in full force
and effect present insurance policies or other comparable insurance
coverage;
(v) use commercially reasonable efforts to maintain and
preserve its business organization intact, retain its respective
present key employees and maintain its respective relationships with
material suppliers, customers and others having business relations with
the Company;
(vi) use commercially reasonable efforts to maintain
compliance with all material permits, laws, rules and regulations,
consent orders, and all other orders of applicable courts, regulatory
agencies and similar governmental authorities;
(vii) maintain present debt and lease instruments and not
enter into new or amended debt or lease instruments without the
knowledge and consent of Pentacon (which consent shall not be
unreasonably withheld, delayed or conditioned), provided that debt
and/or lease instruments may be replaced without the consent of
Pentacon if such replacement instruments are on terms at least as
favorable to the Company as the instruments being replaced; and
(viii) maintain or reduce present salaries and commission
levels for all officers, directors, employees and agents except for
ordinary and customary bonus and salary increases for employees in
accordance with the Company's past practices.
7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3 or as
otherwise expressly contemplated by this Agreement, between the date hereof and
the Consummation Date, the Company will not, without prior written consent of
Pentacon:
(i) make any change in its Articles of Incorporation or
By-laws;
(ii) issue any securities, options, warrants, calls,
conversion rights or commitments relating to its securities of any kind
other than in connection with the exercise of options or warrants
listed in Schedule 5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for
-30-
<PAGE>
value any shares of its stock except for (1) dividends paid in respect
of the Company's Accumulated Adjustment Accounts provided that any such
dividends shall reduce, dollar-for-dollar, the amount of cash
consideration to be received by the Stockholder on the Consummation
Date and (2) dividends paid to cover tax payments required to be made
by the Stockholders for fiscal 1997 and subsequent periods ending on or
prior to the Consummation Date;
(iv) enter into any contract or commitment or incur or agree
to incur any liability or make any capital expenditures, except if it
is in the normal course of business (consistent with past practice) or
involves an amount not in excess of $25,000;
(v) create, assume or permit to exist any mortgage, pledge or
other lien or encumbrance upon any assets or properties whether now
owned or hereafter acquired, except (1) with respect to purchase money
liens incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $25,000 necessary or desirable for the
conduct of the businesses of the Company, (2) (A) liens for Taxes
either not yet due or being contested in good faith and by appropriate
proceedings (and for which contested Taxes adequate reserves have been
established and are being maintained) or (B) materialmen's, mechanics',
workers', repairmen's, employees' or other like liens arising in the
ordinary course of business (the liens set forth in clause (2) being
referred to herein as "Statutory Liens"), or (3) liens set forth on
Schedules 5.10, 5.15 and/or 5.16 hereto;
(vi) sell, assign, lease or otherwise transfer or dispose of
any property or equipment except in the normal course of business and
other than distributions of real estate and other assets as permitted
in this Agreement (including the Schedules hereto);
(vii) negotiate for the acquisition of any business or the
start-up of any new business;
(viii) merge or consolidate or agree to merge or consolidate
with or into any other corporation;
(ix) waive any material rights or claims of the Company,
provided that the Company may negotiate and adjust bills and accounts
in the course of good faith disputes with customers in a manner
consistent with past practice, provided, further, that such adjustments
shall not be deemed to be included in Schedule 5.11 to the extent they
exceed the reserves, if any, established therefor, or unless
specifically listed thereon;
(x) amend or terminate any material agreement, permit, license
or other right of the Company provided that the Company may continue to
administer vendor and supplier contracts in the ordinary course of
business provided written notice of any such material amendments or
terminations is provided to Pentacon as soon as possible following such
action and in any event prior to the Closing; or
-31-
<PAGE>
(xi) enter into any other transaction outside the ordinary
course of its business or prohibited hereunder.
7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders,
the Company, nor any agent, officer, director, trustee or any representative of
any of the foregoing will, during the period commencing on the date of this
Agreement and ending with the earlier to occur of the Consummation Date or the
termination of this Agreement in accordance with its terms, directly or
indirectly:
(i) solicit or initiate the submission of proposals or offers
from any person for,
(ii) participate in any discussions pertaining to, or
(iii) furnish any information to any person other than
Pentacon, Newco or their authorized agents relating to, any acquisition
or purchase of all or a material amount of the assets of, or any equity
interest in, the Company or a merger, consolidation or business
combination of the Company.
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide Pentacon on Schedule 7.5 with proof that any required notice has been
sent.
7.6 AGREEMENTS. The Stockholders and the Company shall terminate (i)
any stockholders agreements, voting agreements, voting trusts, options, warrants
and employment agreements between the Company and any employee listed on
Schedule 9.12 hereto and (ii) any existing agreement between the Company and any
Stockholder, on or prior to the Consummation Date provided that nothing herein
shall prohibit or prevent the Company from paying (either prior to or on the
Closing Date) notes or other obligations from the Company to the Stockholders in
accordance with the terms thereof, which terms have been disclosed to Pentacon.
Such termination agreements are listed on Schedule 7.6 and copies thereof shall
be attached thereto.
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE
COMPANY. The Stockholders and the Company shall give prompt notice to Pentacon
of (i) the occurrence or non-occurrence of any event the occurrence or
nonoccurrence of which would be likely to cause any representation or warranty
of the Company or the Stockholders contained herein to be untrue or inaccurate
in any material respect at or prior to the Closing and (ii) any material failure
of any Stockholder or the Company to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by such person
hereunder. Pentacon and Newco shall give prompt notice to the Company of (i) the
occurrence or non-occurrence of any event the occurrence or non-occurrence of
which would be likely to cause any representation or warranty of Pentacon or
Newco contained herein to be untrue or inaccurate in any material respect at or
prior to the Closing and (ii)
-32-
<PAGE>
any material failure of Pentacon or Newco to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder. The delivery or deemed delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
If, prior to the Closing Date, the Chief Executive Officer, the Chief
Financial Officer or the General Counsel of Pentacon shall determine that any of
Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder
for indemnification against any Stockholder(s) (whether or not such claim might
exceed the Indemnification Threshold), then Pentacon shall promptly advise the
affected Stockholder(s), in writing, of such potential claim and provide
information supporting the basis and potential amount of such claim (a
"Potential Claim Notice"). This procedure with respect to Potential Claim
Notices is intended to afford the affected Stockholder(s) notice so that it may
attempt to cure or otherwise address the claim prior to Closing; provided,
however, that (i) this procedure shall not affect or delay Closing and (ii)
neither the failure or delay by Pentacon to give a Potential Claim Notice nor
the information included or omitted from a Potential Claim Notice shall
constitute a waiver of, or shall otherwise adversely affect the right to receive
indemnification for, any such claim paid by Pentacon, Newco, the Surviving
Corporation or the Company hereunder after the Closing Date.
7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect
to the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until 24 hours prior to the
anticipated effectiveness of the Registration Statement to supplement or amend
promptly the Schedules hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules, provided however,
that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall
only have to be delivered at the Closing Date, unless such Schedule is to be
amended to reflect an event occurring other than in the ordinary course of
business. Notwithstanding the foregoing sentence, no amendment or supplement to
a Schedule prepared by the Company that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect with respect to the Company
may be made unless Pentacon and a majority of the Founding Companies other than
the Company consent to such amendment or supplement; and provided further, that
no amendment or supplement to a Schedule prepared by Pentacon or Newco that
constitutes or reflects an event or occurrence that would have a Material
Adverse Effect with respect to Pentacon or Newco may be made unless a majority
of the Founding Companies consent to such amendment or supplement. For all
purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in Sections 8.1 and 9.1 have been
fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended
or supplemented pursuant to this Section 7.8. In the event that one of the Other
Founding Companies seeks to amend or supplement a Schedule pursuant to Section
7.8 of one of the Other Agreements, and such amendment or supplement constitutes
or reflects an event or occurrence that would have a Material Adverse Effect on
such Other Founding Company, Pentacon shall give the
-33-
<PAGE>
Company written notice promptly after it has knowledge thereof. If Pentacon and
a majority of the Founding Companies consent to such amendment or supplement,
which consent shall have been deemed given by Pentacon or any Founding Company
if no response is received within 24 hours following receipt of written notice
of such amendment or supplement (or sooner if reasonable and if required by the
circumstances under which such consent is requested), but the Company does not
give its consent, the Company may terminate this Agreement pursuant to Section
12.1(iv) hereof. In the event that the Company seeks to amend or supplement a
Schedule pursuant to this Section 7.8, and Pentacon and a majority of the Other
Founding Companies do not consent to such amendment or supplement, this
Agreement shall be deemed terminated by mutual consent as set forth in Section
12.1(i) hereof. In the event that Pentacon or Newco seeks to amend or supplement
a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies
do not consent to such amendment or supplement, this Agreement shall be deemed
terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to
this Agreement shall be liable to any other party if this Agreement shall be
terminated pursuant to the provisions of this Section 7.8. No amendment of or
supplement to a Schedule shall be made later than 24 hours prior to the
anticipated effectiveness of the Registration Statement.
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company
and Stockholders shall furnish or cause to be furnished to Pentacon and the
Underwriters all of the information concerning the Company and the Stockholders
reasonably required for inclusion in, and will cooperate with Pentacon and the
Underwriters in the preparation of, the Registration Statement and the
prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement, except
that the cost of the preparation of any such audited and unaudited Financial
Statements shall be borne by Pentacon). The Company and the Stockholders agree
promptly to advise Pentacon if at any time during the period in which a
prospectus relating to the IPO is required to be delivered under the Securities
Act, any information contained in the prospectus concerning the Company or the
Stockholders becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy. Insofar as the
information relates solely to the Company or the Stockholders, the Company
represents and warrants as to such information with respect to itself, and each
Stockholder represents and warrants, as to such information with respect to the
Company and himself or herself, severally, but not jointly, that the information
expressly provided for inclusion in the Registration Statement or otherwise
confirmed in writing by such Stockholder will not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the
Consummation Date, and Pentacon shall have had sufficient time to review the
unaudited consolidated balance sheets of the Company as of the end of all fiscal
quarters following the Balance Sheet Date, and the unaudited consolidated
statement of income, cash flows and retained earnings of the Company for all
fiscal quarters ended after the Balance Sheet Date. Such financial statements
shall have been prepared in accordance with generally accepted accounting
principles applied on a
-34-
<PAGE>
consistent basis throughout the periods indicated (except as noted therein).
Except as noted in such financial statements, all of such financial statements
will present fairly the results of operations of the Company for the periods
indicated therein.
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and
deliver, or cause to be executed and delivered, such further instruments or
documents or take such other action as may be reasonably necessary or convenient
to carry out the transactions contemplated hereby.
7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall
maintain its authorized capital stock as set forth in the Registration Statement
filed with the SEC except for such changes in authorized capital stock as are
made to respond to comments made by the SEC or requirements of any exchange or
automated trading system for which application is made to register the Pentacon
Stock and any changes necessary or advisable in order to permit the delivery of
the opinion contemplated by Section 8.12 hereof.
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this
Agreement hereby recognize that one or more filings under the Hart-Scott-Rodino
Act may be required in connection with the transactions contemplated herein. If
it is determined by the parties to this Agreement that filings under the
Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees
to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act,
(ii) such compliance by the Stockholders and the Company shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
9 of this Agreement, and (iii) the parties agree to cooperate and use their best
efforts to cause all filings required under the Hart-Scott-Rodino Act to be
made. If filings under the Hart-Scott-Rodino Act are required, the costs and
expenses thereof (including filing fees) shall be borne by Pentacon. The
obligation of each party to consummate the transactions contemplated by this
Agreement is subject to the expiration or termination of the waiting period
under the Hart-Scott-Rodino Act, if applicable.
7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the
date of the final prospectus of Pentacon utilized in connection with the IPO,
the Company or the Stockholders become aware of any fact or circumstance which
would materially affect the accuracy of a representation or warranty of Company
or Stockholders in this Agreement, the Company and the Stockholders shall
promptly give notice of such fact or circumstance to Pentacon. However, subject
to the provisions of Section 7.8, such notification shall not relieve either the
Company or the Stockholders of their respective obligations under this
Agreement, and, subject to the provisions of Section 7.8, at the sole option of
Pentacon, the truth and accuracy of any and all warranties and representations
of the Company, or on behalf of the Company and of Stockholders at the date of
this Agreement and on the Closing Date and on the Consummation Date, shall be a
precondition to the consummation of this transaction.
-35-
<PAGE>
7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately
following the Effective Time of the Merger, Pentacon will pay, or cause to be
paid, all of the outstanding liabilities, obligations and indebtedness of
Company to the lenders identified on Schedule 7.15 hereto. In connection with
such repayment of indebtedness, all associated guaranties of Founder
Stockholders shall be terminated and cancelled.
7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that
one of the conditions to the Stockholders consummating the transactions
contemplated herein is that the IPO shall be closed and the Stockholders (as a
group) shall be entitled to receive consideration not less than the Minimum
Value set forth on Annex I attached hereto.
7.17 DIRECTORS. Pentacon agrees that the number of directors of
Pentacon shall not exceed nine members immediately following the IPO unless the
Founding Stockholder representatives to serve on such board agree in writing to
a larger number of directors.
7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise
required by applicable law, Pentacon will describe or report the transaction in
any required tax reports of Pentacon as a tax-free transaction (insofar as its
relates to the delivery of Pentacon Stock for Company Stock) in a manner
consistent with the tax opinion referenced in Section 8.12.
7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to
obtain all material Licenses necessary for Pentacon to commence the conduct of
business on the Consummation Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY
The obligations of Stockholders and the Company with respect to actions
to be taken on the Closing Date are subject to the satisfaction or waiver on or
prior to the Closing Date of all of the following conditions. The obligations of
the Stockholders and the Company with respect to actions to be taken on the
Consummation Date are subject to the satisfaction or waiver on or prior to the
Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and
8.12. As of the Closing Date or, with respect to the conditions set forth in
Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such
conditions have not been satisfied, the Stockholders (acting in unison) shall
have the right to terminate this Agreement, or in the alternative, waive any
condition not so satisfied. The delivery of certificates representing Company
Stock to Pentacon as of the Consummation Date shall constitute a waiver of any
conditions not so satisfied. However, no such waiver shall be deemed to affect
the survival of the representations and warranties of Pentacon and Newco
contained in Section 6 hereof or the rights of the Stockholders pursuant to
Section 11 hereof.
-36-
<PAGE>
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All
representations and warranties of Pentacon and Newco contained in Section 6
shall be true and correct in all material respects as of the Closing Date and
the Consummation Date as though such representations and warranties had been
made as of that time; all of the terms, covenants and conditions of this
Agreement to be complied with and performed by Pentacon and Newco on or before
the Closing Date and the Consummation Date shall have been duly complied with
and performed in all material respects; and certificates to the foregoing effect
dated the Closing Date and the Consummation Date, respectively, and signed by
the President or any Vice President of Pentacon shall have been delivered to the
Stockholders.
8.2 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be reasonably satisfactory to the Company and its counsel.
The Stockholders and the Company shall be satisfied that the Registration
Statement and the prospectus forming a part thereof, including any amendments
thereof or supplements thereto, shall not contain any untrue statement of a
material fact, or omit to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that, subject to the provisions set forth in the introductory paragraph of this
Section 8, the condition contained in this sentence shall be deemed waived if
the Company or Stockholders shall have failed to inform Pentacon in writing
prior to the effectiveness of the Registration Statement of the existence of an
untrue statement of a material fact or the omission of such a statement of a
material fact.
8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the Company as a result of which
the management of the Company deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion
from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed
hereto as Annex IV.
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis, subject to the conditions set
forth in the underwriting agreement, on terms such that the aggregate value of
the cash and the number of shares of Pentacon Stock to be received by the
Stockholders is not less than the Minimum Value set forth on Annex I.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with
any governmental authority or agency or any third party relating to the
consummation of the transactions contemplated herein or set forth in Schedule
5.23 hereto shall have been obtained and made and no action or proceeding shall
have been instituted or threatened to restrain or prohibit the Merger and no
governmental agency or body shall have taken any other action or made any
request of Company as a result of which Company deems it inadvisable to proceed
with the transactions hereunder.
-37-
<PAGE>
8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have
delivered to the Company a certificate, dated as of a date no later than ten
days prior to the Closing Date, duly issued by the Delaware Secretary of State
and in each state in which Pentacon or Newco is authorized to do business,
showing that each of Pentacon and Newco is in good standing and authorized to do
business and that all state franchise and/or income tax returns and taxes for
Pentacon and Newco, respectively, for all periods prior to the Closing have been
filed and paid.
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to Pentacon or Newco which would constitute a Material
Adverse Effect.
8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to
the Underwriters in the IPO shall have occurred simultaneously with the
Consummation Date hereunder.
8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a
certificate or certificates, dated the Closing Date and signed by the secretary
of Pentacon and of Newco, certifying the truth and correctness of attached
copies of the Pentacon's and Newco's respective Certificates of Incorporation
(including amendments thereto), By-Laws (including amendments thereto), and
resolutions of the boards of directors and, if required, the Stockholders of
Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement
and the consummation of the transactions contemplated hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VI hereto.
8.12 TAX MATTERS. The Stockholders shall have received an opinion of
Ernst & Young LLP or other tax advisor of national recognition reasonably
acceptable to the Stockholders that the Pentacon Plan of Organization will
qualify as a tax-free transfer of property under Section 351 of the Code and
that the Stockholders will not recognize gain to the extent the Stockholders
exchange stock of the Company for Pentacon stock (but not cash or other
property) pursuant to the Pentacon Plan of Organization.
8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for
listing on the New York Stock Exchange, NASDAQ National Market System or the
American Stock Exchange.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO
The obligations of Pentacon and Newco with respect to actions to be
taken on the Closing Date are subject to the satisfaction or waiver on or prior
to the Closing Date of all of the following conditions. The obligations of
Pentacon and Newco with respect to actions to be taken on the Consummation Date
are subject to the satisfaction or waiver on or prior to the Consummation Date
of the conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing
Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13,
as of the Consummation Date, if any such
-38-
<PAGE>
conditions have not been satisfied, Pentacon and Newco shall have the right to
terminate this Agreement, or waive any such condition, but no such waiver shall
be deemed to affect the survival of the representations and warranties contained
in Section 5 hereof.
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All
the representations and warranties of the Stockholders and the Company contained
in this Agreement shall be true and correct in all material respects as of the
Closing Date and the Consummation Date with the same effect as though such
representations and warranties had been made on and as of such date; all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by the Stockholders and the Company on or before the Closing Date or
the Consummation Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the Stockholders shall have
delivered to Pentacon certificates dated the Closing Date and the Consummation
Date, respectively, and signed by them to such effect.
9.2 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of Pentacon as a result of which the
management of Pentacon deems it inadvisable to proceed with the transactions
hereunder.
9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a
certificate, dated the Closing Date and signed by the secretary of the Company,
certifying the truth and correctness of attached copies of the Company's
Certificate of Incorporation (including amendments thereto), By-Laws (including
amendments thereto), and resolutions of the board of directors and the
Stockholders approving the Company's entering into this Agreement and the
consummation of the transactions contemplated hereby.
9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have
occurred with respect to the Company which would constitute a Material Adverse
Effect, and the Company shall not have suffered any material loss or damages to
any of its properties or assets, whether or not covered by insurance, which
change, loss or damage materially affects or impairs the ability of the Company
to conduct its business.
9.5 STOCKHOLDERS' RELEASE. The Stockholders shall have delivered to
Pentacon an instrument dated the Closing Date, which shall be effective only
upon the occurrence of the Consummation Date and shall relate only to matters
accruing on or prior to the Consummation Date, releasing the Company and
Pentacon from (i) any and all claims of the Stockholders against the Company and
Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders,
except for (w) items specifically identified on Schedules 5.10 and 5.15 as being
claims of or obligations to the Stockholders, (x) continuing obligations to
Stockholders relating to their employment by the Company or Pentacon, (y) any
obligations or liabilities arising under this Agreement or the transactions
contemplated hereby and (z) real estate lease agreements between the Company and
Stockholders, as amended which have been accepted or approved by Pentacon. In
the
-39-
<PAGE>
event that the Consummation Date does not occur, then the release instrument
referenced herein shall be void and of no further force or effect.
9.6 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to Pentacon.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, all existing agreements between the Company and the Stockholders
(and entities controlled by the Stockholders) shall have been canceled effective
prior to or as of the Consummation Date.
9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from
Counsel to the Company and the Stockholders, dated the Closing Date,
substantially in the form annexed hereto as Annex V.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with
any governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; all consents
and approvals of third parties listed on Schedule 5.23 shall have been obtained;
and no action or proceeding shall have been instituted or threatened to restrain
or prohibit the Merger and no governmental agency or body shall have taken any
other action or made any request of Pentacon as a result of which Pentacon deems
it inadvisable to proceed with the transactions hereunder.
9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to
Pentacon a certificate, dated as of a date no earlier than ten days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's state of incorporation and, unless waived by Pentacon, in each state
in which the Company is authorized to do business, showing the Company is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for the Company for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall enter into an employment agreement substantially in the form of Annex VI
hereto.
9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to
the Underwriters in the IPO shall have occurred simultaneously with the
Consummation Date hereunder.
-40-
<PAGE>
9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to
Pentacon a certificate to the effect that he is not a foreign person pursuant to
Section 1.1445-2(b) of the Treasury regulations.
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as
contemplated by this Agreement or the Registration Statement, after the
Consummation Date, Pentacon shall not and shall not permit any of its
subsidiaries to undertake any act that would jeopardize the tax-free status of
the organization, including without limitation:
(a) the retirement or reacquisition, directly or indirectly,
of all or part of the Pentacon Stock issued in connection with the transactions
contemplated hereby; or
(b) the entering into of financial arrangements for the
benefit of the Stockholders.
10.2 PREPARATION AND FILING OF TAX RETURNS.
(i) Subsequent to the approval of Jeff Fatica on behalf of the
Stockholders, the Company, if possible, or otherwise the Stockholders
shall file or cause to be filed all Tax Returns (federal, state, local
or otherwise) of any Acquired Party for all taxable periods that end on
or before the Consummation Date. Pentacon shall be given the
opportunity to review all such Returns prior to such filings. Unless
the Company is a C corporation, the Stockholders shall pay or cause to
be paid all Tax liabilities (in excess of all amounts already paid with
respect thereto or properly accrued or reserved with respect thereto on
the Financial Statements) shown by such Returns to be due, subject to
the provisions of 7.3(iii).
(ii) Pentacon shall file or cause to be filed all separate
Returns of, or that include, any Acquired Party for all taxable periods
ending after the Consummation Date.
(iii) Each party hereto shall, and shall cause its
Subsidiaries and Affiliates to, provide to each of the other parties
hereto such cooperation and information as any of them reasonably may
request in filing any Return, amended Return or claim for refund,
determining a liability for Taxes or a right to refund of Taxes or in
conducting any audit or other proceeding in respect of Taxes. Such
cooperation and information shall include providing copies, at the
expense of the requesting party, of all relevant portions of relevant
Returns, together with relevant accompanying schedules and relevant
work papers, relevant documents relating to rulings or other
determinations by Taxing Authorities and relevant records concerning
the ownership and Tax basis of property, which such party may possess.
Each party shall make its employees reasonably available on a mutually
convenient basis at its cost to provide explanation of any documents or
information so provided. Subject to the preceding sentence, each party
required to file Returns pursuant to this Agreement shall bear all
costs of filing such Returns.
-41-
<PAGE>
(iv) Each of the Company, Newco, Pentacon and each Stockholder
shall comply with the tax reporting requirements of Section 1.351-3 of
the Treasury Regulations promulgated under the Code, and treat the
transaction as a tax-free contribution under Section 351(a) of the Code
subject to gain, if any, recognized on the receipt of cash or other
property under Section 351(b) of the Code subject to gain, if any,
recognized on the receipt of cash or other property under Section
351(b) of the Code.
10.3 DIRECTORS. The persons named in the Draft Registration Statement
shall be appointed as directors and elected as officers of Pentacon, as and to
the extent set forth in the Draft Registration Statement, promptly following the
Consummation Date.
11. INDEMNIFICATION
The Stockholders, Pentacon and Newco each make the following covenants
that are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders
covenant and agree that they, jointly and severally, will indemnify, defend,
protect and hold harmless Pentacon, Newco, the Company and the Surviving
Corporation at all times, from and after the date of this Agreement until the
Expiration Date (provided that for purposes of Section 11.1(iii) below, the
Expiration Date shall be the date on which the applicable statute of limitations
expires), from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by Pentacon, Newco, the Company or the Surviving
Corporation as a result of or arising from (i) any breach of the representations
and warranties of the Stockholders or the Company set forth herein or on the
definitive, final schedules or certificates delivered by them in connection
herewith, (ii) any breach of any agreement on the part of the Stockholders or,
prior to Closing, the Company under this Agreement, or (iii) any liability under
the 1933 Act, the 1934 Act or other Federal or state law or regulation, at
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact relating to the Company or the
Stockholders, and provided in writing to Pentacon or its counsel by the Company
or the Stockholders for inclusion in the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact relating to the Company or the Stockholders
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that such indemnity shall not inure to the
benefit of Pentacon, Newco, the Company or the Surviving Corporation to the
extent that such untrue statement (or alleged untrue statement) was made in, or
omission (or alleged omission) occurred in, any preliminary prospectus and the
Stockholders provided, in writing, corrected information to Pentacon counsel and
to Pentacon for inclusion in the final prospectus, and such information was not
so included or properly delivered, and provided further, that no Stockholder
shall be liable for any indemnification obligation pursuant to this
-42-
<PAGE>
Section 11.1(iii) to the extent attributable to a breach of any representation,
warranty or agreement made herein individually by any other Stockholder.
Pentacon and Newco acknowledge and agree that other than the
representations and warranties of Company or Stockholders specifically contained
in this Agreement, there are no representations or warranties of Company or
Stockholders, either express or implied, with respect to the transactions
contemplated by this Agreement, the Company or its assets, liabilities and
business.
Pentacon, Newco and the Company further acknowledge and agree that,
should the Closing occur, their sole and exclusive remedy with respect to any
and all claims relating to this Agreement and the transactions contemplated in
this Agreement, shall be pursuant to the indemnification provisions set forth in
this Section 11.1. Pentacon, Newco and the Company hereby waive, from and after
the Closing, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action they or any indemnified person may have
against the Company or any Stockholder relating to this Agreement or the
transactions contemplated hereby arising under or based upon any federal, state,
local or foreign statute, law, rule, regulation or otherwise (and other than
pursuant to the terms of this Agreement).
11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it
will indemnify, defend, protect and hold harmless the Stockholders at all times
from and after the date of this Agreement until the Expiration Date, from and
against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
Stockholders as a result of or arising from (i) any breach by Pentacon or Newco
of their representations and warranties set forth herein or on the definitive,
final schedules or certificates attached delivered by them pursuant hereto, (ii)
any breach of any agreement on the part of Pentacon or Newco under this
Agreement or any other agreement delivered pursuant hereto, (iii) any
liabilities which the Stockholders may incur due to Pentacon's or Newco's or the
Surviving Corporation's failure to pay, perform or discharge when due any of the
liabilities and obligations of the Company for which Pentacon, Newco or the
Surviving Corporation is responsible pursuant to this Agreement (except to the
extent that Pentacon or Newco has bona fide claims hereunder against the
Stockholders by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to Pentacon, Newco or any of the
Other Founding Companies contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to
Pentacon or Newco or any of the Other Founding Companies required to be stated
therein or necessary to make the statements therein not misleading.
-43-
<PAGE>
11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter
the "Indemnified Party") has received notice of or has actual knowledge of any
claim by a Person (including any governmental agency) not a party to this
Agreement ("Third Person"), or the commencement of any action or proceeding by a
Third Person, with respect to which the Indemnified Person would be entitled to
receive indemnification pursuant to Section 11, the Indemnified Party shall, as
a condition precedent to a claim with respect thereto being made against any
party obligated to provide indemnification pursuant to Section 11.1 or 11.2
hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party
written notice of such claim or the commencement of such action or proceeding.
Such notice shall state the nature and the basis of such claim and a reasonable
estimate of the amount thereof. The Indemnifying Party shall have the right to
defend and settle, at its own expense and by its own counsel, any such matter so
long as the Indemnifying Party pursues the same in good faith and diligently,
provided that the Indemnifying Party shall not settle any criminal proceeding
without the written consent of the Indemnified Party. If the Indemnifying Party
undertakes to defend or settle, it shall promptly notify the Indemnified Party
of its intention to do so, and the Indemnified Party shall cooperate with the
Indemnifying Party and its counsel in the defense thereof and in any settlement
thereof. Such cooperation shall include, but shall not be limited to, furnishing
the Indemnifying Party with any books, records or information reasonably
requested by the Indemnifying Party that are in the Indemnified Party's
possession or control. All Indemnified Parties shall use the same counsel, which
shall be the counsel selected by Indemnifying Party, provided that if counsel to
the Indemnifying Party shall have a conflict of interest that prevents counsel
for the Indemnifying Party from representing Indemnified Party, Indemnified
Party shall have the right to participate in such matter through counsel of its
own choosing and Indemnifying Party will reimburse the Indemnified Party for the
reasonable expenses of its counsel. After the Indemnifying Party has notified
the Indemnified Party of its intention to undertake to defend or settle any such
asserted liability, and for so long as the Indemnifying Party diligently pursues
such defense through appropriate proceedings, the Indemnifying Party shall not
be liable for any additional legal expenses incurred by the Indemnified Party in
connection with any defense or settlement of such asserted liability, except (i)
as set forth in the preceding sentence and (ii) to the extent such participation
is requested by the Indemnifying Party, in which event the Indemnified Party
shall be reimbursed by the Indemnifying Party for reasonable additional legal
expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept
a final and complete settlement of any such Third Person claim and the
Indemnified Party refuses to consent to such settlement, then the Indemnifying
Party's liability under this Section with respect to such Third Person claim
shall be limited to the amount so offered in settlement by said Third Person.
Upon agreement as to such settlement between said Third Person and the
Indemnifying Party, the Indemnifying Party shall, in exchange for a complete
release from the Indemnified Party, promptly pay to the Indemnified Party the
amount agreed to in such settlement and the Indemnified Party shall, from that
moment on, bear full responsibility for any additional costs of defense which it
subsequently incurs with respect to such claim and all additional costs of
settlement or judgment. If the Indemnifying Party does not undertake to defend
such matter to which the Indemnified Party is entitled to indemnification
hereunder, or fails diligently to pursue such defense, the Indemnified Party may
undertake such defense through counsel of its choice, at the cost and expense of
the Indemnifying Party, and the Indemnified Party may settle such matter, and
the Indemnifying Party shall reimburse the
-44-
<PAGE>
Indemnified Party for the amount paid in such settlement and any other
liabilities or expenses incurred by the Indemnified Party in connection
therewith, provided, however, that under no circumstances shall the Indemnified
Party settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
All settlements hereunder shall effect a complete release of the Indemnified
Party, unless the Indemnified Party otherwise agrees in writing. The parties
hereto will make appropriate adjustments for insurance proceeds in determining
the amount of any indemnification obligation under this Section.
11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this
Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any
action seeking damages or any other form of monetary relief brought by any party
to this Agreement against another party, provided that, nothing herein shall be
construed to limit the right of a party, in a proper case pursuant to Section
14.3 or otherwise, to seek injunctive or other equitable relief (except for
rescission which shall not be available) for a breach or threatened breach of
this Agreement. Any indemnity payment under this Section 11 shall be treated as
an adjustment to the exchange consideration for tax purposes unless a final
determination (which shall include the execution of a Form 870-AD or successor
form) with respect to the indemnified party or any of its affiliate causes any
such payment not to be treated as an adjustment to the exchange consideration
for U.S. Federal Income Tax purposes.
(b) Nothing in this Article 11 shall restrict the Stockholders
from subrogation or seeking reimbursement from third parties other than the
Company.
11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim for indemnification hereunder against
the Stockholders after the applicable Expiration Date and in no event until such
time as, and solely to the extent that, the aggregate of all claims which such
persons may have against the Stockholders shall exceed the greater of 1% of the
value of the total consideration (including stock and cash) received by the
Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and
then only to the extent of the excess over the Indemnification Threshold.
Stockholders shall not assert any claim for indemnification hereunder against
Pentacon or Newco after the applicable Expiration Date and in no event until
such time as, and solely to the extent that, the aggregate of all claims which
Stockholders may have against Pentacon or Newco shall exceed the Indemnification
Threshold, and then only to the extent of the excess over the Indemnification
Threshold.
The Indemnification Threshold shall not be applicable to any breach of
covenants made by the Stockholders in this Agreement which require an action or
inaction by such Stockholders from and after the Closing Date (I.E., Article 10,
Article 11, Article 13, Article 14, Article 17 and Section 18.1). No person
shall be entitled to indemnification under this Section 11 if, and only to the
extent that such person's claim for indemnification is directly related to a
breach by such person of any representation, warranty, covenant or other
agreement set forth in this Agreement.
-45-
<PAGE>
The pursuit by Pentacon, the Surviving Corporation, Newco or the
Company, of any claim for indemnification hereunder against a Stockholder shall
require a majority vote of the board of directors of Pentacon, excluding for the
purposes of such vote any director who was previously a stockholder of the
Company or is a representative of the stockholders of the Company as existing
prior to the closing of the transaction contemplated in this Agreement.
Notwithstanding any other term of this Agreement, no Stockholder shall
be liable (in the aggregate from time to time taking into account all
indemnification payments made hereunder) under this Section 11 (a) for any
amount which is less than or equal to the Indemnification Threshold (and then
only to the extent of the excess over the Indemnification Threshold) or (b) for
any amount which exceeds the amount of proceeds (including cash and stock)
received by such Stockholder in connection with the Merger. Each Stockholder
shall have the option of satisfying his or her indemnity obligation in cash
and/or by returning or transferring shares of Pentacon Stock to Pentacon or any
other Indemnified Party. For purposes of calculating the value of the Pentacon
Stock received by a Stockholder and satisfying any indemnity claim by returning
or transferring Pentacon Stock, Pentacon Stock shall be valued at its initial
public offering price as set forth in the Registration Statement.
Notwithstanding any of the foregoing provisions of this Section 11 that
might be read to the contrary, it is the agreement of the parties that the
Indemnification Threshold be given full effect under all circumstances.
Accordingly, insofar as any of the foregoing provisions of this Section 11 may
hold harmless an Indemnified Party before the Indemnification Threshold has been
met, then Pentacon and the Stockholders shall cooperate in good faith to
establish an equitable procedure pursuant to which Pentacon reimburses or causes
the reimbursement to the affected Stockholder(s) of all expenditures and
payments by Stockholders that are intended to be absorbed and borne by any
Indemnified Parties as a result of the prior application of the Indemnification
Threshold or otherwise takes such action as may be reasonably necessary to give
effect to the Indemnification Threshold.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION. This Agreement may be terminated at any time prior to
the Consummation Date solely:
(i) by mutual consent of the boards of directors of Pentacon
and the Company;
(ii) by the Stockholders or the Company (acting through its
board of directors), on the one hand, or by Pentacon (acting through
its board of directors), on the other hand, if the transactions
contemplated by this Agreement to take place at the Closing shall not
have been consummated by February 28, 1998, unless the failure of such
transactions to be consummated is due to the willful failure of the
party seeking to terminate this Agreement to perform any of its
obligations under this Agreement to the extent required to be performed
by it prior to or on the Consummation Date;
-46-
<PAGE>
(iii) by the Stockholders or Company, on the one hand, or by
Pentacon, on the other hand, if a material breach or default shall be
made by the other party in the observance or in the due and timely
performance of any of the covenants or agreements contained herein, and
the curing of such default shall not have been made on or before the
Consummation Date or by the Stockholders or the Company, if the
conditions set forth in Section 8 hereof have not been satisfied or
waived as of the Closing Date or the Consummation Date, as applicable,
or by Pentacon, if the conditions set forth in Section 9 hereof have
not been satisfied or waived as of the Closing Date or the Consummation
Date, as applicable;
(iv) pursuant to Section 7.8 hereof;
(v) pursuant to the termination provisions contained in
Section 4 hereof; or
(vi) pursuant to the other express terms of this Agreement.
12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of
five (5) years following the Consummation Date, for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) except as disclosed in Schedule 13.1, engage, as an
officer, director, shareholder, owner, partner, joint venturer, or in a
managerial capacity, whether as an employee, independent contractor,
consultant or advisor, or as a sales representative, in any fastener
business or operation or related services business in direct
competition with Pentacon or any of the subsidiaries thereof, within
100 miles of where the Company or any of its subsidiaries conducted
business prior to the effectiveness of the Merger (the "Territory");
(ii) except with the prior written consent of Pentacon, call
upon any person who is, at that time, within the Territory, an employee
of Pentacon or any subsidiary thereof for the purpose or with the
intent of enticing such employee away from or out of the employ of
Pentacon or any subsidiary thereof;
(iii) call upon any person or entity which is, at that time,
or which has been, within one (1) year prior to the Consummation Date,
a customer of Pentacon or any subsidiary
-47-
<PAGE>
thereof, of the Company or of any of the Other Founding Companies
within the Territory for the purpose of soliciting or selling products
or services that are in direct competition with Pentacon within the
Territory;
(iv) call upon any prospective acquisition candidate, on any
Stockholder's own behalf or on behalf of any competitor in the fastener
business, which candidate, to the actual knowledge of such Stockholder
after due inquiry, was called upon by Pentacon or any subsidiary
thereof or for which, to the actual knowledge of such Stockholder after
due inquiry, Pentacon or any subsidiary thereof made an acquisition
analysis, for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of
the Company to any person, firm, partnership, corporation or business
for any reason or purpose relating to the fastener business except to
the extent that the Company has in the past disclosed such information
to the public for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit any Stockholder from acquiring as a passive investment not more than
one percent (1%) of the capital stock of a competing business whose stock is
traded on a national securities exchange or over-the counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
Pentacon as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to Pentacon for which it
would have no other adequate remedy, each Stockholder agrees that the foregoing
covenant may be enforced by Pentacon in the event of breach by such Stockholder,
by injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
Stockholders in light of the activities and business of Pentacon and the
subsidiaries thereof on the date of the execution of this Agreement and the
current plans of Pentacon; but it is also the intent of Pentacon and the
Stockholders that such covenants be construed and enforced in accordance with
the changing activities; business and locations of Pentacon and its subsidiaries
throughout the term of this covenant. During the term of this covenant, if
Pentacon or one of its subsidiaries engages in new and different activities,
enters a new business or establishes new locations for its current activities or
business in addition to or other than the activities or business it is currently
conducting in the locations currently established therefor, then the
Stockholders will be precluded from soliciting the customers or employees of
such new activities or business or from such new location and from directly
competing with such new activities or business within 100 miles of its
then-established operating location(s) through the term of this covenant.
-48-
<PAGE>
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any Stockholder
against Pentacon or any subsidiary thereof, whether predicated on this Agreement
or otherwise (except for a claim or cause of action based upon Pentacon's
failure to pay or otherwise tender any of the consideration due to the
Stockholders hereunder), shall not constitute a defense to the enforcement by
Pentacon of such covenants. It is specifically agreed that the period of five
(5) years stated at the beginning of this Section 13, during which the
agreements and covenants of each Stockholder made in this Section 13 shall be
effective, shall be computed by excluding from such computation any time during
which such Stockholder is in violation of any provision of this Section 13. The
covenants contained in Section 13 shall not be affected by any breach of any
other provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The Company and the Stockholders hereby agree that
this covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDERS. The Stockholders recognize and acknowledge that they
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the Company, the Other Founding Companies,
and/or Pentacon, such as operational policies, and pricing and cost policies
that are valuable, special and unique assets of the Company's, the Other
Founding Companies' and/or Pentacon's respective businesses. The Stockholders
agree that they will not disclose such confidential information to any person,
firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of Pentacon, (b) following
the Closing, such information may be disclosed by the Stockholders as is
required in the course of performing their duties for Pentacon or the Surviving
Corporation and (c) to counsel and other advisers, provided that such advisers
(other than counsel) agree to the confidentiality provisions of this Section
14.1, unless (i) such information becomes known to the public generally through
no fault of the Stockholders, (ii) disclosure is required by law or the order of
any governmental authority under color of law, provided, that prior to
disclosing any information pursuant to this clause (ii), the Stockholders shall,
if possible, give prior written notice thereof to Pentacon and provide Pentacon
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any of the Stockholders of the provisions of this Section,
Pentacon shall be entitled to an injunction restraining such
-49-
<PAGE>
Stockholders from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting Pentacon from
pursuing any other available remedy for such breach or threatened breach,
including the recovery of damages. In the event the transactions contemplated by
this Agreement are not consummated, Stockholders shall have none of the
above-mentioned restrictions on their ability to disseminate confidential
information with respect to the Company.
14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge
that they had in the past and currently have access to certain confidential
information of the Company, including, but not limited to, customer and prospect
lists, financial information, operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company's business.
Pentacon and Newco agree that, prior to the Consummation Date, or if the
transactions contemplated by this Agreement are not consummated, they will not,
appropriate or make use of any such information, whether for its own benefit or
the benefit of any other person or entity, for any purpose whatsoever (except
pending the Consummation Date, effecting the transactions contemplated hereby)
disclose such confidential information to any person, firm, corporation,
association or other entity for any purpose or reason whatsoever, except (a) to
authorized representatives of the Company, (b) to counsel and other advisers,
provided that such advisers (other than counsel) agree to the confidentiality
provisions of this Section 14.2, (c) to the Other Founding Companies and their
representatives pursuant to Section 7.1(a), unless (i) such information becomes
known to the public generally through no fault of Pentacon or Newco, (ii)
disclosure is required by law or the order of any governmental authority under
color of law, provided, that prior to disclosing any information pursuant to
this clause (ii), Pentacon and Newco shall, if possible, give prior written
notice thereof to the Company and the Stockholders and provide the Company and
the Stockholders with the opportunity to contest such disclosure, or (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party, and (d)
to the public to the extent necessary or advisable in connection with the filing
of the Registration Statement and the IPO and the securities laws applicable
thereto and to the operation of Pentacon as a publicly held entity after the
IPO. In the event of a breach or threatened breach by Pentacon or Newco of the
provisions of this Section, the Company and the Stockholders shall be entitled
to an injunction restraining Pentacon and Newco from disclosing, in whole or in
part, such confidential information. Nothing herein shall be construed as
prohibiting the Company and the Stockholders from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as
a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach or threatened breach by any of them of the foregoing
covenants, the covenant may be enforced against the other parties by injunctions
and restraining orders or other appropriate equitable relief, without posting
any bond or other security or having to prove irreparable harm or injury.
-50-
<PAGE>
14.4 SURVIVAL. The obligations of the parties under this Article 14
shall survive the termination of this Agreement for a period of five years from
the Consummation Date, or without limitation if the transactions contemplated
hereby are not consummated.
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except
for transfers to immediate family members who agree to be bound by the
restrictions set forth in this Section 15.1 (or trusts or partnerships for the
benefit of charities, the Stockholders, family members, the trustees or partners
of which so agree), for a period of one year from the Closing, except pursuant
to Section 17 hereof, none of the Stockholders shall sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any
shares of Pentacon Stock received by the Stockholders in the Merger. The
certificates evidencing the Pentacon Stock delivered to the Stockholders
pursuant to Section 3 of this Agreement will bear a legend substantially in the
form set forth below and containing such other information as Pentacon may deem
necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE
WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT)
AFTER THE DATE SPECIFIED ABOVE.
16. FEDERAL SECURITIES ACT REPRESENTATIONS
16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares
of Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement
have not been and will not be registered under the 1933 Act (except as provided
in Section 17 hereof) and therefore may not be resold without compliance with
the 1933 Act. The Pentacon Stock to be acquired by such Stockholders pursuant to
this Agreement is being acquired solely for their own respective accounts, for
investment purposes only, and with no present intention of distributing, selling
or otherwise disposing of it in connection with a distribution. The Stockholders
covenant, warrant and represent that none of the shares of Pentacon Stock issued
to such Stockholders will be offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the 1933 Act and the rules and regulations of the
SEC. All the Pentacon Stock shall bear the following legend in addition to the
legend required under Section 15 of this Agreement:
-51-
<PAGE>
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER
HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW.
16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear
the economic risk of an investment in the Pentacon Stock to be acquired pursuant
to this Agreement and can afford to sustain a total loss of such investment and
have such knowledge and experience in financial and business matters that they
are capable of evaluating the merits and risks of the proposed investment in the
Pentacon Stock. The Stockholders party hereto have had an adequate opportunity
to ask questions and receive answers from the officers of Pentacon concerning
any and all matters relating to the transactions described herein including,
without limitation, the background and experience of the current and proposed
officers and directors of Pentacon, the plans for the operations of the business
of Pentacon, the business, operations and financial condition of the Founding
Companies other than the Company, and any plans for additional acquisitions and
the like. The Stockholders have asked any and all questions in the nature
described in the preceding sentence and all questions have been answered to
their satisfaction.
17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing,
whenever Pentacon proposes to register any Pentacon Stock for its own or others
account under the 1933 Act for a public offering, other than (i) any shelf or
other registration of shares to be used as consideration for acquisitions of
additional businesses by Pentacon and (ii) registrations relating to employee
benefit plans, Pentacon shall give each of the Stockholders prompt written
notice of its intent to do so. Upon the written request of any of the
Stockholders given within 30 days after receipt of such notice, Pentacon shall
cause to be included in such registration all of the Pentacon Stock issued to
the Stockholders pursuant to this Agreement (including any stock issued as (or
issuable upon the conversion or exchange of any convertible security, warrant,
right or other security which is issued by Pentacon as) a dividend or other
distribution with respect to, or in exchange for, or in replacement of such
Pentacon Stock) which any such Stockholder requests, provided that Pentacon
shall have the right to reduce the number of shares included in such
registration to the extent that inclusion of such shares would, in the written
opinion of tax counsel to Pentacon or its independent auditors, reasonably be
likely to jeopardize the status of the transactions contemplated hereby and by
the Registration Statement as a tax-free organization under Section 351 of the
Code. In addition, if Pentacon is advised in writing in good faith by any
managing underwriter of an underwritten offering of the securities being offered
pursuant to any registration statement under this Section 17.1 that the number
of shares to be sold by persons other than Pentacon is greater than the number
of such shares which can be offered without adversely affecting the offering,
Pentacon may reduce pro rata the number of shares offered for the accounts of
such persons (based upon the number of shares held by such person) to a number
deemed satisfactory by such managing underwriter, provided, that, for each such
offering made by Pentacon after the IPO, such reduction shall be made first by
reducing the number of shares to be sold by persons other than Pentacon, the
-52-
<PAGE>
Stockholders and the Stockholders of the Other Founding Companies (collectively,
the Stockholders and the Stockholders of the other Founding Companies being
referred to herein as the "Founding Stockholders"), and thereafter, if a further
reduction is required, by reducing the number of shares to be sold by the
Founding Stockholders.
17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register
shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement
with respect to such shares and use its best efforts to cause such
registration statement to become effective (provided that before filing
a registration statement or prospectus or any amendments or supplements
or term sheets thereto, Pentacon will furnish a representative of the
Stockholders with copies of all such documents proposed to be filed) as
promptly as practical;
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than 120 days;
(iii) Furnish to each Stockholder who so requests such number
of copies of such registration statement, each amendment and supplement
thereto and the prospectus included in such registration statement
(including each preliminary prospectus and any term sheet associated
therewith), and such other documents as such Stockholder may reasonably
request in order to facilitate the disposition of the relevant shares;
(iv) Use its best efforts to register or qualify the
securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Stockholders, and to keep such registration
or qualification effective during the period such registration
statement is to be kept effective, provided that Pentacon shall not be
required to become subject to taxation, to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions;
(v) Cause all such shares of Pentacon Stock to be listed or
included on any securities exchanges or trading systems on which
similar securities issued by Pentacon are then listed or included;
(vi) Notify each Stockholder at any time when a prospectus
relating thereto is required to be delivered under the 1933 Act within
the period that Pentacon is required to keep the registration statement
effective of the happening of any event as a result of which the
prospectus included in such registration statement, together with any
associated term sheet, contains an untrue statement of a material fact
or omits any fact necessary to make the statement therein not
misleading, and, at the request of such Stockholder, Pentacon will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the
-53-
<PAGE>
purchasers of the covered shares, such prospectus will not contain an
untrue statement of material fact or omit to state any fact necessary
to make the statements therein not misleading.
All expenses incurred in connection with the registration under this
Article 17 (including all registration, filing, qualification, legal, printer
and accounting fees, but excluding underwriting commissions and discounts),
shall be borne by Pentacon.
17.3 INDEMNIFICATION.
(a) In connection with any registration hereunder, Pentacon
shall indemnify, to the extent permitted by law, each Stockholder against all
losses, claims, damages, liabilities and expenses arising out of or resulting
from any untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or associated term
sheet or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading except insofar as the same are caused by or contained in or omitted
from any information furnished in writing to Pentacon by such indemnified party
expressly for use therein or by any indemnified parties' failure to deliver a
copy of the registration statement or prospectus or any amendment or supplements
thereto after Pentacon has furnished such Indemnified Party with a sufficient
number of copies of the same.
(b) In connection with any registration hereunder, each
Stockholder shall furnish to Pentacon in writing such information as is
reasonably requested by Pentacon for use in any such registration statement or
prospectus and will indemnify, to the extent permitted by law, Pentacon, its
directors and officers and each person who controls Pentacon (within the meaning
of the 1933 Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement or material fact or any
omission or alleged omission of a material fact required to be stated in the
registration statement or prospectus or any amendment thereof or supplement
thereto necessary to make the statements therein not misleading, but only to the
extent that such untrue statement or omission is contained in information so
furnished in writing by such Stockholder specifically for use in preparing the
registration statement. Notwithstanding the foregoing, the liability of a
Stockholder under this Section 17.3 shall be limited to an amount equal to the
net proceeds actually received by such Stockholder from the sale of the relevant
shares covered by the registration statement.
(c) Any person entitled to indemnification under this Section
will (i) give prompt notice to the indemnifying party of any claim with respect
to which it seeks indemnification and (ii) unless in such indemnified parties'
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. Any failure to give prompt notice shall
deprive a party of its right to indemnification hereunder only to the extent
that such failure shall have adversely affected the indemnifying party. If the
defense of any claim is assumed, the indemnifying party will not be
-54-
<PAGE>
subject to any liability for any settlement made without its consent (but such
consent shall not be unreasonably withheld). An indemnifying party who is not
entitled or elects not to assume the defense of a claim, will not be obligated
to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party, a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.
17.4 UNDERWRITING AGREEMENT. In connection with each registration
pursuant to Section 17.1 covering an underwritten registered offering, Pentacon
and each participating holder agree to enter into a written agreement with the
managing underwriters in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
managing underwriters and companies of Pentacon's size and investment stature,
including indemnification.
17.5 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the SEC that may permit the sale of Pentacon
stock to the public without registration, Pentacon agrees to use its
commercially reasonable efforts to:
(i) make and keep public information regarding Pentacon
available as those terms are understood and defined in Rule 144 under
the 1933 Act for a period of four years beginning 90 days following the
effective date of the Registration Statement;
(ii) file with the SEC in a timely manner all reports and
other documents required of Pentacon under the 1933 Act and the 1934
Act at any time after it has become subject to such reporting
requirements; and
(iii) so long as a Stockholder owns any restricted Pentacon
Common Stock, furnish to each Stockholder forthwith upon written
request a written statement by Pentacon as to its compliance with the
reporting requirements of Rule 144 (at any time from and after 90 days
following the effective date of the Registration Statement, and of the
1933 Act and the 1934 Act (any time after it has become subject to such
reporting requirements), a copy of the most recent annual or quarterly
report of Pentacon, and such other reports and documents so filed as a
Stockholder may reasonably request in availing itself of any rule or
regulation of the SEC allowing a Stockholder to sell any such shares
without registration.
18. GENERAL
18.1 COOPERATION. The Company, Stockholders, Pentacon and Newco shall
each deliver or cause to be delivered to the other on the Consummation Date, and
at such other times and places as shall be reasonably agreed to, such additional
instruments as the other may reasonably request for the purpose of carrying out
this Agreement. The Company will cooperate and use its reasonable efforts to
have the present officers, directors and employees of the Company cooperate with
Pentacon on and after the Consummation Date in furnishing information, evidence,
testimony and
-55-
<PAGE>
other assistance in connection with any tax return filing obligations, actions,
proceedings, arrangements or disputes of any nature with respect to matters
pertaining to all periods prior to the Consummation Date.
18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of Pentacon, and the heirs and legal representatives of the
Stockholders.
18.3 ENTIRE AGREEMENT. This Agreement (including the schedules,
exhibits and annexes attached hereto) and the documents delivered pursuant
hereto constitute the entire agreement and understanding among the Stockholders,
the Company, Newco and Pentacon and supersede any prior agreement and
understanding relating to the subject matter of this Agreement. This Agreement,
upon execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only (i)
pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a
written instrument executed by the Stockholders, the Company, Newco and
Pentacon, acting through their respective officers or trustees, duly authorized
by their respective Boards of Directors. Any disclosure made on any Schedule
delivered pursuant hereto shall be deemed to have been disclosed for purposes of
any other Schedule required hereby, provided that the Company shall make a good
faith effort to cross reference disclosure, as necessary or advisable, between
related Schedules, and provided further that the failure to do so will not
affect the validity of such disclosure.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each
party represents and warrants that it employed no broker or agent in connection
with this transaction and agrees to indemnify the other parties hereto against
all loss, cost, damages or expense arising out of claims for fees or commission
of brokers employed or alleged to have been employed by such indemnifying party.
18.6 EXPENSES. Whether or not the transactions herein contemplated
shall be consummated, Pentacon will pay the fees, expenses and disbursements of
Pentacon and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by Pentacon under this Agreement, including the
fees and expenses of Ernst & Young LLP, Andrews & Kurth L.L.P., and any other
person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures
II, L.C., and the costs of preparing the Registration Statement. Except as
otherwise agreed in writing by Pentacon, each Stockholder shall pay their
respective fees, expenses and disbursements of counsel and other professionals
in connection with this transaction and shall pay all sales, use, transfer, real
property
-56-
<PAGE>
transfer, recording, gains, stock transfer and other similar taxes and fees
("Transfer Taxes") imposed in connection with the Merger, other than Transfer
Taxes, if any, imposed by the State of Delaware. Each Stockholder shall file all
necessary documentation and Returns with respect to such Transfer Taxes. In
addition, each Stockholder acknowledges that he, and not the Company or
Pentacon, will pay all taxes due upon receipt of the consideration payable
pursuant to Section 2 hereof. The Stockholders acknowledge that the risks of the
transactions contemplated hereby include tax risks, with respect to which the
Stockholders are relying solely on the opinion contemplated by Section 8.12
hereof.
18.7 NOTICES. All notices of communication required or permitted
hereunder shall be in writing and may be given by depositing the same in United
States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the same
in person to an officer or agent of such party.
(a) If to Pentacon, or Newco, addressed to them at:
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
with copies to:
Bruce Taten, Esquire
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
and
Christopher S. Collins, Esquire
Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
(b) If to the Stockholders, addressed to them at their addresses set
forth on Annex II, with copies to:
Matthew S. Brown
Katten, Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
(c) If to the Company, addressed to it at:
-57-
<PAGE>
Jack L. Fatica
AXS Solutions, Inc.
1926 Peach Street
Erie, Pennsylvania 16502
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the State of Delaware.
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties made herein and at the time
of the Closing or in writing delivered pursuant to the provisions of this
Agreement shall survive the consummation of the transactions contemplated hereby
and any examination on behalf of the parties until the applicable Expiration
Date.
18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 TIME. Time is of the essence with respect to this Agreement.
18.12 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section
11.4, no right, remedy or election given by any term of this Agreement shall be
deemed exclusive but each shall be cumulative with all other rights, remedies
and elections available at law or in equity.
18.14 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
-58-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
PENTACON, INC.
By:_______________________
Mark E. Baldwin
Chief Executive Officer
AXS SOLUTIONS ACQUISITION
COMPANY
By:_______________________
Name: Mark E. Baldwin
Title: President
AXS SOLUTIONS, INC.
By:_______________________
Name: Jack L. Fatica
Title: Chief Executive
Officer
STOCKHOLDERS:
__________________________
JACK L. FATICA
__________________________
JEFFREY P. FATICA
__________________________
ROBERT HOYT
-59-
<PAGE>
__________________________
NATALIE L. RANUS
JACK C. FATICA TRUST
By:_______________________
Name:_____________________
Title:____________________
JUSTIN P. FATICA TRUST
By:_______________________
Name:_____________________
Title:____________________
RYAN A. FATICA TRUST
By:_______________________
Name:_____________________
Title:____________________
OAK RIDGE TRUST
By:_______________________
Name:_____________________
Title:____________________
-60-
<PAGE>
JASON P. FATICA TRUST
By:_______________________
Name:_____________________
Title:____________________
-61-
<PAGE>
ANNEX I (AXS)
CONSIDERATION TO BE PAID TO THE STOCKHOLDERS
STOCKHOLDER SHARES OF COMMON STOCK
OF PENTACON, INC. MERGER CASH
----------- -------------
Natalie L. Ranus ....................... 92,782 $ 395,737.61
Jack C. Fatica Trust ................... 54,578 $ 232,786.83
Justin P. Fatica Trust ................. 38,205 $ 162,950.78
Jason P. Fatica Trust .................. 92,782 $ 395,737.61
Ryan A. Fatica Trust ................... 92,782 $ 395,737.61
Oak Ridge Trust ........................ 327,466 $1,396,720.98
Jeffrey P. Fatica ...................... 281,621 $1,201,180.05
Jack L. Fatica ......................... 802,656 $3,423,518.31
Robert Hoyt ............................ 36,385 $ 155,191.22
----------- -------------
1,819,257 $7,759,561.00
=========== =============
MINIMUM VALUE: ......................... $26,370,560
<PAGE>
ANNEX II
AXS SOLUTIONS, INC. STOCK OWNERSHIP
Natalie L. Ranus 500 Shares
Jack C. Fatica Trust 300 Shares
Justin P. Fatica Trust 220 Shares
Jason P. Fatica Trust 510 Shares
Ryan A. Fatica Trust 510 Shares
Oak Ridge Trust 1800 Shares
Jeffery P. Fatica 1548 Shares
Jack L. Fatica 4412 Shares
Robert Hoyt 200 Shares
See attachment for stockholder addresses.
-62-
EXHIBIT 10.3
AGREEMENT AND PLAN OF ORGANIZATION
dated as of the 1st day of December 1997
by and among
PENTACON, INC.
CAPITOL BOLT & SUPPLY ACQUISITION COMPANY
(a subsidiary of Pentacon, Inc.)
CAPITOL BOLT & SUPPLY, INC.
and
the STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
Page
RECITALS.....................................................................1
1. THE MERGER.............................................................6
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................6
1.2 EFFECTIVE TIME OF THE MERGER.....................................6
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS
OF SURVIVING CORPORATION.........................................6
1.4 EFFECT OF MERGER.................................................7
2. CONVERSION OF STOCK....................................................7
2.1 MANNER OF CONVERSION.............................................7
3. DELIVERY OF MERGER CONSIDERATION.......................................8
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8
4. CLOSING................................................................9
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.....9
5.1 DUE ORGANIZATION................................................10
5.2 AUTHORIZATION...................................................10
5.3 CAPITAL STOCK OF THE COMPANY....................................10
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10
5.5 NO BONUS SHARES.................................................11
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................11
5.7 PREDECESSOR STATUS; ETC.........................................11
5.8 SPIN-OFF BY THE COMPANY.........................................11
5.9 FINANCIAL STATEMENTS............................................11
5.10 LIABILITIES AND OBLIGATIONS.....................................12
5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12
5.12 PERMITS AND INTANGIBLES.........................................13
5.13 ENVIRONMENTAL MATTERS...........................................13
5.14 PERSONAL PROPERTY...............................................14
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15
5.16 REAL PROPERTY...................................................16
5.17 INSURANCE.......................................................16
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............17
-i-
<PAGE>
5.19 EMPLOYEE PLANS..................................................17
5.20 COMPLIANCE WITH ERISA...........................................18
5.21 CONFORMITY WITH LAW; LITIGATION.................................19
5.22 TAXES...........................................................19
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21
5.25 ABSENCE OF CHANGES..............................................21
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................23
5.27 VALIDITY OF OBLIGATIONS.........................................23
5.28 RELATIONS WITH GOVERNMENTS......................................23
5.29 DISCLOSURE......................................................23
5.30 PROHIBITED ACTIVITIES...........................................24
5.31 NO WARRANTIES OR INSURANCE......................................24
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS....................................................24
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................25
5.34 PREEMPTIVE RIGHTS...............................................25
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................25
6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25
6.1 DUE ORGANIZATION................................................25
6.2 AUTHORIZATION...................................................26
6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................26
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26
6.5 SUBSIDIARIES....................................................26
6.6 FINANCIAL STATEMENTS............................................27
6.7 LIABILITIES AND OBLIGATIONS.....................................27
6.8 CONFORMITY WITH LAW; LITIGATION.................................27
6.9 NO VIOLATIONS...................................................27
6.10 VALIDITY OF OBLIGATIONS.........................................28
6.11 PENTACON STOCK..................................................28
6.12 NO SIDE AGREEMENTS..............................................29
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................29
6.14 DISCLOSURE......................................................29
7. COVENANTS PRIOR TO CLOSING............................................29
7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29
7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................30
7.3 PROHIBITED ACTIVITIES...........................................31
7.4 NO SHOP.........................................................32
7.5 NOTICE TO BARGAINING AGENTS.....................................33
7.6 AGREEMENTS......................................................33
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE
COMPANY.........................................................33
7.8 AMENDMENT OF SCHEDULES..........................................34
-ii-
<PAGE>
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............35
7.10 FINAL FINANCIAL STATEMENTS......................................35
7.11 FURTHER ASSURANCES..............................................35
7.12 AUTHORIZED CAPITAL..............................................35
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........36
7.14 PRE-CLOSING NOTIFICATIONS.......................................36
7.15 PAYMENT OF INDEBTEDNESS.........................................36
7.16 MINIMUM VALUE...................................................36
7.17 DIRECTORS. ....................................................36
7.18 TRANSACTION REPORTING...........................................37
7.19 PERMITS.........................................................37
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.......37
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......37
8.2 SATISFACTION....................................................37
8.3 NO LITIGATION...................................................38
8.4 OPINION OF COUNSEL..............................................38
8.5 REGISTRATION STATEMENT..........................................38
8.6 CONSENTS AND APPROVALS..........................................38
8.7 GOOD STANDING CERTIFICATES......................................38
8.8 NO MATERIAL ADVERSE CHANGE......................................38
8.9 CLOSING OF IPO..................................................38
8.10 SECRETARY'S CERTIFICATE.........................................38
8.11 EMPLOYMENT AGREEMENTS...........................................39
8.12 TAX MATTERS.....................................................39
8.13 EXCHANGE LISTING................................................39
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO.............39
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....39
9.2 NO LITIGATION...................................................40
9.3 SECRETARY'S CERTIFICATE.........................................40
9.4 NO MATERIAL ADVERSE EFFECT......................................40
9.5 STOCKHOLDERS' RELEASE...........................................40
9.6 SATISFACTION....................................................40
9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................40
9.8 OPINION OF COUNSEL..............................................41
9.9 CONSENTS AND APPROVALS..........................................41
9.10 GOOD STANDING CERTIFICATES......................................41
9.11 REGISTRATION STATEMENT..........................................41
9.12 EMPLOYMENT AGREEMENTS...........................................41
-iii-
<PAGE>
9.13 CLOSING OF IPO..................................................41
9.14 FIRPTA CERTIFICATE..............................................41
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............41
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................41
10.2 PREPARATION AND FILING OF TAX RETURNS...........................42
10.3 DIRECTORS.......................................................42
11. INDEMNIFICATION.......................................................43
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.....................43
11.2 INDEMNIFICATION BY PENTACON.....................................44
11.3 THIRD PERSON CLAIMS.............................................44
11.4 EXCLUSIVE REMEDY................................................45
11.5 LIMITATIONS ON INDEMNIFICATION..................................46
12. TERMINATION OF AGREEMENT..............................................47
12.1 TERMINATION.....................................................47
12.2 LIABILITIES IN EVENT OF TERMINATION.............................48
13. NONCOMPETITION........................................................48
13.1 PROHIBITED ACTIVITIES...........................................48
13.2 DAMAGES.........................................................49
13.3 REASONABLE RESTRAINT............................................49
13.4 SEVERABILITY; REFORMATION.......................................49
13.5 INDEPENDENT COVENANT............................................49
13.6 MATERIALITY.....................................................50
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................50
14.1 STOCKHOLDERS....................................................50
14.2 PENTACON AND NEWCO..............................................50
14.3 DAMAGES.........................................................51
14.4 SURVIVAL........................................................51
15. TRANSFER RESTRICTIONS.................................................51
15.1 TRANSFER RESTRICTIONS...........................................51
16. FEDERAL SECURITIES ACT REPRESENTATIONS................................52
16.1 COMPLIANCE WITH LAW.............................................52
16.2 ECONOMIC RISK; SOPHISTICATION...................................52
17. REGISTRATION RIGHTS...................................................53
17.1 PIGGYBACK REGISTRATION RIGHTS...................................53
-iv-
<PAGE>
17.2 REGISTRATION PROCEDURES.........................................53
17.3 INDEMNIFICATION.................................................54
17.4 UNDERWRITING AGREEMENT..........................................55
17.5 RULE 144 REPORTING..............................................56
18. GENERAL...............................................................56
18.1 COOPERATION.....................................................56
18.2 SUCCESSORS AND ASSIGNS..........................................56
18.3 ENTIRE AGREEMENT................................................57
18.4 COUNTERPARTS....................................................57
18.5 BROKERS AND AGENTS..............................................57
18.6 EXPENSES........................................................57
18.7 NOTICES.........................................................58
18.8 GOVERNING LAW...................................................59
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................59
18.10 EXERCISE OF RIGHTS AND REMEDIES.................................59
18.11 TIME............................................................59
18.12 REFORMATION AND SEVERABILITY....................................59
18.13 REMEDIES CUMULATIVE.............................................59
18.14 CAPTIONS........................................................59
-v-
<PAGE>
ANNEXES
Annex I - Consideration to Be Paid to Stockholders and Other
Stockholders
Annex II - Stockholders and Stock Ownership of the Company
Annex III - Certificate of Incorporation and By-Laws of Pentacon and
Newco
Annex IV - Form of Opinion of Counsel to Pentacon and Newco
Annex V - Form of Opinion of Counsel to Company and Stockholders
Annex VI - Form of Founder Employment Agreement
-vi-
<PAGE>
SCHEDULES
5.1 Due Organization
5.2 Authorization
5.3 Capital Stock of the Company
5.4 Transactions in Capital Stock, Organization Accounting
5.5 No Bonus Shares
5.6 Subsidiaries
5.7 Predecessor Status; etc.
5.8 Spin-off by the Company
5.9 Financial Statements
5.10 Liabilities and Obligations
5.11 Accounts and Notes Receivable
5.12 Permits and Intangibles
5.13 Environmental Matters
5.14 Personal Property
5.15 Significant Customers; Material Contracts and Commitments
5.16 Real Property
5.17 Insurance
5.18 Compensation; Employment Agreements; Labor Matters
5.19 Employee Plans
5.20 Compliance with ERISA
5.21 Conformity with Law; Litigation
5.22 Taxes
5.23 No Violations, Consents, etc.
5.24 Government Contracts
5.25 Absence of Changes
5.26 Deposit Accounts; Powers of Attorney
5.30 Prohibited Activities
5.31 No Warranties or Insurance
5.32 Related Party Transactions
5.35 No Intention to Dispose of Pentacon Stock
6.3 Capital Stock of Pentacon and Newco
6.4 Options, Warrants and Rights
6.8 Litigation
6.9 No Violations
6.12 Side Agreements
7.2 Conduct of Business Pending Closing
7.3 Prohibited Activities
7.5 Notice to Bargaining Agents
7.6 Termination Agreements
7.15 Obligations to be Paid at Closing
9.7 Continuing Related Party Agreements
9.12 Employment Agreements
18.5 Brokers and Agents
-vii-
<PAGE>
AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of
the 1st day of December, 1997, by and among PENTACON, INC., a Delaware
corporation ("Pentacon"), CAPITOL BOLT & SUPPLY ACQUISITION COMPANY, a Delaware
corporation ("Newco"), CAPITOL BOLT & SUPPLY, INC., a Texas corporation (the
"Company"), and MARY E. McCLURE, INDIVIDUALLY and as CO-TRUSTEE OF THE EARL
MILTON McCLURE, JR. RESIDUARY TRUST (the "Stockholders"), who, together with the
other stockholders of the Company who are not party to this Agreement (the
"Other Stockholders"), are all the stockholders of the Company, who herein agree
as follows:
RECITALS
WHEREAS, Newco is a corporation duly organized and existing under the laws
of the State of Delaware, having been incorporated on November 26, 1997, solely
for the purpose of completing the transactions set forth herein, and is a wholly
owned subsidiary of Pentacon, a corporation organized and existing under the
laws of the State of Delaware;
WHEREAS, the respective boards of directors of Newco and the Company
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Newco merge with and into
the Company pursuant to this Agreement and the applicable provisions of the laws
of the States of Delaware and the State of Incorporation (as hereinafter
defined);
WHEREAS, Pentacon is entering into other separate agreements substantially
similar to this Agreement (the "Other Agreements"), each of which is entitled
"Agreement and Plan of Organization," with each of the Other Founding Companies
(as defined herein) and their respective stockholders in order to acquire
additional fasteners companies;
WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon
Plan of Organization;"
WHEREAS, the Stockholders and Other Stockholders and the boards of
directors and the stockholders of Pentacon, each of the Other Founding Companies
and each of the subsidiaries of Pentacon that are parties to the Other
Agreements have approved and adopted or prior to the Closing Date will adopt and
approve the Pentacon Plan of Organization as an integrated plan pursuant to
which the Stockholders, the Other Stockholders and the stockholders of each of
the other Founding Companies will transfer the capital stock of each of the
Founding Companies to Pentacon and the stockholders of each of the other
Founding Companies will acquire the stock of Pentacon (but not cash or other
property) as a tax-free transfer of property under Section 351 of the Code;
-1-
<PAGE>
WHEREAS, the Board of Directors of the Company has approved this Agreement
as part of the Pentacon Plan of Organization in order to transfer the capital
stock of the Company to Pentacon;
WHEREAS, unless the context otherwise requires, capitalized terms used in
this Agreement or in any schedule attached hereto and not otherwise defined
shall have the following meanings for all purposes of this Agreement:
"1933 ACT" means the Securities Act of 1933, as amended.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"ACQUIRED PARTY" means the Company, any subsidiary and any member of a
Relevant Group.
"ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware
companies wholly-owned by Pentacon prior to the Consummation Date.
"AFFILIATES" shall mean with respect to any person or entity, any other
person or entity that directly or indirectly, controls, is controlled, or is
under common control with such person or entity. For purposes hereof, control
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger
with respect to the Merger in such forms as may be required by the laws of the
State of Delaware and the State of Incorporation.
"BALANCE SHEET DATE" means August 31, 1997.
"CHARTER DOCUMENTS" has the meaning set forth in Section 5.1.
"CLOSING" has the meaning set forth in Section 4.
"CLOSING DATE" has the meaning set forth in Section 4.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY STOCK" has the meaning set forth in Section 2.1.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital
of this Agreement.
-2-
<PAGE>
"CONSUMMATION DATE" has the meaning set forth in Section 4.
"DELAWARE GCL" has the meaning set forth in Section 1.4.
"DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of
the Registration Statement, and any corrections thereto and supplemental
information delivered by Pentacon to the Company for delivery to the
Stockholders prior to the time this Agreement is delivered by the Company and
the Stockholders to Pentacon.
"EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger
becomes effective, which shall occur on the Consummation Date.
"ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13.
"ERISA" has the meaning set forth in Section 5.19.
"EXPIRATION DATE" has the meaning set forth in Section 5(A).
"FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii).
"FOUNDING COMPANIES" means:
Alatec Products, Inc., a California corporation;
AXS Solutions, Inc., a Delaware corporation;
Capitol Bolt & Supply, Inc., a Texas corporation;
Maumee Industries, Inc., an Indiana corporation; and
Sales Systems, Limited, a Pennsylvania corporation.
"HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c).
"INTERIM BALANCE SHEET" has the meaning set forth in Section 5.9(ii).
"IPO" means the initial public offering of Pentacon Stock pursuant to the
Registration Statement described herein.
"LICENSES" has the meaning set forth in Section 5.12.
-3-
<PAGE>
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the business,
operations, properties, assets or condition (financial or otherwise), of the
subject entity and its subsidiaries taken as a whole.
"MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a).
"MERGER" means the merger of Newco with and into the Company pursuant to
this Agreement and the applicable provisions of the laws of the State of
Delaware and the laws of the State of Incorporation.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"NEWCO STOCK" means the common stock, par value $.0l per share, of Newco.
"OTHER AGREEMENTS" has the meaning set forth in the third recital hereof.
"OTHER FOUNDING COMPANIES" means all of the Founding Companies other than
the Company.
"OTHER STOCKHOLDERS" means those persons or entities owning stock in the
Company other than the Stockholders.
"PBGC" has the meaning set forth in Section 5.19.
"PENTACON" has the meaning set forth in the first paragraph of this
Agreement.
"PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1
"PENTACON STOCK" means the common stock, par value $.01 per share, of
Pentacon.
"PERSON" means an individual, partnership, joint venture, corporation,
bank, trust, unincorporated organization or other entity.
"PRICING" means the date of determination by Pentacon and the Underwriters
of the public offering price of the shares of Pentacon Stock in the IPO; the
parties hereto contemplate that the Pricing shall take place on the Closing
Date.
"PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30.
"QUALIFIED PLANS" has the meaning set forth in Section 5.20.
-4-
<PAGE>
"REGISTRATION STATEMENT" means that certain registration statement on Form
S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued
in the IPO and all amendments thereto.
"RELEVANT GROUP" means the Company and any affiliated, combined,
consolidated, unitary or similar group of which the Company is or was a member.
"RETURNS" means any returns, reports or statements (including any
information returns) required to be filed for purposes of reporting, computing
or otherwise required in connection with a particular Tax.
"SCHEDULE" means each Schedule attached hereto, which shall reference the
relevant sections of this Agreement, on which parties hereto disclose
information as part of their respective representations, warranties and
covenants.
"SEC" means the United States Securities and Exchange Commission.
"STATE OF INCORPORATION" means the State of Texas.
"STOCKHOLDERS" has the meaning set forth in the first paragraph of this
Agreement.
"SUBSIDIARIES" means with respect to a person or entity, any corporation
or other entity in which such person or entity owns a 5% or greater ownership
interest.
"SURVIVING CORPORATION" has the meaning set forth in Section 1.2.
"TAX" OR "TAXES" means all federal, state, local or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, withholding, employment, excise, property, deed, stamp, alternative
or add on minimum, or other taxes, assessments, duties, fees, levies or other
governmental charges, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"UNDERWRITERS" means the prospective underwriters identified in the Draft
Registration Statement.
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(i).
-5-
<PAGE>
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and
delivered to Pentacon to be held for filing with the Secretary of State of the
State of Delaware and the Secretary of State (or other appropriate authority) of
the State of Incorporation on or effective as of the Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
Newco shall be merged with and into the Company in accordance with the Articles
of Merger and the separate existence of Newco shall cease. The Company shall be
the surviving party in the Merger and the Company is sometimes hereinafter
referred to as the "Surviving Corporation". As a result of the Merger, the
outstanding shares of capital stock of Newco and the Company shall be converted
or canceled in the manner provided in Section 2.
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
(i) the Certificate of Incorporation of the Company then in effect
shall be the Certificate of Incorporation of the Surviving Corporation
until changed as provided by law;
(ii) the By-laws of Newco then in effect shall become the By-laws of
the Surviving Corporation; and subsequent to the Effective Time of the
Merger, such By-laws shall be the By-laws of the Surviving Corporation
until they shall thereafter be duly amended (and such By-laws shall be
amended, if necessary, to comply with applicable state law);
(iii) the Board of Directors of the Surviving Corporation shall
consist of the persons who are on the Board of Directors of the Company
immediately prior to the Effective Time of the Merger, provided that Bruce
Taten shall become an additional director of the Surviving Corporation
effective as of the Effective Time of the Merger, and the number of
directors constituting the entire Board of Directors of the Company shall
be increased, if necessary, to accommodate the addition of such additional
director; the Board of Directors of the Surviving Corporation shall hold
office subject to the provisions of the laws of the State of Incorporation
and of the Certificate of Incorporation and By-laws of the Surviving
Corporation; and
(iv) the officers of the Company immediately prior to the Effective
Time of the Merger shall continue as the officers of the Surviving
Corporation in the same capacity or capacities, and effective upon the
Effective Time of the Merger Brian Fontana shall become an additional Vice
President and Bruce Taten will become the Secretary of the Surviving
Corporation, such officers to serve, subject to the provisions of the
Certificate of Incorporation and By-laws of the Surviving Corporation,
until their respective successors are duly elected and qualified.
-6-
<PAGE>
1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of
the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of
the State of Incorporation. Except as herein specifically set forth, the
identity, existence, purposes, powers, objects, franchises, privileges, rights
and immunities of the Company shall continue unaffected and unimpaired by the
Merger and the corporate franchises, existence and rights of Newco shall be
merged with and into the Company, and the Company, as the Surviving Corporation,
shall be fully vested therewith. At the Effective Time of the Merger, the
separate existence of Newco shall cease and, in accordance with the terms of
this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public, as well as of a private,
nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all taxes, including
those due and owing and those accrued, and all other choses in action, and all
and every other interest of or belonging to or due to the Company or Newco shall
be transferred to, and vested in, the Surviving Corporation without further act
or deed; and all property, rights and privileges, powers and franchises and all
and every other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Company and Newco; and the title to
any real estate, or interest therein, whether by deed or otherwise, under the
laws of the State of Incorporation vested in the Company or Newco, shall not
revert or be in any way impaired by reason of the Merger. Except as otherwise
provided herein, the Surviving Corporation shall thenceforth be responsible and
liable for all the liabilities and obligations of the Company and Newco and any
claim existing, or action or proceeding pending, by or against the Company or
Newco may be prosecuted as if the Merger had not taken place, or the Surviving
Corporation may be substituted in their place. Neither the rights of creditors
nor any liens upon the property of the Company or Newco shall be impaired by the
Merger, and all debts, liabilities and duties of the Company and Newco shall
attach to the Surviving Corporation, and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the Company ("Company Stock") into shares of
Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of
the Surviving Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of Company Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically shall be deemed to represent (1) the right to receive the
number of shares of Pentacon Stock set forth on Annex I hereto with
respect to such holder and (2) the right to receive the amount of cash set
forth on Annex I hereto with respect to such holder;
-7-
<PAGE>
(ii) all shares of Company Stock that are held by the Company as
treasury stock or which are otherwise issued but not outstanding shall be
canceled and retired and shall cease to exist and no shares of Pentacon
Stock or other consideration shall be delivered or paid in exchange
therefor; and
(iii) each share of Newco Stock issued and outstanding immediately
prior to the Effective Time of the Merger, shall, by virtue of the Merger
and without any action on the part of Pentacon, automatically be converted
into one fully paid and non-assessable share of common stock of the
Surviving Corporation which shall constitute all of the issued and
outstanding shares of common stock of the Surviving Corporation
immediately after the Effective Time of the Merger.
All Pentacon Stock received by the Stockholders and Other Stockholders
pursuant to this Agreement shall, except for restrictions on resale or transfer
described in Sections 15 and 16 hereof, have the same rights as all the other
shares of outstanding Pentacon Stock by reason of the provisions of the
Certificate of Incorporation of Pentacon or as otherwise provided by the
Delaware GCL. All Pentacon Stock received by the Stockholders and Other
Stockholders shall be issued and delivered to the Stockholders and Other
Stockholders free and clear of any liens, claims or encumbrances of any kind or
nature. All voting rights of such Pentacon Stock received by the Stockholders
and Other Stockholders shall be fully exercisable by the Stockholders and Other
Stockholders and the Stockholders and Other Stockholders shall not be deprived
nor restricted in exercising those rights. At the Effective Time of the Merger,
Pentacon shall have no class of capital stock issued and outstanding other than
the Pentacon Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date
the Stockholders and Other Stockholders, who are the holders of all of the
outstanding capital stock of the Company, shall, upon surrender of their
certificates, receive the respective number of shares of Pentacon Stock and the
amount of cash described on Annex I hereto, said cash to be payable by certified
check, or if hereafter agreed by the Stockholder or Other Stockholder and
Pentacon, by wire transfer.
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders and Other
Stockholders shall deliver to Pentacon at the Closing the certificates
representing Company Stock, duly endorsed in blank by the Stockholders and Other
Stockholders, or accompanied by blank stock powers, and with all necessary
transfer tax and other revenue stamps, acquired at the Stockholders' and Other
Stockholders' expense, affixed and canceled. The Stockholders and Other
Stockholders agree promptly to cure any deficiencies with respect to the
endorsement of the stock certificates or other documents of conveyance with
respect to such Company Stock or with respect to the stock powers accompanying
any Company Stock.
-8-
<PAGE>
4. CLOSING
At or prior to the Pricing, the parties shall take all actions reasonably
necessary to prepare to (i) effect the Merger (including the execution of the
Articles of Merger which shall be placed in escrow with Pentacon for filing with
the appropriate authorities effective on the Consummation Date, subject,
however, to satisfaction or waiver of all conditions precedent) and (ii) effect
the conversion and delivery of shares referred to in Section 3 hereof; provided,
that such actions shall not include the actual completion of the Merger or the
conversion and delivery of the shares and certified check(s) (or wire transfers)
referred to in Section 3 hereof, each of which actions shall only be taken upon
the Consummation Date as herein provided. In the event that there is no
Consummation Date and this Agreement automatically terminates as provided in
this Section 4 the Articles of Merger shall not be filed and shall be promptly
returned to the Stockholders. The taking of the actions described in clauses (i)
and (ii) above (the "Closing") shall take place on the closing date (the
"Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce
Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between
the Stockholders and Pentacon. On the Consummation Date (x) the Articles of
Merger shall be filed with the appropriate state authorities so that they shall
be, as early as practicable on the Consummation Date, effective and the Merger
shall thereby be effected, (y) all transactions contemplated by this Agreement,
including the conversion and delivery of shares, the delivery of a certified
check or checks (or wire transfers) in an amount equal to the cash portion of
the consideration which the Stockholders and the Other Stockholders shall be
entitled to receive pursuant to Section 3 hereof shall occur and be completed
and (z) the closing with respect to the IPO shall occur and be completed. The
date on which the actions described in the preceding clauses (x), (y) and (z)
occurs shall be referred to as the "Consummation Date." During the period from
the Closing Date to the Consummation Date, this Agreement may only be terminated
by the parties if the underwriting agreement in respect of the IPO is terminated
pursuant to the terms of such underwriting agreement. This Agreement shall also
in any event automatically terminate if the Consummation Date has not occurred
within 15 business days following the Closing Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
(A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.
Each of the Stockholders, jointly and severally, and the Company represent
and warrant that all of the following representations and warranties in this
Section 5(A) are true at the date of this Agreement, and that such
representations and warranties shall survive the Consummation Date for a period
of twenty-four months (the last day of such period being the "Expiration Date"),
except that the warranties and representations set forth in Sections 5.13 and
5.22 hereof shall survive until such time as the applicable statute of
limitations period has run or for five (5) years if there is no applicable
statute of limitations, which shall be deemed to be the Expiration Date for
Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall
mean and refer to the Company and all of its Subsidiaries, if any.
-9-
<PAGE>
5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and
organized, validly existing and in good standing under the laws of the State of
Incorporation, and has the requisite power and authority to carry on its
business as it is now being conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction in which failure to so
qualify would reasonably be expected to have a Material Adverse Effect on the
Company. Schedule 5.1 sets forth a list of all jurisdictions in which the
Company is authorized or qualified to do business. True, complete and correct
copies of (i) the Certificate of Incorporation and By-laws, each as amended, of
the Company (the "Charter Documents"), and (ii) the stock records of the Company
(including, without limitation, a copy of the Company's stock ledger), are all
attached to Schedule 5.1. The Company has delivered complete and correct copies
of all minutes of meetings, written consents and other written evidence, if any,
of deliberations of or actions taken by the Company's Board of Directors, any
Committees of the Board of Directors and stockholders of the Company during the
last five years.
5.2 AUTHORIZATION. (i) The officers or other representatives of the
Company executing this Agreement have the authority to enter into and bind the
Company to the terms of this Agreement and (ii) the Company has the full legal
right, power and authority to enter into this Agreement and the Merger. Prior to
the Closing, the directors and the shareholders of each class of stock will
approve this Agreement and the transactions contemplated hereby in all respects,
and copies of all such resolutions, certified by the Secretary or an Assistant
Secretary of the Company as being in full force and effect on the date hereof,
are attached hereto as Schedule 5.2. Mary E. McClure and the trustee of the
profit sharing plan have given their agreement to vote in favor of this
Agreement at the time of the meeting of the shareholders of the corporation
called for the purposes of voting on such Agreement.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company is as set forth on Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the Company are owned by the Stockholders and
Other Stockholders in the amounts set forth in Annex II. The Stockholders
represent and warrant that except as set forth on Schedule 5.3, the shares of
capital stock of the Company owned by each Stockholder and the Other
Stockholders are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the Stockholders and the Other Stockholders
and further, such shares were offered, issued, sold and delivered by the Company
in compliance with all applicable state and Federal laws concerning the issuance
of securities. Further, none of such shares were issued in violation of any
preemptive rights of any past or present stockholder of the Company.
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set
forth on Schedule 5.4, the Company has not acquired or redeemed any Company
Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option,
warrant, call, conversion right or commitment of any kind exists which obligates
the Company to issue any of its authorized but unissued capital stock; (ii) the
Company has no obligation (contingent or otherwise) to purchase, redeem or
otherwise
-10-
<PAGE>
acquire any of its equity securities or any interests therein or to pay any
dividend or make any distribution in respect thereof; and (iii) neither the
voting stock structure of the Company nor the relative ownership of shares among
any of its respective stockholders has been altered or changed in contemplation
of the Merger and/or the Pentacon Plan of Organization. Except as set forth in
Schedule 5.4, there are no voting trusts, proxies or other agreements or
understandings to which the Company or any of its stockholders is a party or is
bound with respect to the voting of any shares of capital stock of the Company.
5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the
shares of Company Stock was issued pursuant to awards, grants or bonuses in
contemplation of the Merger or the Pentacon Plan of Organization.
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on
Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule
5.6, the Company does not presently own, of record or beneficially, or control,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity nor is the Company, directly or indirectly, a participant in any joint
venture, partnership or other non-corporate entity.
5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all
predecessor companies of the Company, including the names of any entities
acquired by the Company (by stock purchase, merger or otherwise) or owned by the
Company or from whom the Company previously acquired material assets, in any
case, from the earliest date upon which any Stockholder or Other Stockholder
acquired his or her stock in any Company. Except as disclosed on Schedule 5.7,
the Company has not been, within such period of time, a subsidiary or division
of another corporation or a part of an acquisition which was later rescinded.
5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
Company or any other person or entity that is an Affiliate of the Company since
January 1, 1995.
5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following
financial statements are attached hereto as Schedule 5.9:
(i) the balance sheets of the Company as of October 31, 1995 and
1996 and the related statements of operations and retained earnings as
well as the related supplemental schedule of selling, general and
administrative expense for the two-year period ended October 31, 1996,
(such balance sheets, the related statements of operations and retained
earnings as well as the related supplemental schedule of selling, general
and administrative expense are referred to herein as the "Year-end
Financial Statements"); and
-11-
<PAGE>
(ii) the balance sheet of the Company as of August 31, 1997, (the
"Interim Balance Sheet"). The Year-end Financial Statements and the
Interim Balance Sheet are collectively called the "Financial Statements".
5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate
list as of the Balance Sheet Date of (i) all liabilities of the Company which
are not reflected on the Interim Balance Sheet at the Balance Sheet Date except
for those liabilities not required to be reflected or disclosed under generally
accepted accounting principles or F.A.S.B. 5 and which were not reflected or
disclosed in the Interim Balance Sheet, and (ii) all loan agreements, indemnity
or guaranty agreements, bonds, mortgages, pledges or other security agreements
to which the Company is a party or by which its properties may be bound. Except
as set forth on Schedule 5.10, since the Balance Sheet Date, the Company has not
incurred any liabilities or obligations of any kind, character or description,
whether accrued, absolute, secured or unsecured, contingent or otherwise, other
than liabilities incurred in the ordinary course of business and consistent with
past practices. The Company has also delivered to Pentacon on Schedule 5.10, in
the case of those contingent liabilities related to pending or threatened
litigation, a good faith and reasonable estimate (to the extent the Company can
reasonably make an estimate) of the maximum amount which the Company reasonably
expects may be payable and the amount, if any, accrued or reserved for each such
potential liability on the Company's Financial Statements. If no estimate is
provided, the estimate shall for purposes of this Agreement be deemed to be
zero. For each such contingent liability or liability for which the amount is
not fixed or is contested, the Company has provided to Pentacon the following
information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation relating thereto;
(b) amounts claimed and any other action or relief sought;
and
(c) name of claimant and all other parties to the claim,
suit or proceeding;
(ii) the name of each court or agency before which such claim, suit
or proceeding is pending; and
(iii) the date (if any) on which such claim, suit or proceeding was
instituted or the date (period) to which such claim relates.
5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate
list of the accounts and notes receivable of the Company, as of the Balance
Sheet Date, including any such amounts which are not reflected in the Interim
Balance Sheet as of the Balance Sheet Date, and including receivables from and
advances to employees and the Stockholders or Other Stockholders, which are
identified as such. Except to the extent reflected on Schedule 5.11, such
accounts, notes and other receivables are collectible in the amounts shown on
Schedule 5.11, net of reserves reflected in the Interim Balance Sheet of the
Balance Sheet Date.
-12-
<PAGE>
5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses,
franchises, permits and other governmental authorizations ("Licenses") necessary
to conduct the business of the Company and the Company has delivered to Pentacon
an accurate list and summary description (which is set forth on Schedule 5.12)
of all such material Licenses, including any material trademarks, trade names,
patents, patent applications and copyrights owned or held by the Company or any
of its employees (including interests in software or other technology systems,
programs and intellectual property). At or prior to the Closing, all rights to
such trademarks, trade names, patents, patent applications, copyrights and other
intellectual property held by the Stockholders, or their Affiliates will be
assigned or licensed to the Company for no additional consideration. The
Licenses and other rights listed on Schedule 5.12 are valid, and the Company has
not received any notice that any person intends to cancel, terminate or not
renew any such License or other right. The Company has conducted and is
conducting its business in compliance with the requirements, standards, criteria
and conditions set forth in the Licenses and other rights listed on Schedule
5.12 and is not in violation of any of the foregoing. Except as specifically
provided in Schedule 5.12, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded to the Company by, any such Licenses or other
rights. None of the Other Stockholders hold any Licenses used by the Company.
5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached
hereto, (i) the Company has conducted its businesses in compliance with all
applicable Environmental Laws, including, without limitation, having all
environmental permits, licenses and other approvals and authorizations necessary
for the operation of its business as presently conducted, (ii) none of the
properties owned by the Company contain any Hazardous Substance as a result of
any activity of the Company in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) the Company has not received any notices,
demand letters or requests for information from any Federal, state, local or
foreign governmental entity or third party indicating that the Company may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of its business, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or to the knowledge of the Stockholders threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (vi) no Hazardous
Substance has been disposed of, released or transported in violation of any
applicable Environmental Law from any properties owned by the Company as a
result of any activity of the Company during the time such properties were
owned, leased or operated by the Company, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analysis regarding
compliance or non-compliance with any applicable Environmental Law conducted by
or which are in the possession of or readily available to the Company relating
to the activities of the Company which are not listed on Schedule 5.13 attached
hereto prior to the date hereof, (viii) there are no underground storage tanks
on, in or under any properties owned by the Company and no underground storage
tanks have been closed or removed from any of such properties during the time
such properties were owned, leased or operated by the Company, (ix) there is no
asbestos or asbestos containing material present in any of the properties owned
by the Company, and no asbestos has
-13-
<PAGE>
been removed from any of such properties during the time such properties were
owned, leased or operated by the Company, and (x) neither the Company nor any of
its respective properties are subject to any material liabilities or
expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim asserted
or arising under any Environmental Law.
(b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity which is
applicable where the Company conducts or conducted business or owns or owned
property or is applicable to any disposal, transportation or release of
Hazardous Substances by or for the Company and, in each case, relates to (x) the
protection, preservation or restoration of the environment (including, without
limitation, air, water vapor, surface water, groundwater, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource) or to human health or safety or (y) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances, in each case
as amended and as in effect on the Closing Date. The term Environmental Law
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Federal Occupational Safety and Health Act of 1970, each as amended and as
in effect on the Closing Date, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of, effects of or exposure to any Hazardous Substance.
(c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive, or
dangerous, or otherwise regulated, under any Environmental Law. Hazardous
Substance includes any substance to which exposure is regulated by any
government authority or any Environmental Law including, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate
list (which is set forth on Schedule 5.14) of (x) all personal property material
to the operations of the Company included in "plant, property and equipment" on
the Interim Balance Sheet of the Company, (y) all other personal property owned
by the Company with an individual fair market value in excess of $5,000 (i) as
of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z)
all
-14-
<PAGE>
material leases and agreements in respect of personal property, including, in
the case of each of (x), (y) and (z), (1) true, complete and correct copies of
all such leases and (2) an indication as to which assets are currently owned, or
were formerly owned, by Stockholders or Other Stockholders, relatives of
Stockholders or Other Stockholders, or Affiliates of the Company. Except as set
forth on Schedule 5.14, (i) all material personal property used by the Company
in its business is either owned by the Company or leased by the Company pursuant
to a lease included on Schedule 5.14, (ii) all of the personal property listed
on Schedule 5.14 is in working order and condition sufficient for the operation
of the Company's business, ordinary wear and tear excepted and (iii) all leases
and agreements included on Schedule 5.14 are in full force and effect and
constitute valid and binding agreements of the Company and of the other parties
(and their successors) thereto in accordance with their respective terms.
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.15) of all customers (persons or entities) representing 5%
or more of the Company's annual revenues for the period covered by any of the
most current Year-End Financial Statements. Except to the extent set forth on
Schedule 5.15, none of such customers have canceled or substantially reduced or,
to the knowledge of the Company and the Stockholders, are currently attempting
or threatening to cancel a contract or substantially reduce utilization of the
services provided by the Company.
(b) The Company has listed on Schedule 5.15 all material contracts,
commitments and similar agreements to which the Company is a party or by which
it or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, strategic alliances and options to purchase land),
other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence
as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date,
and in each case has delivered (or, in the case of supplier and distributor
contracts and customer contracts on standard purchase forms, has made available)
true, complete and correct copies of such agreements to Pentacon. The Company
has also indicated on Schedule 5.15 a summary description of all plans or
projects commenced or approved in the last six (6) months and involving the
opening of new operations, expansion of existing operations, the acquisition of
any personal property, business or assets requiring, in any event, the payment
of more than $20,000 by the Company during any 12-month period.
(c) Except as set forth on Schedule 5.15, since January 1, 1995, the
Company has not experienced any difficulties in obtaining any inventory items
necessary to the operation of its business, and, to the knowledge of the Company
and the Stockholders, no such shortage of supply of inventory items is
threatened or pending. To the knowledge of the Company and the Stockholders, no
customer or supplier of the Company will cease to do business with, or
substantially reduce its purchases from, the Company after the consummation of
the transactions contemplated hereby.
-15-
<PAGE>
(d) The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
(e) Except as disclosed in the schedules hereto, none of the Other
Stockholders are parties to agreements with the Company or any of its
Affiliates, have pending claims against or have threatened claims against the
Company or any of its Affiliates.
5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property
owned or leased by the Company at the date hereof and all other real property,
if any, used by the Company in the conduct of its business. Except as set forth
on Schedule 5.16, any such real property owned by the Company will be sold or
distributed by the Company on terms acceptable to Pentacon and leased back by
the Company on terms no less favorable to the Company than those available from
an unaffiliated party and otherwise reasonably acceptable to Pentacon at or
prior to the Closing Date. The Company has good and insurable title to any real
property owned by it that is shown on Schedule 5.16, other than property
intended to be sold or distributed prior to the Closing Date, subject to no
mortgage, pledge, lien, conditional sales agreement, encumbrance or charge,
except for:
(i) liens reflected on Schedules 5.10 or 5.16 as securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title which do not adversely affect the current use of the property.
True, complete and correct copies of all leases and agreements in respect
of such real property leased by the Company are attached to Schedule 5.16, and
an indication as to which such properties, if any, are currently owned, or were
formerly owned, by Stockholders or Other Stockholders or Affiliates of the
Company or Affiliates of Stockholders or Other Stockholders is included in
Schedule 5.16. Except as set forth on Schedule 5.16, all of such leases included
on Schedule 5.16 are in full force and effect and constitute valid and binding
agreements of the Company and of the other parties (and their successors)
thereto in accordance with their respective terms.
5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the
Balance Sheet Date of all insurance policies carried by the Company, (ii) an
accurate list of all insurance loss runs (to the extent available) or workers
compensation claims received for the past three policy years. True, complete and
correct copies of all insurance policies currently in effect have been delivered
or made available to Pentacon. Such insurance policies evidence all of the
insurance that the
-16-
<PAGE>
Company is required to carry pursuant to all of its contracts and other
agreements and pursuant to all applicable laws, and, in the reasonable judgment
of the Company's management, provide adequate coverage against the risks
involved in the Company's business. All of such insurance policies are currently
in full force and effect and are scheduled to remain in full force and effect
through the Consummation Date. Since January 1, 1995, no insurance carried by
the Company has been canceled by the insurer and the Company has not been denied
coverage.
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS.
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.18) showing all officers, directors and key employees of the
Company, listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided
to Pentacon true, complete and correct copies of any existing employment
agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and
except as described in Schedule 5.18, there have been no increases in the
compensation payable or any special bonuses to any officer, director, key
employee or other employee, except ordinary salary increases implemented on a
basis consistent with past practices and bonuses, as described in Schedule 5.18.
(b) Except as set forth on Schedule 5.18, (i) the Company is not bound by
or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
Company are represented by any labor union or covered by any collective
bargaining agreement, (iii) to the best knowledge of the Company, no campaign to
establish such representation is in progress and (iv) there is no pending or, to
the knowledge of the Company and the Stockholders, threatened labor dispute
involving the Company and any group of its employees nor has the Company
experienced any labor interruptions over the past three years.
(c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no
significant controversies pending or, to the knowledge of the Company and the
Stockholders, threatened between the Company and any of its employees, (ii) the
Company has complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (iii) to the knowledge of the Company and the
Stockholders, no person has asserted that the Company is liable in any material
amount for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee
benefit plans of the Company, including all employment agreements and other
agreements or arrangements containing "golden parachute" or other similar
provisions, and deferred compensation agreements, together with true, complete
and correct copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19, the
Company does not sponsor,
-17-
<PAGE>
maintain or contribute to any plan program, fund or arrangement that constitutes
an "employee pension benefit plan", and neither the Company nor any subsidiary
has any obligation to contribute to or accrue or pay any benefits under any
deferred compensation or retirement funding arrangement on behalf of any
employee or employees (such as, for example, and without limitation, any
individual retirement account or annuity, any "excess benefit plan" (within the
meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) or any non-qualified deferred compensation arrangement).
For the purposes of this Agreement, the term "employee pension benefit plan"
shall have the same meaning as is given that term in Section 3(2) of ERISA. The
Company has not sponsored, maintained or contributed to any employee pension
benefit plan other than the plans set forth on Schedule 5.19, and the Company is
not or could not be required to contribute to any retirement plan pursuant to
the provisions of any collective bargaining agreement establishing the terms and
conditions or employment of any of the Company's employees.
Except as set forth on Schedule 5.19, the Company is not now, or will not
as a result of its past activities become, liable to the Pension Benefit
Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit
plan under the provisions of Title IV of ERISA.
All employee benefit plans listed on Schedule 5.19 and the administration
thereof are in compliance with their terms and all applicable provisions of
ERISA and the regulations issued thereunder, as well as with all other
applicable federal, state and local statutes, ordinances and regulations.
All accrued contribution obligations of the Company with respect to any
plan listed on Schedule 5.19 as of the Balance Sheet Date have either been
fulfilled in their entirety or are fully reflected on the Interim Balance Sheet
as of the Balance Sheet Date.
5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, all such
plans listed on Schedule 5.19 that are intended to qualify (the "Qualified
Plans") under Section 401 (a) of the Code are, and have been so qualified and
have been determined by the Internal Revenue Service to be so qualified, and
copies of the most recent determination letters with respect thereto are
attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and
other documents required to be filed with any governmental agency or distributed
to plan participants or beneficiaries (including, but not limited to, actuarial
reports, audits or tax returns) have been timely filed or distributed, and
copies of the most recent reports and filing relating thereto are included as
part of Schedule 5.19 hereof. Neither the Stockholders, the Other Stockholders,
any such plan listed in Schedule 5.19, nor the Company has engaged in any
transaction prohibited under the provisions of Section 4975 of the Code or
Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code and
Section 302(l) of ERISA; and the Company has not incurred any liability for
excise tax or penalty due to the Internal Revenue Service nor any liability to
the PBGC. The Stockholders further represent that except as set forth on
Schedule 5.19 hereto:
-18-
<PAGE>
(i) there have been no terminations, partial terminations or
discontinuations of contributions to any Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and approval by
the Internal Revenue Service;
(ii) no plan listed in Schedule 5.19 subject to the provisions of
Title IV of ERISA has been terminated;
(iii) there have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such plan listed in
Schedule 5.19;
(iv) the Company (including any subsidiaries) has not incurred
liability under Section 4062 of ERISA; and
(v) to the knowledge of the Company and the Stockholders, no
circumstances exist pursuant to which the Company would be reasonably
likely to have any direct or indirect liability whatsoever (including, but
not limited to, any liability to any multiemployer plan or the PBGC under
Title IV of ERISA or to the Internal Revenue Service for any excise tax or
penalty, or being subject to any statutory lien to secure payment of any
such liability) with respect to any plan now or heretofore maintained or
contributed to by any entity other than the Company that is, or at any
time was, a member of a "controlled group" (as defined in Section
412(n)(6)(B) of the Code) that includes the Company.
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is
not in violation of any law or regulation or any order of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality having jurisdiction over it; and except to the extent
set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or
proceedings, pending or, to the knowledge of the Company and the Stockholders,
threatened against or affecting, the Company, at law or in equity, or before or
by any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received by the Company, and, to the knowledge of the
Company and the Stockholders, there is no basis for any such claim, action, suit
or proceeding. The Company has conducted and is now conducting its business in
substantial compliance with the requirements, standards, criteria and conditions
set forth in applicable Federal, state and local statutes, ordinances, orders,
approvals, variances, rules and regulations.
5.22 TAXES.
(a) Except as set forth in Schedule 5.22, the Company has timely filed all
requisite Federal, state and other Tax Returns or extension requests for all
fiscal periods ended on or before the Balance Sheet Date; and except as set
forth on Schedule 5.22, the Company has no notice that any examinations are in
progress or that any claims are pending against it for federal, state and other
-19-
<PAGE>
Taxes (including penalties and interest) for any period or periods prior to and
including the Balance Sheet Date and no notice of any claim for Taxes, whether
pending or threatened, has been received. Except as set forth in Schedule 5.22,
all Tax, including interest and penalties (whether or not shown on any Tax
Return) owed by the Company has been paid or accrued in its financial accounts.
The amounts shown as accruals for Taxes on the Company Financial Statements are
sufficient for the payment of all Taxes of the kinds indicated (including
penalties and interest) for all fiscal periods ended on or before that date.
Copies of (i) any tax examinations, (ii) extensions of statutory limitations and
(iii) the federal and local income Tax Returns and franchise Tax Returns of
Company for their last three (3) fiscal years, or such shorter period of time as
any of them shall have existed, are attached hereto as Schedule 5.22 or have
otherwise been delivered to Pentacon. The Company has a taxable year ended
October 31. Except as set forth on Schedule 5.22, Company uses the accrual
method of accounting for income tax purposes, and the Company's methods of
accounting have not changed in the past five years. The Company is not an
investment Company as defined in Section 351(e)(1) of the Code. Except as set
forth in Schedule 5.22, the Company is not and has not during the last five
years been a party to any tax sharing agreement or agreement of similar effect.
The Company is not and has not during the last five years been a member of any
consolidated group. Except as set forth on Schedule 5.22, the Company has not
received, been denied, or applied for any private letter ruling during the last
ten years.
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.
(a) The Company is not in violation of any Charter Document. Except as set
forth in Schedule 5.23, neither the Company nor, to the best knowledge of the
Company and the Stockholders, any other party thereto, is in default under any
lease, instrument, agreement, license, or permit set forth on Schedule 5.12,
5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party
or by which its properties are bound (the "Material Documents").
(b) Except as set forth in Schedule 5.23, the execution and delivery of
this Agreement by each of the Company and the Stockholders do not violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company under any of the terms,
conditions or provisions of (i) the Charter Documents (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Company or
any of its properties or assets, or (iii) any Material Document or other
material instrument, obligation or agreement of any kind to which the Company or
any of the Stockholders is now a party or by which any of the Stockholders or
the Company or any of its properties or assets may be bound or affected. The
consummation by the Company and the Stockholders of the transactions
contemplated hereby will not result in any violation, conflict, breach, right of
termination or acceleration or creation of liens under any of the terms,
conditions or provisions of the items described in clauses (i) through (iii) of
the preceding sentence, subject, in the case of the terms, conditions or
provisions of the items described in
-20-
<PAGE>
clause (iii) above, to obtaining (prior to the Effective Time of the Merger)
such consents as may be required from commercial lenders, lessors or other third
parties.
(c) Except as set forth on Schedule 5.23, none of the Material Documents
requires notice to, or the consent or approval of, any governmental agency or
other third party with respect to any of the transactions contemplated hereby in
order to remain in full force and effect, and consummation of the transactions
contemplated hereby will not give rise to any right to termination, cancellation
or acceleration or loss of any material right or benefit.
(d) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
for the making of the merger filings with the Secretary of State of the State of
Delaware and the State of Incorporation in connection with the Merger, (iv) for
filings in connection with listing on the NASDAQ National Market System or New
York Stock Exchange or other nationally recognized securities exchange; (v) for
possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13
and (vi) as set forth in Schedule 5.23, neither the Company, the Stockholders
nor Other Stockholders are required to make any declaration, filing or
registration with, or notice to, or obtain any authorization, consent or
approval of, any governmental or regulatory body or authority is necessary for
the execution and delivery of this Agreement by the Company and the Stockholders
or the consummation by the Company and the Stockholders or Other Stockholders of
the transactions contemplated hereby.
(e) Except as set forth on Schedule 5.23, none of the Material Documents
prohibits the use or publication by the Company, Pentacon or Newco of the name
of any other party to such Material Document, and none of the Material Documents
prohibits or restricts the Company from freely providing services or selling
products to any other customer or potential customer of the Company, Pentacon,
Newco or any Other Founding Company.
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth
on Schedule 5.24, the Company is not now a party to any governmental contract
that, by its express terms, is subject to price redetermination or renegotiation
or that is customarily subject to price redetermination or renegotiations in the
ordinary course of business. Except as set forth on Schedule 5.24, the Company
is not now a party to any material contract based on minority ownership which
would be canceled or otherwise materially adversely impacted by completion of
the Pentacon Plan of Organization.
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth
on Schedule 5.25 or as otherwise contemplated hereby, there has not been:
(i) any Material Adverse Effect with respect to the Company;
(ii) any damage, destruction or loss (whether or not covered by
insurance), alone or in the aggregate, materially adversely affecting the
properties or business of the Company;
-21-
<PAGE>
(iii) any change in the authorized capital of the Company or its
outstanding securities or any change in its ownership interests or any
grant of any options, warrants, calls, conversion rights or commitments;
(iv) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the Company
except for distributions that would have been permitted after the date
hereof under Section 7.3(iii) hereof,
(v) any increase in the compensation, bonus, sales commissions or
fee arrangement payable or to become payable by the Company to any of its
officers, directors, Stockholders, Other Stockholders, employees,
consultants or agents, except for ordinary and customary bonuses and
salary increases for employees in accordance with past practice;
(vi) any work interruptions, labor grievances or claims filed, or
any event or condition of any character, materially adversely affecting
the business or future prospects of the Company;
(vii) any sale or transfer, or any agreement to sell or transfer,
any material assets, property or rights of Company outside of the ordinary
course of business to any person, including, without limitation, the
Stockholders or Other Stockholders and their respective affiliates;
(viii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company, including without limitation any
indebtedness or obligation of any Stockholders, Other Stockholders or any
respective affiliate thereof;
(ix) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside
of the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the Company;
(xii) any amendment or termination of any Material Document;
(xiii) any transaction by the Company outside the ordinary course of
its business;
-22-
<PAGE>
(xiv) any cancellation or termination of a Material Document or
material customer contract with a customer or client prior to the
scheduled termination date; or
(xv) any other distribution of property or assets by the Company
other than in the ordinary course of business and other than distributions
of real estate and other assets as permitted by this Agreement.
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an
accurate schedule as of the date of the Agreement of:
(i) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the Company and
a description of the terms of such power.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
by the Company and the performance of the transactions contemplated herein have
been duly and validly authorized by the Board of Directors of the Company and
this Agreement has been duly and validly authorized by all necessary corporate
action and is a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the
Stockholders, or any Affiliate of any of them has given or offered anything of
value to any governmental official, political party or candidate for government
office in violation of any applicable laws, rules or regulations, nor has it or
any of them otherwise taken any action which would cause the Company to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended or any
applicable law of similar effect.
5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules
hereto, furnished to Pentacon by the Company and the Stockholders in connection
herewith, do not contain an untrue statement of a material fact or omit to state
a material fact necessary to make the statements herein and therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that the foregoing does not apply to statements contained in or omitted from any
of such documents made or omitted in reliance upon information furnished in
writing by Pentacon or Newco.
-23-
<PAGE>
(b) The Company and the Stockholders acknowledge and agree (i) that there
exists no firm commitment, binding agreement, or promise or other assurance of
any kind, whether express or implied, oral or written, that a Registration
Statement will become effective or that the IPO pursuant thereto will occur at a
particular price or within a particular range of prices or occur at all; (ii)
that neither Pentacon or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the Company, the
Stockholders or any other person affiliated or associated with the Company for
any failure of the Registration Statement to become effective, the IPO to occur
at a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of Stockholders to enter into this Agreement, or to
vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to Pentacon or the
prospective IPO.
5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the
Company has not, between the Balance Sheet Date and the date hereof, taken any
of the actions which are prohibited ("Prohibited Activities") in Section 7.3.
5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to
the knowledge of the Company or the Stockholders, the Company has no liability
or potential liability to any person under any product or service warranty and
the Company does not offer or sell insurance or consumer protection plans or
other similar arrangements that could result in the Company being required to
make any material payment to or perform any material service for any person
thereunder.
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS.
Except as described on Schedule 5.32, no Stockholder, Other Stockholder,
officer, director or Affiliate of the Company (i) possesses, directly or
indirectly, any financial interest in, or is a director, officer, employee or
affiliate of, any corporation, firm, association or business organization that
is a client, supplier, customer, lessor, lessee or competitor of the Company, or
(ii) is a party to an agreement or relationship, that involves the receipt by
such person of compensation or property from the Company other than through a
customary employment relationship.
(B) REPRESENTATIONS AND WARRANTIES ON BEHALF OF STOCKHOLDERS AND
OTHER STOCKHOLDERS.
The Stockholders jointly represent and warrant that the
representations and warranties set forth below are true as of the date of this
Agreement as they relate to each and that the representations and warranties set
forth in this Section 5(B) shall survive the Consummation Date.
-24-
<PAGE>
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Each Stockholder has
the full legal right, power and authority to enter into this Agreement. Each
Stockholder and Other Stockholder owns beneficially and of record all of the
shares of the Company stock identified on Annex II as being owned by such
Stockholder and Other Stockholder, and, such Company Stock is owned free and
clear of all liens, encumbrances and claims of every kind. This Agreement is a
legal, valid, and binding obligation of the Stockholder.
5.34 PREEMPTIVE RIGHTS. No Stockholder or Other Stockholder has any
preemptive or other right to acquire shares of Company Stock or Pentacon Stock.
Nothing herein, however, shall limit or restrict the rights of any Stockholder
or Other Stockholder to acquire Pentacon Stock pursuant to (i) this Agreement or
(ii) any option granted by Pentacon.
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. Except as set forth in
Schedule 5.35, no Stockholder or Other Stockholder is under any binding
commitment or contract to sell, exchange or otherwise dispose of shares of
Pentacon Stock received as described in Section 3.1.
6. REPRESENTATIONS OF PENTACON AND NEWCO
Pentacon and Newco, jointly and severally, represent and warrant to the
Stockholders that all of the following representations and warranties in this
Section 6 are true at the date of this Agreement and, subject to Section 7.8
hereof, shall be true at the time of Closing and the Consummation Date, and that
such representations and warranties shall survive the Consummation Date for a
period of twenty-four months (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Consummation Date, which shall be
deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes
of determining whether a claim for indemnification under Section 11.2(iv) hereof
has been made on a timely basis, and solely to the extent that in connection
with the IPO, any of the Stockholders actually incurs liability under the 1933
Act, the 1934 Act, or any other Federal or state securities laws, the
representations and warranties of Pentacon and Newco set forth herein shall
survive until the expiration of any applicable limitations period, which shall
be deemed to be the Expiration Date for such purposes.
6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly
incorporated and organized, validly existing and in good standing under the laws
of the State of Delaware, and each has the requisite power and authority to
carry on its business as it is now being conducted. Pentacon and Newco are each
qualified to do business and are each in good standing in each jurisdiction in
which the nature of its business makes such qualification necessary. True,
complete and correct copies of the Certificate of Incorporation and By-laws,
each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter
Documents") are all attached hereto as Annex III.
-25-
<PAGE>
6.2 AUTHORIZATION. (i) The respective officers or other representatives of
Pentacon and Newco executing this Agreement have the authority to enter into and
bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and
Newco have the full legal right, power and authority to enter into this
Agreement and the Other Agreements and consummate the Merger. All corporate acts
and other proceedings required to have been taken by Pentacon and Newco to
authorize the execution, delivery and performance of this Agreement and the
consummation of the Merger have been duly and properly taken.
6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of
Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration
Statement. All of the issued and outstanding shares of the capital stock of
Newco are owned by Pentacon and all of the issued and outstanding shares of the
capital stock of Pentacon are owned by the persons set forth on Schedule 6.3
hereof, in each case, free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of Pentacon and Newco
have been duly authorized and validly issued, are fully paid and nonassessable,
and further, such shares were offered, issued, sold and delivered by Pentacon
and Newco in compliance with all applicable state and Federal laws concerning
the issuance of securities. Further, none of such shares were issued in
violation of the preemptive rights of any past or present stockholder of
Pentacon or Newco.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the
Other Agreements and except as set forth in the Draft Registration Statement or
in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates Pentacon or Newco to issue any of
their respective authorized but unissued capital stock; (ii) no voting trust,
voting agreement, proxy or other agreements or understandings exist with respect
to the voting of any shares of capital stock of Pentacon; and (iii) neither
Pentacon nor Newco has any obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its equity securities or any interests
therein or to pay any dividend or make any distribution in respect thereof.
Schedule 6.4 also includes a list of all outstanding options, warrants or other
rights to acquire shares of the stock of Pentacon.
6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries
except for Newco and each of the companies identified as "Newco" in each of the
Other Agreements. Except as set forth in the preceding sentence, neither
Pentacon nor Newco presently owns, of record or beneficially, or controls,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity, and neither Pentacon nor Newco, directly or indirectly, is a participant
in any joint venture, partnership or other non-corporate entity.
-26-
<PAGE>
6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in
the Draft Registration Statement (the "Pentacon Financial Statements") have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated (except as noted thereon),
and the balance sheet included therein presents fairly the financial position of
Pentacon as of its date.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft
Registration Statement, Pentacon and Newco have no material liabilities,
contingent or otherwise, except as set forth in or contemplated by this
Agreement and the Other Agreements and except for fees generally described in
Part II of the Draft Registration Statement and incurred in connection with the
transactions contemplated hereby and thereby.
6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the
Draft Registration Statement, neither Pentacon nor Newco is in violation of any
law or regulation or any order of any court or Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them and except to the extent
set forth in Schedule 6.8, there are no material claims, actions, suits or
proceedings, pending or, to the knowledge of Pentacon or Newco, threatened
against or affecting, Pentacon or Newco, at law or in equity, or before or by
any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over either of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received. Pentacon and Newco have conducted and are
conducting their respective businesses in substantial compliance with the
requirements, standards, criteria and conditions set forth in applicable
Federal, state and local statutes, ordinances, permits, licenses, orders,
approvals, variances, rules and regulations and are not in violation, in any
material respect, of any of the foregoing.
6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any
Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of
Pentacon and Newco, any other party thereto, is in default under any lease,
instrument, agreement, license, or permit to which Pentacon or Newco is a party,
or by which Pentacon or Newco, or any of their respective properties, are bound
(collectively, the "Pentacon Documents"); and (a) the rights and benefits of
Pentacon and Newco under the Pentacon Documents will not be adversely affected
by the transactions contemplated hereby and (b) the execution and delivery of
this Agreement and the Other Agreements by Pentacon and Newco and the
performance of their obligations hereunder and thereunder do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation or default (with or without notice or lapse of time, or both), under
or give rise to a right of termination, cancellation, or acceleration of any
obligation or to loss of a material benefit under, or result in the creation of
any lien upon any of the assets of Pentacon or Newco under, any provision of (i)
the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the
comparable governing instruments of Newco, (ii) any note, bond, mortgage,
indenture or deed of trust or any license, lease, contract, commitment,
agreement or arrangement to which Pentacon or Newco is a party or by which any
of
-27-
<PAGE>
their respective properties or assets are bound or (iii) any judgment, order,
decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or
their respective properties or assets.
(b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the
Pentacon Documents requires notice to, or the consent or approval of, any
governmental agency or other third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect and consummation
of the transactions contemplated hereby will not give rise to any right to
termination, cancellation or acceleration or loss of any right or benefit.
(c) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
filings with blue sky authorities in connection with the transactions
contemplated by this Agreement, (iv) for the making of the merger filings with
the Secretary of State of the State of Delaware and the State of Incorporation
in connection with the Merger, (v) for filings in consideration for listing on
the NASDAQ National Market System or the New York Stock Exchange or other
nationally recognized securities exchange; and (vi) for possible filings under
the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not
required make any declaration, filing or registration with, or notice to, or
obtain any authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by Newco or Pentacon or the consummation by the Newco and Pentacon of the
transactions contemplated hereby.
6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
and the Other Agreements by Pentacon and Newco and the performance of the
transactions contemplated herein and therein have been duly and validly
authorized by the respective Boards of Directors and stockholders of Pentacon
and Newco and this Agreement and the Other Agreements have been duly and validly
authorized by all necessary corporate action and are legal, valid and binding
obligations of Pentacon and Newco, enforceable against them in accordance with
their respective terms.
6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the
Stockholders and Other Stockholders, the Pentacon Stock to be delivered to the
Stockholders and Other Stockholders pursuant to this Agreement will constitute
valid and legally issued shares of Pentacon, fully paid and nonassessable, and
with the exception of restrictions upon resale set forth in Sections 15 and 16
hereof, will be identical in all substantive respects (which do not include the
form of certificate upon which it is printed or the presence or absence of a
CUSIP number on any such certificate) to the Pentacon Stock issued and
outstanding as of the date hereof by reason of the provisions of the Delaware
GCL. The Pentacon Stock issued and delivered to the Stockholders and Other
Stockholders shall at the time of such issuance and delivery be free and clear
of any liens, claims or encumbrances of any kind or character. The shares of
Pentacon Stock to be issued to the Stockholders and Other Stockholders pursuant
to this Agreement will not be registered under the 1933 Act, except as provided
in Section 17 hereof.
-28-
<PAGE>
6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither
Pentacon nor Newco has entered or will enter into any agreement with any of the
Founding Companies or any of the Stockholders and Other Stockholders of the
Founding Companies or Pentacon other than the Other Agreements and the
agreements contemplated by each of the Other Agreements, including the
employment agreements and real property leases referred to herein or entered
into in connection with the transactions contemplated hereby and thereby.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on
March 20, 1997 and has conducted only limited operations since that time.
Neither Pentacon nor Newco has conducted any material business since the date of
its inception, except in connection with this Agreement, the Other Agreements
and the IPO. Except as described in the Draft Registration Statement, neither
Pentacon nor Newco owns or has at any time owned any real property or any
material personal property or is a party to any other material agreement other
than the Other Agreements, the agreements contemplated thereby and such
agreements as will be filed as Exhibits to the Registration Statement.
6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company
and the Stockholders, together with this Agreement and the information furnished
to the Company and the Stockholders in connection herewith, does not contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing does not apply
to statements contained in or omitted from any of such documents made or omitted
in reliance upon information furnished in writing by the Company or the
Stockholders or information pertaining to the Company or a Stockholder which is
confirmed in writing by the Company or such Stockholder.
7. COVENANTS PRIOR TO CLOSING
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.
(a) Between the date of this Agreement and the Consummation Date, the
Company will afford to the officers and authorized representatives of Pentacon
and the Other Founding Companies access to all of the Company's sites,
properties, books and records and will furnish Pentacon with such additional
financial and operating data and other information as to the business and
properties of the Company as Pentacon or the Other Founding Companies may from
time to time reasonably request; provided, however, that the Company shall not
prior to the Closing Date be required to disclose to the Other Founding
Companies, and Pentacon shall not without first obtaining the written approval
of the Company disclose to the Other Founding Companies, information relating to
pricing or profitability on an account-by-account basis or any pricing
information relating to the Company's suppliers on a supplier-by-supplier basis.
The Company will cooperate with Pentacon, its representatives, auditors and
counsel and the Other Founding Companies in the preparation of any documents or
other material which may be required in connection with any documents or
materials required by this Agreement. Pentacon, Newco, the Stockholders and the
Company will treat all information obtained in connection with the negotiation
and performance of this Agreement or the
-29-
<PAGE>
due diligence investigations conducted with respect to the Other Founding
Companies as confidential in accordance with the provisions of Section 14
hereof. In addition, Pentacon will cause each of the Other Founding Companies to
enter into a provision similar to this Section 7.1(a) requiring each such Other
Founding Company, its stockholders, directors, officers, representatives,
employees and agents to keep confidential any information obtained by such Other
Founding Company.
(b) Between the date of this Agreement and the Consummation Date, Pentacon
will afford to the officers and authorized representatives of the Company and
the Stockholders access to all of Pentacon's and Newco's sites, properties,
books and records and will furnish the Company with such additional financial
and operating data and other information as to the business and properties of
Pentacon and Newco as the Company may from time to time reasonably request.
Pentacon and Newco will cooperate with the Company, its representatives,
auditors and counsel in the preparation of any documents or other material which
may be required in connection with any documents or materials required by this
Agreement. The Company will cause all information obtained in connection with
the negotiation and performance of this Agreement to be treated as confidential
in accordance with the provisions of Section 14 hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Consummation Date, the Company will, except as set forth on
Sales Systems, Limited 7.2 or as otherwise expressly contemplated by this
Agreement:
(i) carry on its respective businesses in substantially the same
manner as it has heretofore and not introduce any material new method of
management, operation or accounting;
(ii) use commercially reasonable efforts to maintain its respective
properties and facilities, including those held under leases, in as good
working order and condition as at present, ordinary wear and tear
excepted;
(iii) perform in all material respects all of its respective
obligations under agreements relating to or affecting its respective
assets, properties or rights;
(iv) use commercially reasonable efforts to keep in full force and
effect present insurance policies or other comparable insurance coverage;
(v) use commercially reasonable efforts to maintain and preserve its
business organization intact, retain its respective present key employees
and maintain its respective relationships with material suppliers,
customers and others having business relations with the Company;
-30-
<PAGE>
(vi) use commercially reasonable efforts to maintain compliance with
all material permits, laws, rules and regulations, consent orders, and all
other orders of applicable courts, regulatory agencies and similar
governmental authorities;
(vii) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments without the knowledge and consent
of Pentacon (which consent shall not be unreasonably withheld, delayed or
conditioned), provided that debt and/or lease instruments may be replaced
without the consent of Pentacon if such replacement instruments are on
terms at least as favorable to the Company as the instruments being
replaced; and
(viii) maintain or reduce present salaries and commission levels for
all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with the
Company's past practices.
7.3 PROHIBITED ACTIVITIES. Except as disclosed on Sales Systems, Limited
7.3 or as otherwise expressly contemplated by this Agreement, between the date
hereof and the Consummation Date, the Company will not, without prior written
consent of Pentacon:
(i) make any change in its Articles of Incorporation or By-laws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed in Schedule
5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures, except if it is in
the normal course of business (consistent with past practice) or involves
an amount not in excess of $25,000;
(v) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens
incurred in connection with the acquisition of equipment with an aggregate
cost not in excess of $25,000 necessary or desirable for the conduct of
the businesses of the Company, (2) (A) liens for Taxes either not yet due
or being contested in good faith and by appropriate proceedings (and for
which contested Taxes adequate reserves have been established and are
being maintained) or (B) materialmen's, mechanics', workers', repairmen's,
employees' or other like liens arising in the ordinary course of business
(the liens set forth in clause (2) being referred to herein as "Statutory
Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16
hereto;
-31-
<PAGE>
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the normal course of business and other
than distributions of real estate and other assets as permitted in this
Agreement (including the Schedules hereto);
(vii) negotiate for the acquisition of any business or the start-up
of any new business;
(viii) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(ix) waive any material rights or claims of the Company, provided
that the Company may negotiate and adjust bills and accounts in the course
of good faith disputes with customers in a manner consistent with past
practice, provided, further, that such adjustments shall not be deemed to
be included in Schedule 5.11 to the extent they exceed the reserves, if
any, established therefor, or unless specifically listed thereon;
(x) amend or terminate any material agreement, permit, license or
other right of the Company provided that the Company may continue to
administer vendor and supplier contracts in the ordinary course of
business provided written notice of any such material amendments or
terminations is provided to Pentacon as soon as possible following such
action and in any event prior to the Closing; or
(xi) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the
Company, nor any agent, officer, director, trustee or any representative of any
of the foregoing will, during the period commencing on the date of this
Agreement and ending with the earlier to occur of the Consummation Date or the
termination of this Agreement in accordance with its terms, directly or
indirectly:
(i) solicit or initiate the submission of proposals or offers from
any person for,
(ii) participate in any discussions pertaining to, or
(iii) furnish any information to any person other than Pentacon,
Newco or their authorized agents relating to, any acquisition or purchase
of all or a material amount of the assets of, or any equity interest in,
the Company or a merger, consolidation or business combination of the
Company.
-32-
<PAGE>
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide Pentacon on Schedule 7.5 with proof that any required notice has been
sent.
7.6 AGREEMENTS. The Stockholders and the Company shall terminate (i) any
stockholders agreements, voting agreements, voting trusts, options, warrants and
employment agreements between the Company and any employee listed on Schedule
9.12 hereto and (ii) any existing agreement between the Company and any
Stockholder on or prior to the Consummation Date provided that nothing herein
shall prohibit or prevent the Company from paying (either prior to or on the
Closing Date) notes or other obligations from the Company to the Stockholders in
accordance with the terms thereof, which terms have been disclosed to Pentacon.
Such termination agreements are listed on Schedule 7.6 and copies thereof shall
be attached thereto.
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.
The Stockholders and the Company shall give prompt notice to Pentacon of (i) the
occurrence or non-occurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty of the Company or
the Stockholders contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of any
Stockholder or the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such person hereunder. Pentacon
and Newco shall give prompt notice to the Company of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of Pentacon or Newco contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of Pentacon or Newco to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder. The delivery or deemed delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
If, prior to the Closing Date, the Chief Executive Officer, the Chief
Financial Officer or the General Counsel of Pentacon shall determine that any of
Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder
for indemnification against any Stockholder(s) (whether or not such claim might
exceed the Indemnification Threshold), then Pentacon shall promptly advise the
affected Stockholder(s), in writing, of such potential claim and provide
information supporting the basis and potential amount of such claim (a
"Potential Claim Notice"). This procedure with respect to Potential Claim
Notices is intended to afford the affected Stockholder(s) notice so that it may
attempt to cure or otherwise address the claim prior to Closing; provided,
however, that (i) this procedure shall not affect or delay Closing and (ii)
neither the failure or delay by Pentacon to give a Potential Claim Notice nor
the information included or omitted from a Potential Claim Notice shall
constitute a waiver of, or shall otherwise adversely affect the right to
-33-
<PAGE>
receive indemnification for, any such claim paid by Pentacon, Newco, the
Surviving Corporation or the Company hereunder after the Closing Date.
7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until 24 hours prior to the
anticipated effectiveness of the Registration Statement to supplement or amend
promptly the Schedules hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules, provided however,
that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall
only have to be delivered at the Closing Date, unless such Schedule is to be
amended to reflect an event occurring other than in the ordinary course of
business. Notwithstanding the foregoing sentence, no amendment or supplement to
a Schedule prepared by the Company that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect with respect to the Company
may be made unless Pentacon and a majority of the Founding Companies other than
the Company consent to such amendment or supplement; and provided further, that
no amendment or supplement to a Schedule prepared by Pentacon or Newco that
constitutes or reflects an event or occurrence that would have a Material
Adverse Effect with respect to Pentacon or Newco may be made unless a majority
of the Founding Companies consent to such amendment or supplement. For all
purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in Sections 8.1 and 9.1 have been
fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended
or supplemented pursuant to this Section 7.8. In the event that one of the Other
Founding Companies seeks to amend or supplement a Schedule pursuant to Section
7.8 of one of the Other Agreements, and such amendment or supplement constitutes
or reflects an event or occurrence that would have a Material Adverse Effect on
such Other Founding Company, Pentacon shall give the Company written notice
promptly after it has knowledge thereof. If Pentacon and a majority of the
Founding Companies consent to such amendment or supplement, which consent shall
have been deemed given by Pentacon or any Founding Company if no response is
received within 24 hours following receipt of written notice of such amendment
or supplement (or sooner if reasonable and if required by the circumstances
under which such consent is requested), but the Company does not give its
consent, the Company may terminate this Agreement pursuant to Section 12.1(iv)
hereof. In the event that the Company seeks to amend or supplement a Schedule
pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding
Companies do not consent to such amendment or supplement, this Agreement shall
be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof.
In the event that Pentacon or Newco seeks to amend or supplement a Schedule
pursuant to this Section 7.8 and a majority of the Founding Companies do not
consent to such amendment or supplement, this Agreement shall be deemed
terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to
this Agreement shall be liable to any other party if this Agreement shall be
terminated pursuant to the provisions of this Section 7.8. No amendment of or
supplement to a Schedule shall be made later than 24 hours prior to the
anticipated effectiveness of the Registration Statement.
-34-
<PAGE>
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and
Stockholders shall furnish or cause to be furnished to Pentacon and the
Underwriters all of the information concerning the Company and the Stockholders
reasonably required for inclusion in, and will cooperate with Pentacon and the
Underwriters in the preparation of, the Registration Statement and the
prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement, except
that the cost of the preparation of any such audited and unaudited Financial
Statements shall be borne by Pentacon). The Company and the Stockholders agree
promptly to advise Pentacon if at any time during the period in which a
prospectus relating to the IPO is required to be delivered under the Securities
Act, any information contained in the prospectus concerning the Company or the
Stockholders becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy. Insofar as the
information relates solely to the Company or the Stockholders, the Company
represents and warrants as to such information with respect to itself, and each
Stockholder represents and warrants, as to such information with respect to the
Company and himself or herself, severally, but not jointly, that the information
expressly provided for inclusion in the Registration Statement or otherwise
confirmed in writing by such Stockholder will not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the
Consummation Date, and Pentacon shall have had sufficient time to review the
unaudited consolidated balance sheets of the Company as of the end of all fiscal
quarters following the Balance Sheet Date, and the unaudited consolidated
statement of income, cash flows and retained earnings of the Company for all
fiscal quarters ended after the Balance Sheet Date. Such financial statements
shall have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated
(except as noted therein). Except as noted in such financial statements, all of
such financial statements will present fairly the results of operations of the
Company for the periods indicated therein.
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver,
or cause to be executed and delivered, such further instruments or documents or
take such other action as may be reasonably necessary or convenient to carry out
the transactions contemplated hereby.
7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall
maintain its authorized capital stock as set forth in the Registration Statement
filed with the SEC except for such changes in authorized capital stock as are
made to respond to comments made by the SEC or requirements of any exchange or
automated trading system for which application is made to register the Pentacon
Stock and any changes necessary or advisable in order to permit the delivery of
the opinion contemplated by Section 8.12 hereof.
-35-
<PAGE>
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS
ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby
recognize that one or more filings under the Hart-Scott-Rodino Act may be
required in connection with the transactions contemplated herein. If it is
determined by the parties to this Agreement that filings under the
Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees
to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act,
(ii) such compliance by the Stockholders and the Company shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
9 of this Agreement, and (iii) the parties agree to cooperate and use their best
efforts to cause all filings required under the Hart-Scott-Rodino Act to be
made. If filings under the Hart-Scott-Rodino Act are required, the costs and
expenses thereof (including filing fees) shall be borne by Pentacon. The
obligation of each party to consummate the transactions contemplated by this
Agreement is subject to the expiration or termination of the waiting period
under the Hart-Scott-Rodino Act, if applicable.
7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date
of the final prospectus of Pentacon utilized in connection with the IPO, the
Company or the Stockholders become aware of any fact or circumstance which would
materially affect the accuracy of a representation or warranty of Company or
Stockholders in this Agreement, the Company and the Stockholders shall promptly
give notice of such fact or circumstance to Pentacon. However, subject to the
provisions of Section 7.8, such notification shall not relieve either the
Company or the Stockholders of their respective obligations under this
Agreement, and, subject to the provisions of Section 7.8, at the sole option of
Pentacon, the truth and accuracy of any and all warranties and representations
of the Company, or on behalf of the Company and of Stockholders at the date of
this Agreement and on the Closing Date and on the Consummation Date, shall be a
precondition to the consummation of this transaction.
7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately
following the Effective Time of the Merger, Pentacon will pay, or cause to be
paid, all of the outstanding liabilities, obligations and indebtedness of
Company to the lenders identified on Schedule 7.15 hereto. In connection with
such repayment of indebtedness, all associated guaranties of Stockholders shall
be terminated and canceled.
7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that
one of the conditions to the Stockholders consummating the transactions
contemplated herein is that the IPO shall be closed and the Stockholders and
Other Stockholders (as a group) shall be entitled to receive consideration not
less than the Minimum Value set forth on Annex I attached hereto.
7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon
shall not exceed nine members immediately following the IPO unless the Founding
Stockholder representatives to serve on such board agree in writing to a larger
number of directors.
-36-
<PAGE>
7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise
required by applicable law, Pentacon will describe or report the transaction in
any required tax reports of Pentacon as a tax-free transaction (insofar as its
relates to the delivery of Pentacon Stock for Company Stock) in a manner
consistent with the tax opinion referenced in Section 8.12.
7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain
all material Licenses necessary for Pentacon to commence the conduct of business
on the Consummation Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY
The obligations of Stockholders and the Company with respect to actions to
be taken on the Closing Date are subject to the satisfaction or waiver on or
prior to the Closing Date of all of the following conditions. The obligations of
the Stockholders and the Company with respect to actions to be taken on the
Consummation Date are subject to the satisfaction or waiver on or prior to the
Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and
8.12. As of the Closing Date or, with respect to the conditions set forth in
Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such
conditions have not been satisfied, the Stockholders (acting in unison) shall
have the right to terminate this Agreement, or in the alternative, waive any
condition not so satisfied. The delivery of certificates representing Company
Stock to Pentacon as of the Consummation Date shall constitute a waiver of any
conditions not so satisfied. However, no such waiver shall be deemed to affect
the survival of the representations and warranties of Pentacon and Newco
contained in Section 6 hereof or the rights of the Stockholders pursuant to
Section 11 hereof.
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All
representations and warranties of Pentacon and Newco contained in Section 6
shall be true and correct in all material respects as of the Closing Date and
the Consummation Date as though such representations and warranties had been
made as of that time; all of the terms, covenants and conditions of this
Agreement to be complied with and performed by Pentacon and Newco on or before
the Closing Date and the Consummation Date shall have been duly complied with
and performed in all material respects; and certificates to the foregoing effect
dated the Closing Date and the Consummation Date, respectively, and signed by
the President or any Vice President of Pentacon shall have been delivered to the
Stockholders.
8.2 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be reasonably satisfactory to the Company and its counsel.
The Stockholders and the Company shall be satisfied that the Registration
Statement and the prospectus forming a part thereof, including any amendments
thereof or supplements thereto, shall not contain any untrue statement of a
material fact, or omit to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that, subject to the provisions set forth in the introductory paragraph of this
Section 8, the condition contained in this sentence shall be deemed waived if
the Company or Stockholders shall have failed to inform Pentacon in writing
prior to the effectiveness of the
-37-
<PAGE>
Registration Statement of the existence of an untrue statement of a material
fact or the omission of such a statement of a material fact.
8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the Company as a result of which
the management of the Company deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion
from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed
hereto as Annex IV.
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis, subject to the conditions set
forth in the underwriting agreement, on terms such that the aggregate value of
the cash and the number of shares of Pentacon Stock to be received by the
Stockholders and Other Stockholders is not less than the Minimum Value set forth
on Annex I.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency or any third party relating to the consummation
of the transactions contemplated herein or set forth in Schedule 5.23 hereto
shall have been obtained and made and no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger and no governmental
agency or body shall have taken any other action or made any request of Company
as a result of which Company deems it inadvisable to proceed with the
transactions hereunder.
8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have
delivered to the Company a certificate, dated as of a date no later than ten
days prior to the Closing Date, duly issued by the Delaware Secretary of State
and in each state in which Pentacon or Newco is authorized to do business,
showing that each of Pentacon and Newco is in good standing and authorized to do
business and that all state franchise and/or income tax returns and taxes for
Pentacon and Newco, respectively, for all periods prior to the Closing have been
filed and paid.
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to Pentacon or Newco which would constitute a Material
Adverse Effect.
8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a
certificate or certificates, dated the Closing Date and signed by the secretary
of Pentacon and of Newco, certifying the truth and correctness of attached
copies of the Pentacon's and Newco's respective Certificates of Incorporation
(including amendments thereto), By-Laws (including amendments thereto), and
resolutions of the boards of directors and, if required, the Stockholders of
Pentacon and Newco
-38-
<PAGE>
approving Pentacon's and Newco's entering into this Agreement and the
consummation of the transactions contemplated hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VI hereto.
8.12 TAX MATTERS. The Stockholders and Other Stockholders shall have
received an opinion of Ernst & Young LLP or other tax advisor of national
recognition reasonably acceptable to the Stockholders that the Pentacon Plan of
Organization will qualify as a tax-free transfer of property under Section 351
of the Code and that the Stockholders and Other Stockholders will not recognize
gain to the extent the Stockholders and Other Stockholders exchange stock of the
Company for Pentacon stock (but not cash or other property) pursuant to the
Pentacon Plan of Organization.
8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for
listing on the New York Stock Exchange, NASDAQ National Market System or the
American Stock Exchange.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO
The obligations of Pentacon and Newco with respect to actions to be taken
on the Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of all of the following conditions. The obligations of Pentacon and
Newco with respect to actions to be taken on the Consummation Date are subject
to the satisfaction or waiver on or prior to the Consummation Date of the
conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or,
with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of
the Consummation Date, if any such conditions have not been satisfied, Pentacon
and Newco shall have the right to terminate this Agreement, or waive any such
condition, but no such waiver shall be deemed to affect the survival of the
representations and warranties contained in Section 5 hereof.
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the
representations and warranties of the Stockholders and the Company contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date and the Consummation Date with the same effect as though such
representations and warranties had been made on and as of such date; all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by the Stockholders and the Company on or before the Closing Date or
the Consummation Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the Stockholders shall have
delivered to Pentacon certificates dated the Closing Date and the Consummation
Date, respectively, and signed by them to such effect.
-39-
<PAGE>
9.2 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of Pentacon as a result of which the
management of Pentacon deems it inadvisable to proceed with the transactions
hereunder.
9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate,
dated the Closing Date and signed by the secretary of the Company, certifying
the truth and correctness of attached copies of the Company's Certificate of
Incorporation (including amendments thereto), By-Laws (including amendments
thereto), and resolutions of the board of directors and the Stockholders and
Other Stockholders approving the Company's entering into this Agreement and the
consummation of the transactions contemplated hereby.
9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have
occurred with respect to the Company which would constitute a Material Adverse
Effect, and the Company shall not have suffered any material loss or damages to
any of its properties or assets, whether or not covered by insurance, which
change, loss or damage materially affects or impairs the ability of the Company
to conduct its business.
9.5 STOCKHOLDERS' RELEASE. The Stockholders shall have delivered to
Pentacon an instrument dated the Closing Date, which shall be effective only
upon the occurrence of the Consummation Date and shall relate only to matters
accruing on or prior to the Consummation Date, releasing the Company and
Pentacon from (i) any and all claims of the Stockholders against the Company and
Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders,
except for (w) items specifically identified on Schedules 5.10 and 5.15 as being
claims of or obligations to the Stockholders, (x) continuing obligations to
Stockholders relating to their employment by the Company or Pentacon, (y) any
obligations or liabilities arising under this Agreement or the transactions
contemplated hereby and (z) real estate lease agreements between the Company and
Stockholders, as amended which have been accepted or approved by Pentacon. In
the event that the Consummation Date does not occur, then the release instrument
referenced herein shall be void and of no further force or effect.
9.6 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to Pentacon.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, all existing agreements between the Company and the Stockholders
(and entities controlled by the Stockholders) shall have been canceled effective
prior to or as of the Consummation Date.
-40-
<PAGE>
9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from
Counsel to the Company and the Stockholders, dated the Closing Date,
substantially in the form annexed hereto as Annex V.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; all consents
and approvals of third parties listed on Schedule 5.23 shall have been obtained;
and no action or proceeding shall have been instituted or threatened to restrain
or prohibit the Merger and no governmental agency or body shall have taken any
other action or made any request of Pentacon as a result of which Pentacon deems
it inadvisable to proceed with the transactions hereunder.
9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to
Pentacon a certificate, dated as of a date no earlier than ten days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's state of incorporation and, unless waived by Pentacon, in each state
in which the Company is authorized to do business, showing the Company is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for the Company for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall enter into an employment agreement substantially in the form of Annex VI
hereto.
9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon
a certificate to the effect that he is not a foreign person pursuant to Section
1.1445-2(b) of the Treasury regulations.
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated
by this Agreement or the Registration Statement, after the Consummation Date,
Pentacon shall not and shall not permit any of its subsidiaries to undertake any
act that would jeopardize the tax-free status of the organization, including
without limitation:
(a) the retirement or reacquisition, directly or indirectly, of all
or part of the Pentacon Stock issued in connection with the transactions
contemplated hereby; or
-41-
<PAGE>
(b) the entering into of financial arrangements for the benefit of
the Stockholders or Other Stockholders.
10.2 PREPARATION AND FILING OF TAX RETURNS.
(i) The Company, if possible, or otherwise the Stockholders shall
file or cause to be filed all Tax Returns (federal, state, local or
otherwise) of any Acquired Party for all taxable periods that end on or
before the Consummation Date, and shall permit Pentacon to review all such
Returns prior to such filings. Unless the Company is a C corporation, the
Stockholders shall pay or cause to be paid all Tax liabilities (in excess
of all amounts already paid with respect thereto or properly accrued or
reserved with respect thereto on the Financial Statements) shown by such
Returns to be due.
(ii) Pentacon shall file or cause to be filed all separate Returns
of, or that include, any Acquired Party for all taxable periods ending
after the Consummation Date.
(iii) Each party hereto shall, and shall cause its Subsidiaries and
Affiliates to, provide to each of the other parties hereto such
cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any
audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies, at the expense of the
requesting party, of all relevant portions of relevant Returns, together
with relevant accompanying schedules and relevant work papers, relevant
documents relating to rulings or other determinations by Taxing
Authorities and relevant records concerning the ownership and Tax basis of
property, which such party may possess. Each party shall make its
employees reasonably available on a mutually convenient basis at its cost
to provide explanation of any documents or information so provided.
Subject to the preceding sentence, each party required to file Returns
pursuant to this Agreement shall bear all costs of filing such Returns.
(iv) Each of the Company, Newco, Pentacon and each Stockholder shall
comply with the tax reporting requirements of Section 1.351-3 of the
Treasury Regulations promulgated under the Code, and treat the transaction
as a tax-free contribution under Section 351(a) of the Code subject to
gain, if any, recognized on the receipt of cash or other property under
Section 351(b) of the Code subject to gain, if any, recognized on the
receipt of cash or other property under Section 351(b) of the Code.
10.3 DIRECTORS. The persons named in the Draft Registration Statement
shall be appointed as directors and elected as officers of Pentacon, as and to
the extent set forth in the Draft Registration Statement, promptly following the
Consummation Date.
-42-
<PAGE>
11. INDEMNIFICATION
The Stockholders, Pentacon and Newco each make the following covenants
that are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders
covenant and agree that they, jointly and severally, will indemnify, defend,
protect and hold harmless Pentacon, Newco, the Company and the Surviving
Corporation at all times, from and after the date of this Agreement until the
Expiration Date (provided that for purposes of Section 11.1(iii) below, the
Expiration Date shall be the date on which the applicable statute of limitations
expires), from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by Pentacon, Newco, the Company or the Surviving
Corporation as a result of or arising from (i) any breach of the representations
and warranties of the Stockholders or the Company set forth herein or on the
definitive, final schedules or certificates delivered by them in connection
herewith, (ii) any breach of any agreement on the part of the Stockholders or,
prior to Closing, the Company under this Agreement, or (iii) any liability under
the 1933 Act, the 1934 Act or other Federal or state law or regulation, at
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact relating to the Company or the
Stockholders, and provided in writing to Pentacon or its counsel by the Company
or the Stockholders for inclusion in the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact relating to the Company or the Stockholders
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that such indemnity shall not inure to the
benefit of Pentacon, Newco, the Company or the Surviving Corporation to the
extent that such untrue statement (or alleged untrue statement) was made in, or
omission (or alleged omission) occurred in, any preliminary prospectus and the
Stockholders provided, in writing, corrected information to Pentacon counsel and
to Pentacon for inclusion in the final prospectus, and such information was not
so included or properly delivered, and provided further, that, except as herein
otherwise provided, no Stockholder shall be liable for any indemnification
obligation pursuant to this Section 11.1(iii) to the extent attributable to a
breach of any representation, warranty or agreement made herein individually by
any other Stockholder.
Pentacon and Newco acknowledge and agree that other than the
representations and warranties of Company or Stockholders specifically contained
in this Agreement, there are no representations or warranties of Company or
Stockholders, either express or implied, with respect to the transactions
contemplated by this Agreement, the Company or its assets, liabilities and
business.
Pentacon, Newco and the Company further acknowledge and agree that, should
the Closing occur, their sole and exclusive remedy with respect to any and all
claims relating to this Agreement and the transactions contemplated in this
Agreement, shall be pursuant to the indemnification provisions set forth in this
Section 11.1. Pentacon, Newco and the Company hereby waive, from
-43-
<PAGE>
and after the Closing, to the fullest extent permitted under applicable law, any
and all rights, claims and causes of action they or any indemnified person may
have against the Company or any Stockholder relating to this Agreement or the
transactions contemplated hereby arising under or based upon any federal, state,
local or foreign statute, law, rule, regulation or otherwise (and other than
pursuant to the terms of this Agreement).
11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it
will indemnify, defend, protect and hold harmless the Stockholders at all times
from and after the date of this Agreement until the Expiration Date, from and
against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
Stockholders as a result of or arising from (i) any breach by Pentacon or Newco
of their representations and warranties set forth herein or on the definitive,
final schedules or certificates attached delivered by them pursuant hereto, (ii)
any breach of any agreement on the part of Pentacon or Newco under this
Agreement or any other agreement delivered pursuant hereto, (iii) any
liabilities which the Stockholders may incur due to Pentacon's or Newco's or the
Surviving Corporation's failure to pay, perform or discharge when due any of the
liabilities and obligations of the Company for which Pentacon, Newco or the
Surviving Corporation is responsible pursuant to this Agreement (except to the
extent that Pentacon or Newco has bona fide claims hereunder against the
Stockholders by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to Pentacon, Newco or any of the
Other Founding Companies contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to
Pentacon or Newco or any of the Other Founding Companies required to be stated
therein or necessary to make the statements therein not misleading.
11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the
"Indemnified Party") has received notice of or has actual knowledge of any claim
by a Person (including a governmental agency) not a party to this Agreement
("Third Person"), or the commencement of any action or proceeding by a Third
Person, with respect to which the Indemnified Person would be entitled to
receive indemnification pursuant to Section 11, the Indemnified Party shall, as
a condition precedent to a claim with respect thereto being made against any
party obligated to provide indemnification pursuant to Section 11.1 or 11.2
hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party
written notice of such claim or the commencement of such action or proceeding.
Such notice shall state the nature and the basis of such claim and a reasonable
estimate of the amount thereof. The Indemnifying Party shall have the right to
defend and settle, at its own expense and by its own counsel, any such matter so
long as the Indemnifying Party pursues the same in good faith and diligently,
provided that the Indemnifying Party shall not settle any criminal proceeding
without the written consent of the Indemnified Party. If the Indemnifying Party
undertakes to defend or settle, it shall promptly notify the Indemnified Party
of its intention to do so, and the Indemnified Party shall cooperate with the
Indemnifying Party and its counsel in the
-44-
<PAGE>
defense thereof and in any settlement thereof. Such cooperation shall include,
but shall not be limited to, furnishing the Indemnifying Party with any books,
records or information reasonably requested by the Indemnifying Party that are
in the Indemnified Party's possession or control. All Indemnified Parties shall
use the same counsel, which shall be the counsel selected by Indemnifying Party,
provided that if counsel to the Indemnifying Party shall have a conflict of
interest that prevents counsel for the Indemnifying Party from representing
Indemnified Party, Indemnified Party shall have the right to participate in such
matter through counsel of its own choosing and Indemnifying Party will reimburse
the Indemnified Party for the reasonable expenses of its counsel. After the
Indemnifying Party has notified the Indemnified Party of its intention to
undertake to defend or settle any such asserted liability, and for so long as
the Indemnifying Party diligently pursues such defense through appropriate
proceedings, the Indemnifying Party shall not be liable for any additional legal
expenses incurred by the Indemnified Party in connection with any defense or
settlement of such asserted liability, except (i) as set forth in the preceding
sentence and (ii) to the extent such participation is requested by the
Indemnifying Party, in which event the Indemnified Party shall be reimbursed by
the Indemnifying Party for reasonable additional legal expenses and
out-of-pocket expenses. If the Indemnifying Party desires to accept a final and
complete settlement of any such Third Person claim and the Indemnified Party
refuses to consent to such settlement, then the Indemnifying Party's liability
under this Section with respect to such Third Person claim shall be limited to
the amount so offered in settlement by said Third Person. Upon agreement as to
such settlement between said Third Person and the Indemnifying Party, the
Indemnifying Party shall, in exchange for a complete release from the
Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in
such settlement and the Indemnified Party shall, from that moment on, bear full
responsibility for any additional costs of defense which it subsequently incurs
with respect to such claim and all additional costs of settlement or judgment.
If the Indemnifying Party does not undertake to defend such matter to which the
Indemnified Party is entitled to indemnification hereunder, or fails diligently
to pursue such defense, the Indemnified Party may undertake such defense through
counsel of its choice, at the cost and expense of the Indemnifying Party, and
the Indemnified Party may settle such matter, and the Indemnifying Party shall
reimburse the Indemnified Party for the amount paid in such settlement and any
other liabilities or expenses incurred by the Indemnified Party in connection
therewith, provided, however, that under no circumstances shall the Indemnified
Party settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
All settlements hereunder shall effect a complete release of the Indemnified
Party, unless the Indemnified Party otherwise agrees in writing. The parties
hereto will make appropriate adjustments for insurance proceeds in determining
the amount of any indemnification obligation under this Section.
11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this
Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any
action seeking damages or any other form of monetary relief brought by any party
to this Agreement against another party, provided that, nothing herein shall be
construed to limit the right of a party, in a proper case pursuant to Section
14.3 or otherwise, to seek injunctive or other equitable relief (except for
rescission which shall not be available) for a breach or threatened breach of
this Agreement. Any indemnity payment
-45-
<PAGE>
under this Section 11 shall be treated as an adjustment to the exchange
consideration for tax purposes unless a final determination (which shall include
the execution of a Form 870-AD or successor form) with respect to the
indemnified party or any of its affiliate causes any such payment not to be
treated as an adjustment to the exchange consideration for U.S. Federal Income
Tax purposes.
(b) Nothing in this Article 11 shall restrict the Stockholders from
subrogation or seeking reimbursement from third parties other than the Company.
11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim for indemnification hereunder against
the Stockholders after the applicable Expiration Date and in no event until such
time as, and solely to the extent that, the aggregate of all claims which such
persons may have against the Stockholders shall exceed the greater of 1% of the
sum of the value of the total consideration (including stock and cash) received
by the Stockholders and Other Stockholders from the Merger or $100,000 (the
"Indemnification Threshold"), and then only to the extent of the excess over the
Indemnification Threshold. Stockholders shall not assert any claim for
indemnification hereunder against Pentacon or Newco after the applicable
Expiration Date and in no event until such time as, and solely to the extent
that, the aggregate of all claims which Stockholders may have against Pentacon
or Newco shall exceed the Indemnification Threshold, and then only to the extent
of the excess over the Indemnification Threshold.
The Indemnification Threshold and the other limitations contained in this
Section 11.5 shall not be applicable to any breach of covenants made by the
Stockholders in this Agreement which require an action or inaction by such
Stockholders from and after the Closing Date (i.e., Article 10, Article 11,
Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall
be entitled to indemnification under this Section 11 if, and only to the extent
that such person's claim for indemnification is directly related to a breach by
such person of any representation, warranty, covenant or other agreement set
forth in this Agreement.
The pursuit by Pentacon, the Surviving Corporation, Newco or the Company,
of any claim for indemnification hereunder against a Stockholder shall require a
majority vote of the board of directors of Pentacon excluding for the purposes
of such acts any directors who was previously a stockholder of the Company or is
a representative of the stockholders of the Company as existing prior to the
closing of the transactions contemplated at this Agreement.
Notwithstanding any other term of this Agreement, no Stockholder shall be
liable (in the aggregate from time to time taking into account all
indemnification payments made hereunder) under this Section 11 (i) for any
amount which is less than or equal to the Indemnification Threshold (and then
only to the extent of the excess over the Indemnification Threshold) or (ii) for
any amount which exceeds the sum of the amount of proceeds (including cash and
stock) received by the Stockholders and Other Stockholders in connection with
the Merger. Each Stockholder shall have the option of satisfying his or her
indemnity obligation in cash and/or by returning or transferring shares of
Pentacon Stock to Pentacon or any other Indemnified Party. For purposes of
calculating
-46-
<PAGE>
the value of the Pentacon Stock received by a Stockholder and satisfying any
indemnity claim by returning or transferring Pentacon Stock, Pentacon Stock
shall be valued at its initial public offering price as set forth in the
Registration Statement.
Notwithstanding any of the foregoing provisions of this Section 11 that
might be read to the contrary, it is the agreement of the parties that the
Indemnification Threshold be given full effect under all circumstances.
Accordingly, insofar as any of the foregoing provisions of this Section 11 may
hold harmless an Indemnified Party before the Indemnification Threshold has been
met, then Pentacon and the Stockholders shall cooperate in good faith to
establish an equitable procedure pursuant to which Pentacon reimburses or causes
the reimbursement to the affected Stockholder(s) of all expenditures and
payments by Stockholders that are intended to be absorbed and borne by any
Indemnified Parties as a result of the prior application of the Indemnification
Threshold or otherwise takes such action as may be reasonably necessary to give
effect to the Indemnification Threshold.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION. This Agreement may be terminated at any time prior to
the Consummation Date solely:
(i) by mutual consent of the boards of directors of Pentacon and the
Company;
(ii) by the Stockholders or the Company (acting through its board of
directors), on the one hand, or by Pentacon (acting through its board of
directors), on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated by
February 28, 1998, unless the failure of such transactions to be
consummated is due to the willful failure of the party seeking to
terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Consummation Date;
(iii) by the Stockholders or Company, on the one hand, or by
Pentacon, on the other hand, if a material breach or default shall be made
by the other party in the observance or in the due and timely performance
of any of the covenants or agreements contained herein, and the curing of
such default shall not have been made on or before the Consummation Date
or by the Stockholders or the Company, if the conditions set forth in
Section 8 hereof have not been satisfied or waived as of the Closing Date
or the Consummation Date, as applicable, or by Pentacon, if the conditions
set forth in Section 9 hereof have not been satisfied or waived as of the
Closing Date or the Consummation Date, as applicable;
(iv) pursuant to Section 7.8 hereof;
(v) pursuant to the termination provisions contained in Section 4
hereof; or
(vi) pursuant to the other express terms of this Agreement.
-47-
<PAGE>
12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of
five (5) years following the Consummation Date, for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) except as disclosed in Section 13.1, engage, as an officer,
director, shareholder, owner, partner, joint venturer, or in a managerial
capacity, whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any fastener business or
operation or related services business in direct competition with Pentacon
or any of the subsidiaries thereof, within 100 miles of where the Company
or any of its subsidiaries conducted business prior to the effectiveness
of the Merger (the "Territory");
(ii) except with the prior written consent of Pentacon, call upon
any person who is, at that time, within the Territory, an employee of
Pentacon or any subsidiary thereof for the purpose or with the intent of
enticing such employee away from or out of the employ of Pentacon or any
subsidiary thereof;
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to the Consummation Date, a
customer of Pentacon or any subsidiary thereof, of the Company or of any
of the Other Founding Companies within the Territory for the purpose of
soliciting or selling products or services that are in direct competition
with Pentacon within the Territory;
(iv) call upon any prospective acquisition candidate, on any
Stockholder's own behalf or on behalf of any competitor in the fastener
business, which candidate, to the actual knowledge of such Stockholder
after due inquiry, was called upon by Pentacon or any subsidiary thereof
or for which, to the actual knowledge of such Stockholder after due
inquiry, Pentacon or any subsidiary thereof made an acquisition analysis,
for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of the
Company to any person, firm, partnership, corporation or business for any
reason or purpose relating to the
-48-
<PAGE>
fastener business except to the extent that the Company has in the past
disclosed such information to the public for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit any Stockholder from acquiring as a passive investment not more than
one percent (1%) of the capital stock of a competing business whose stock is
traded on a national securities exchange or over-the counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
Pentacon as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to Pentacon for which it
would have no other adequate remedy, each Stockholder agrees that the foregoing
covenant may be enforced by Pentacon in the event of breach by such Stockholder,
by injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
Stockholders in light of the activities and business of Pentacon and the
subsidiaries thereof on the date of the execution of this Agreement and the
current plans of Pentacon; but it is also the intent of Pentacon and the
Stockholders that such covenants be construed and enforced in accordance with
the changing activities; business and locations of Pentacon and its subsidiaries
throughout the term of this covenant. During the term of this covenant, if
Pentacon or one of its subsidiaries engages in new and different activities,
enters a new business or establishes new locations for its current activities or
business in addition to or other than the activities or business it is currently
conducting in the locations currently established therefor, then the
Stockholders will be precluded from soliciting the customers or employees of
such new activities or business or from such new location and from directly
competing with such new activities or business within 100 miles of its
then-established operating location(s) through the term of this covenant.
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any Stockholder
against Pentacon or any subsidiary thereof, whether predicated on this Agreement
or otherwise (except for a claim or cause of action based upon Pentacon's
failure to pay or otherwise tender any of the consideration due to the
Stockholders hereunder), shall not constitute a defense to the enforcement by
Pentacon of such covenants. It is specifically agreed that the period of five
(5) years stated at the beginning of this Section 13, during which the
agreements and covenants of each Stockholder made in this Section 13 shall be
effective,
-49-
<PAGE>
shall be computed by excluding from such computation any time during which such
Stockholder is in violation of any provision of this Section 13. The covenants
contained in Section 13 shall not be affected by any breach of any other
provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The Company and the Stockholders hereby agree that this
covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDERS. The Stockholders recognize and acknowledge that they
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the Company, the Other Founding Companies,
and/or Pentacon, such as operational policies, and pricing and cost policies
that are valuable, special and unique assets of the Company's, the Other
Founding Companies' and/or Pentacon's respective businesses. The Stockholders
agree that they will not disclose such confidential information to any person,
firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of Pentacon, (b) following
the Closing, such information may be disclosed by the Stockholders as is
required in the course of performing their duties for Pentacon or the Surviving
Corporation and (c) to counsel and other advisers, provided that such advisers
(other than counsel) agree to the confidentiality provisions of this Section
14.1, unless (i) such information becomes known to the public generally through
no fault of the Stockholders, (ii) disclosure is required by law or the order of
any governmental authority under color of law, provided, that prior to
disclosing any information pursuant to this clause (ii), the Stockholders shall,
if possible, give prior written notice thereof to Pentacon and provide Pentacon
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any of the Stockholders of the provisions of this Section,
Pentacon shall be entitled to an injunction restraining such Stockholders from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting Pentacon from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
In the event the transactions contemplated by this Agreement are not
consummated, Stockholders shall have none of the above-mentioned restrictions on
their ability to disseminate confidential information with respect to the
Company.
14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that
they had in the past and currently have access to certain confidential
information of the Company, including, but not limited to, customer and prospect
lists, financial information, operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company's business.
Pentacon and Newco agree that, prior to the Consummation Date, or if the
transactions contemplated by this Agreement are not consummated, they will not,
appropriate or make use of any such information, whether for its own benefit or
the benefit of any other person or entity, for any purpose whatsoever (except
pending the Consummation Date, effecting the transactions contemplated hereby)
disclose such confidential information to any person, firm, corporation,
association or other entity
-50-
<PAGE>
for any purpose or reason whatsoever, except (a) to authorized representatives
of the Company, (b) to counsel and other advisers, provided that such advisers
(other than counsel) agree to the confidentiality provisions of this Section
14.2, (c) to the Other Founding Companies and their representatives pursuant to
Section 7.1(a), unless (i) such information becomes known to the public
generally through no fault of Pentacon or Newco, (ii) disclosure is required by
law or the order of any governmental authority under color of law, provided,
that prior to disclosing any information pursuant to this clause (ii), Pentacon
and Newco shall, if possible, give prior written notice thereof to the Company
and the Stockholders and provide the Company and the Stockholders with the
opportunity to contest such disclosure, or (iii) the disclosing party reasonably
believes that such disclosure is required in connection with the defense of a
lawsuit against the disclosing party, and (d) to the public to the extent
necessary or advisable in connection with the filing of the Registration
Statement and the IPO and the securities laws applicable thereto and to the
operation of Pentacon as a publicly held entity after the IPO. In the event of a
breach or threatened breach by Pentacon or Newco of the provisions of this
Section, the Company and the Stockholders shall be entitled to an injunction
restraining Pentacon and Newco from disclosing, in whole or in part, such
confidential information. Nothing herein shall be construed as prohibiting the
Company and the Stockholders from pursuing any other available remedy for such
breach or threatened breach, including the recovery of damages.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach or threatened breach by any of them of the foregoing
covenants, the covenant may be enforced against the other parties by injunctions
and restraining orders or other appropriate equitable relief, without posting
any bond or other security or having to prove irreparable harm or injury.
14.4 SURVIVAL. The obligations of the parties under this Article 14 shall
survive the termination of this Agreement for a period of five years from the
Consummation Date, or without limitation if the transactions contemplated hereby
are not consummated.
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except
for transfers to immediate family members who agree to be bound by the
restrictions set forth in this Section 15.1 (or trusts or partnerships for the
benefit of charities, the Stockholders or Other Stockholders, family members,
the trustees or partners of which so agree), for a period of one year from the
Closing, except pursuant to Section 17 hereof, none of the Stockholders or Other
Stockholders shall sell, assign, exchange, transfer, encumber, pledge,
distribute, appoint, or otherwise dispose of any shares of Pentacon Stock
received by the Stockholders or Other Stockholders in the Merger. The
certificates evidencing the Pentacon Stock delivered to the Stockholders or
Other Stockholders pursuant to Section 3 of this Agreement will bear a legend
substantially in the form set forth below and containing such other information
as Pentacon may deem necessary or appropriate:
-51-
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE
WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT)
AFTER THE DATE SPECIFIED ABOVE.
16. FEDERAL SECURITIES ACT REPRESENTATIONS
16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of
Pentacon Stock to be delivered to the Stockholders and Other Stockholders
pursuant to this Agreement have not been and will not be registered under the
1933 Act (except as provided in Section 17 hereof) and therefore may not be
resold without compliance with the 1933 Act. The Pentacon Stock to be acquired
by such Stockholders and Other Stockholders pursuant to this Agreement is being
acquired solely for their own respective accounts, for investment purposes only,
and with no present intention of distributing, selling or otherwise disposing of
it in connection with a distribution. The Stockholders covenant, warrant and
represent that none of the shares of Pentacon Stock issued to such Stockholders
and Other Stockholders will be offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the 1933 Act and the rules and regulations of the
SEC. All the Pentacon Stock shall bear the following legend in addition to the
legend required under Section 15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER
HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW.
16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the
economic risk of an investment in the Pentacon Stock to be acquired pursuant to
this Agreement and can afford to sustain a total loss of such investment and
have such knowledge and experience in financial and business matters that they
are capable of evaluating the merits and risks of the proposed investment in the
Pentacon Stock. The Stockholders party hereto have had an adequate opportunity
to ask questions and receive answers from the officers of Pentacon concerning
any and all matters relating to the transactions described herein including,
without limitation, the background and experience of the current and proposed
officers and directors of Pentacon, the plans for the operations of the business
of Pentacon, the business, operations and financial condition of the Founding
Companies other than the Company, and any plans for additional acquisitions and
the like. The Stockholders have asked any and all questions in the nature
described in the preceding sentence and all questions have been answered to
their satisfaction.
-52-
<PAGE>
17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing,
whenever Pentacon proposes to register any Pentacon Stock for its own or others
account under the 1933 Act for a public offering, other than (i) any shelf or
other registration of shares to be used as consideration for acquisitions of
additional businesses by Pentacon and (ii) registrations relating to employee
benefit plans, Pentacon shall give each of the Stockholders and Other
Stockholders prompt written notice of its intent to do so. Upon the written
request of any of the Stockholders or Other Stockholders given within 30 days
after receipt of such notice, Pentacon shall cause to be included in such
registration all of the Pentacon Stock issued to the Stockholders or Other
Stockholders pursuant to this Agreement (including any stock issued as (or
issuable upon the conversion or exchange of any convertible security, warrant,
right or other security which is issued by Pentacon as) a dividend or other
distribution with respect to, or in exchange for, or in replacement of such
Pentacon Stock) which any such Stockholder or Other Stockholder requests,
provided that Pentacon shall have the right to reduce the number of shares
included in such registration to the extent that inclusion of such shares would,
in the written opinion of tax counsel to Pentacon or its independent auditors,
reasonably be likely to jeopardize the status of the transactions contemplated
hereby and by the Registration Statement as a tax-free organization under
Section 351 of the Code. In addition, if Pentacon is advised in writing in good
faith by any managing underwriter of an underwritten offering of the securities
being offered pursuant to any registration statement under this Section 17.1
that the number of shares to be sold by persons other than Pentacon is greater
than the number of such shares which can be offered without adversely affecting
the offering, Pentacon may reduce pro rata the number of shares offered for the
accounts of such persons (based upon the number of shares held by such person)
to a number deemed satisfactory by such managing underwriter, provided, that,
for each such offering made by Pentacon after the IPO, such reduction shall be
made first by reducing the number of shares to be sold by persons other than
Pentacon, the Stockholders or Other Stockholders and the Stockholders of the
Other Founding Companies (collectively, the Stockholders, Other Stockholders and
the Stockholders of the other Founding Companies being referred to herein as the
"Founding Stockholders"), and thereafter, if a further reduction is required, by
reducing the number of shares to be sold by the Founding Stockholders.
17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register
shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements or term sheets
thereto, Pentacon will furnish a representative of the Stockholders or
Other Stockholders with copies of all such documents proposed to be filed)
as promptly as practical;
-53-
<PAGE>
(ii) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 120 days;
(iii) Furnish to each Stockholder or Other Stockholder who so
requests such number of copies of such registration statement, each
amendment and supplement thereto and the prospectus included in such
registration statement (including each preliminary prospectus and any term
sheet associated therewith), and such other documents as such Stockholder
or Other Stockholder may reasonably request in order to facilitate the
disposition of the relevant shares;
(iv) Use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Stockholders or Other Stockholders, and to keep such registration or
qualification effective during the period such registration statement is
to be kept effective, provided that Pentacon shall not be required to
become subject to taxation, to qualify to do business or to file a general
consent to service of process in any such states or jurisdictions;
(v) Cause all such shares of Pentacon Stock to be listed or included
on any securities exchanges or trading systems on which similar securities
issued by Pentacon are then listed or included;
(vi) Notify each Stockholder or Other Stockholder at any time when a
prospectus relating thereto is required to be delivered under the 1933 Act
within the period that Pentacon is required to keep the registration
statement effective of the happening of any event as a result of which the
prospectus included in such registration statement, together with any
associated term sheet, contains an untrue statement of a material fact or
omits any fact necessary to make the statement therein not misleading,
and, at the request of such Stockholder or Other Stockholder, Pentacon
will prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of the covered shares, such
prospectus will not contain an untrue statement of material fact or omit
to state any fact necessary to make the statements therein not misleading.
All expenses incurred in connection with the registration under this
Article 17 (including all registration, filing, qualification, legal, printer
and accounting fees, but excluding underwriting commissions and discounts),
shall be borne by Pentacon.
17.3 INDEMNIFICATION.
(a) In connection with any registration hereunder, Pentacon shall
indemnify, to the extent permitted by law, each Stockholder and Other
Stockholders against all losses, claims, damages, liabilities and expenses
arising out of or resulting from any untrue or alleged untrue
-54-
<PAGE>
statement of material fact contained in any registration statement, prospectus
or preliminary prospectus or associated term sheet or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as the
same are caused by or contained in or omitted from any information furnished in
writing to Pentacon by such indemnified party expressly for use therein or by
any indemnified parties' failure to deliver a copy of the registration statement
or prospectus or any amendment or supplements thereto after Pentacon has
furnished such Indemnified Party with a sufficient number of copies of the same.
(b) In connection with any registration hereunder, each Stockholder
shall furnish to Pentacon in writing such information as is reasonably requested
by Pentacon for use in any such registration statement or prospectus and will
indemnify, to the extent permitted by law, Pentacon, its directors and officers
and each person who controls Pentacon (within the meaning of the 1933 Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement or material fact or any omission or alleged
omission of a material fact required to be stated in the registration statement
or prospectus or any amendment thereof or supplement thereto necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in information so furnished in writing by
such Stockholder specifically for use in preparing the registration statement.
Notwithstanding the foregoing, the liability of a Stockholder under this Section
17.3 shall be limited to an amount equal to the net proceeds actually received
by such Stockholder from the sale of the relevant shares covered by the
registration statement.
(c) Any person entitled to indemnification under this Section will
(i) give prompt notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified parties'
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. Any failure to give prompt notice shall
deprive a party of its right to indemnification hereunder only to the extent
that such failure shall have adversely affected the indemnifying party. If the
defense of any claim is assumed, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
or elects not to assume the defense of a claim, will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party, a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant
to Section 17.1 covering an underwritten registered offering, Pentacon and each
participating holder agree to enter into a written agreement with the managing
underwriters in such form and containing such provisions as are customary in the
securities business for such an arrangement between such
-55-
<PAGE>
managing underwriters and companies of Pentacon's size and investment stature,
including indemnification.
17.5 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of Pentacon
stock to the public without registration, Pentacon agrees to use its
commercially reasonable efforts to:
(i) make and keep public information regarding Pentacon available as
those terms are understood and defined in Rule 144 under the 1933 Act for
a period of four years beginning 90 days following the effective date of
the Registration Statement;
(ii) file with the SEC in a timely manner all reports and other
documents required of Pentacon under the 1933 Act and the 1934 Act at any
time after it has become subject to such reporting requirements; and
(iii) so long as a Stockholder or Other Stockholder owns any
restricted Pentacon Common Stock, furnish to each Stockholder or Other
Stockholder forthwith upon written request a written statement by Pentacon
as to its compliance with the reporting requirements of Rule 144 (at any
time from and after 90 days following the effective date of the
Registration Statement, and of the 1933 Act and the 1934 Act (any time
after it has become subject to such reporting requirements), a copy of the
most recent annual or quarterly report of Pentacon, and such other reports
and documents so filed as a Stockholder or Other Stockholder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing a Stockholder or Other Stockholder to sell any such shares
without registration.
18. GENERAL
18.1 COOPERATION. The Company, Stockholders, Pentacon and Newco shall each
deliver or cause to be delivered to the other on the Consummation Date, and at
such other times and places as shall be reasonably agreed to, such additional
instruments as the other may reasonably request for the purpose of carrying out
this Agreement. The Company will cooperate and use its reasonable efforts to
have the present officers, directors and employees of the Company cooperate with
Pentacon on and after the Consummation Date in furnishing information, evidence,
testimony and other assistance in connection with any tax return filing
obligations, actions, proceedings, arrangements or disputes of any nature with
respect to matters pertaining to all periods prior to the Consummation Date.
18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
Pentacon, and the heirs and legal representatives of the Stockholders.
-56-
<PAGE>
18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Stockholders, the
Company, Newco and Pentacon and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only (i)
pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a
written instrument executed by the Stockholders, the Company, Newco and
Pentacon, acting through their respective officers or trustees, duly authorized
by their respective Boards of Directors. Any disclosure made on any Schedule
delivered pursuant hereto shall be deemed to have been disclosed for purposes of
any other Schedule required hereby, provided that the Company shall make a good
faith effort to cross reference disclosure, as necessary or advisable, between
related Schedules, and provided further that the failure to do so will not
affect the validity of such disclosure.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other parties hereto against all
loss, cost, damages or expense arising out of claims for fees or commission of
brokers employed or alleged to have been employed by such indemnifying party.
18.6 EXPENSES. Whether or not the transactions herein contemplated shall
be consummated, Pentacon will pay the fees, expenses and disbursements of
Pentacon and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by Pentacon under this Agreement, including the
fees and expenses of Ernst & Young LLP, Andrews & Kurth L.L.P., and any other
person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures
II, L.C., and the costs of preparing the Registration Statement. Except as
agreed in writing by Pentacon, each Stockholder shall pay their respective fees,
expenses and disbursements of counsel and other professionals in connection with
this transaction and shall pay all sales, use, transfer, real property transfer,
recording, gains, stock transfer and other similar taxes and fees ("Transfer
Taxes") imposed in connection with the Merger, other than Transfer Taxes, if
any, imposed by the State of Delaware. Each Stockholder shall file all necessary
documentation and Returns with respect to such Transfer Taxes. In addition, each
Stockholder acknowledges that he, and not the Company or Pentacon, will pay all
taxes due upon receipt of the consideration payable pursuant to Section 2
hereof. The Stockholders acknowledge that the risks of the transactions
contemplated hereby include tax risks, with respect to which the Stockholders
are relying solely on the opinion contemplated by Section 8.12 hereof.
-57-
<PAGE>
18.7 NOTICES. All notices of communication required or permitted hereunder
shall be in writing and may be given by depositing the same in United States
mail, addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person to
an officer or agent of such party.
(a) If to Pentacon, or Newco, addressed to them at:
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
with copies to:
Bruce Taten, Esquire
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
and
Christopher S. Collins, Esquire
Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
(b) If to the Stockholders and Other Stockholders, addressed to them at
their addresses set forth on Annex II, with copies to:
David I. Kuperman
Kuperman, Orr, Mouer & Albers
100 Congress Avenue, Suite 1400
Austin, Texas 78701
(c) If to the Company, addressed to it at:
Michelyn McClure Read
Capital Bolt & Supply, Inc.
850 NW Broad Street
Lyons, Georgia 30436
and
-58-
<PAGE>
Rory McClure
Capitol Bolt & Supply, Inc.
6015 Dillard Circle
P.O. Box 140029
Austin, Texas 78714
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware.
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties made herein and at the time
of the Closing or in writing delivered pursuant to the provisions of this
Agreement shall survive the consummation of the transactions contemplated hereby
and any examination on behalf of the parties until the applicable Expiration
Date.
18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 TIME. Time is of the essence with respect to this Agreement.
18.12 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4,
no right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
-59-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PENTACON, INC.
By:_________________________________
Mark E. Baldwin
Chief Executive Officer
CAPITOL BOLT & SUPPLY ACQUISITION
COMPANY
By:_________________________________
Mark E. Baldwin
President
CAPITOL BOLT & SUPPLY, INC.
By:_________________________________
Mary E. McClure
President
STOCKHOLDERS:
_____________________________________
MARY E. McCLURE
_____________________________________
MARY E. McCLURE as Co-Trustee
of the Earl Milton McClure, Jr.
Residuary Trust
-60-
<PAGE>
ANNEX I (Capitol Bolt & Supply, Inc.)
CONSIDERATION TO BE PAID TO THE STOCKHOLDERS
STOCKHOLDER SHARES OF COMMON STOCK
OF PENTACON, INC. MERGER CASH
----------- -------------
Earl Milton McClure, Jr
Residuary Trust ..................... 71,759 $306,067.32
Nancy Adami ............................... 11 $ 52.39
Mike Samuels .............................. 5 $ 22.88
Tommie Jalufka ............................ 1 $ 2.79
Jack Revell ............................... 4 $ 11.61
Rudy Ygnacio .............................. 18 $ 85.72
Rick Harkins .............................. 1 $ 4.02
John Downing .............................. 2 $ 5.80
Frost National CBS Profit
Sharing Plan ........................ 24,582 $104,846.97
Michelyn J. McClure ....................... 1,412 $ 6,019.48
Mary E. McClure ........................... 83,139 $354,609.02
---------- -----------
180,934 $771,728.00
========== ===========
MINIMUM VALUE: ............................ $2,622,683 --
<PAGE>
ANNEX II
Capitol Bolt & Supply, Inc. Stock Ownership
CLASS A
Earl Milton McClure, Jr. Residuary Trust 250,000 shares
Michelyn J. McClure 5,000 shares
Mary E. McClure 245,000 shares
CLASS B
Earl Milton McClure, Jr. Residuary Trust 4,599.5 shares
Nancy Adami 39 shares
Mike Samuels 17 shares
Tommie Jalufka 2 shares
Jack Revell 8 shares
Rudy Ygnacio 63 shares
Rick Harkins 3 shares
John Downing 4 shares
Frost National CBS Profit Sharing Plan 87,215 shares
Mary E. McClure 49,985.5 shares
For addresses of Stockholders, see attachment hereto.
------------------------------------------------------------------------------
AGREEMENT AND PLAN OF ORGANIZATION
dated as of the 1st day of December 1997
by and among
PENTACON, INC.
MAUMEE INDUSTRIES ACQUISITION COMPANY
(a subsidiary of Pentacon, Inc.)
MAUMEE INDUSTRIES, INC.
and
the STOCKHOLDERS named herein
------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
RECITALS.....................................................................1
1. THE MERGER.............................................................5
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................5
1.2 EFFECTIVE TIME OF THE MERGER.....................................5
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION............................................6
1.4 EFFECT OF MERGER.................................................6
2. CONVERSION OF STOCK....................................................7
2.1 MANNER OF CONVERSION.............................................7
3. DELIVERY OF MERGER CONSIDERATION.......................................8
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8
4. CLOSING................................................................8
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE STOCKHOLDERS.......................................................9
5.1 DUE ORGANIZATION.................................................9
5.2 AUTHORIZATION...................................................10
5.3 CAPITAL STOCK OF THE COMPANY....................................10
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10
5.5 NO BONUS SHARES.................................................10
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................10
5.7 PREDECESSOR STATUS; ETC.........................................11
5.8 SPIN-OFF BY THE COMPANY.........................................11
5.9 FINANCIAL STATEMENTS............................................11
5.10 LIABILITIES AND OBLIGATIONS.....................................11
5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12
5.12 PERMITS AND INTANGIBLES.........................................12
5.13 ENVIRONMENTAL MATTERS...........................................13
5.14 PERSONAL PROPERTY...............................................14
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15
5.16 REAL PROPERTY...................................................15
5.17 INSURANCE.......................................................16
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............16
-i-
<PAGE>
5.19 EMPLOYEE PLANS..................................................17
5.20 COMPLIANCE WITH ERISA...........................................18
5.21 CONFORMITY WITH LAW; LITIGATION.................................19
5.22 TAXES...........................................................19
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21
5.25 ABSENCE OF CHANGES..............................................21
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................22
5.27 VALIDITY OF OBLIGATIONS.........................................23
5.28 RELATIONS WITH GOVERNMENTS......................................23
5.29 DISCLOSURE......................................................23
5.30 PROHIBITED ACTIVITIES...........................................23
5.31 NO WARRANTIES OR INSURANCE......................................24
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS....................................................24
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................24
5.34 PREEMPTIVE RIGHTS...............................................24
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................24
6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25
6.1 DUE ORGANIZATION................................................25
6.2 AUTHORIZATION...................................................25
6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................25
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26
6.5 SUBSIDIARIES....................................................26
6.6 FINANCIAL STATEMENTS............................................26
6.7 LIABILITIES AND OBLIGATIONS.....................................26
6.8 CONFORMITY WITH LAW; LITIGATION.................................26
6.9 NO VIOLATIONS...................................................27
6.10 VALIDITY OF OBLIGATIONS.........................................28
6.11 PENTACON STOCK..................................................28
6.12 NO SIDE AGREEMENTS..............................................28
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................28
6.14 DISCLOSURE......................................................28
7. COVENANTS PRIOR TO CLOSING............................................29
7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29
7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................29
7.3 PROHIBITED ACTIVITIES...........................................30
7.4 NO SHOP.........................................................32
7.5 NOTICE TO BARGAINING AGENTS.....................................32
7.6 AGREEMENTS......................................................32
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE
COMPANY.........................................................32
7.8 AMENDMENT OF SCHEDULES..........................................33
-ii-
<PAGE>
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............34
7.10 FINAL FINANCIAL STATEMENTS......................................34
7.11 FURTHER ASSURANCES..............................................35
7.12 AUTHORIZED CAPITAL..............................................35
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........35
7.14 PRE-CLOSING NOTIFICATIONS.......................................35
7.15 PAYMENT OF INDEBTEDNESS.........................................35
7.16 MINIMUM VALUE...................................................36
7.17 DIRECTORS.......................................................36
7.18 TRANSACTION REPORTING...........................................36
7.19 PERMITS.........................................................36
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS
AND COMPANY...........................................................36
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......36
8.2 SATISFACTION....................................................37
8.3 NO LITIGATION...................................................37
8.4 OPINION OF COUNSEL..............................................37
8.5 REGISTRATION STATEMENT..........................................37
8.6 CONSENTS AND APPROVALS..........................................37
8.7 GOOD STANDING CERTIFICATES......................................37
8.8 NO MATERIAL ADVERSE CHANGE......................................38
8.9 CLOSING OF IPO..................................................38
8.10 SECRETARY'S CERTIFICATE.........................................38
8.11 EMPLOYMENT AGREEMENTS...........................................38
8.12 TAX MATTERS.....................................................38
8.13 EXCHANGE LISTING................................................38
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO.............38
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....39
9.2 NO LITIGATION...................................................39
9.3 SECRETARY'S CERTIFICATE.........................................39
9.4 NO MATERIAL ADVERSE EFFECT......................................39
9.5 STOCKHOLDERS' RELEASE...........................................39
9.6 SATISFACTION....................................................40
9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................40
9.8 OPINION OF COUNSEL..............................................40
9.9 CONSENTS AND APPROVALS..........................................40
9.10 GOOD STANDING CERTIFICATES......................................40
9.11 REGISTRATION STATEMENT..........................................40
9.12 EMPLOYMENT AGREEMENTS...........................................40
9.13 CLOSING OF IPO..................................................40
-iii-
<PAGE>
9.14 FIRPTA CERTIFICATE..............................................40
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............41
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................41
10.2 PREPARATION AND FILING OF TAX RETURNS...........................41
10.3 DIRECTORS.......................................................42
11. INDEMNIFICATION.......................................................42
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.....................42
11.2 INDEMNIFICATION BY PENTACON.....................................43
11.3 THIRD PERSON CLAIMS.............................................43
11.4 EXCLUSIVE REMEDY................................................45
11.5 LIMITATIONS ON INDEMNIFICATION..................................45
12. TERMINATION OF AGREEMENT..............................................46
12.1 TERMINATION.....................................................46
12.2 LIABILITIES IN EVENT OF TERMINATION.............................47
13. NONCOMPETITION........................................................47
13.1 PROHIBITED ACTIVITIES...........................................47
13.2 DAMAGES.........................................................48
13.3 REASONABLE RESTRAINT............................................48
13.4 SEVERABILITY; REFORMATION.......................................48
13.5 INDEPENDENT COVENANT............................................48
13.6 MATERIALITY.....................................................49
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................49
14.1 STOCKHOLDERS....................................................49
14.2 PENTACON AND NEWCO..............................................49
14.3 DAMAGES.........................................................50
14.4 SURVIVAL........................................................50
15. TRANSFER RESTRICTIONS.................................................50
15.1 TRANSFER RESTRICTIONS...........................................50
16. FEDERAL SECURITIES ACT REPRESENTATIONS................................51
16.1 COMPLIANCE WITH LAW.............................................51
16.2 ECONOMIC RISK; SOPHISTICATION...................................51
17. REGISTRATION RIGHTS...................................................52
17.1 PIGGYBACK REGISTRATION RIGHTS...................................52
17.2 REGISTRATION PROCEDURES.........................................52
17.3 INDEMNIFICATION.................................................53
-iv-
<PAGE>
17.4 UNDERWRITING AGREEMENT..........................................54
17.5 RULE 144 REPORTING..............................................55
18. GENERAL...............................................................55
18.1 COOPERATION.....................................................55
18.2 SUCCESSORS AND ASSIGNS..........................................55
18.3 ENTIRE AGREEMENT................................................55
18.4 COUNTERPARTS....................................................56
18.5 BROKERS AND AGENTS..............................................56
18.6 EXPENSES........................................................56
18.7 NOTICES.........................................................56
18.8 GOVERNING LAW...................................................58
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................58
18.10 EXERCISE OF RIGHTS AND REMEDIES.................................58
18.11 TIME............................................................58
18.12 REFORMATION AND SEVERABILITY....................................58
18.13 REMEDIES CUMULATIVE.............................................58
18.14 CAPTIONS........................................................58
-v-
<PAGE>
ANNEXES
Annex I - Consideration to Be Paid to Stockholders
Annex II - Stockholders and Stock Ownership of the Company
Annex III - Certificate of Incorporation and By-Laws of Pentacon and Newco
Annex IV - Form of Opinion of Counsel to Pentacon and Newco
Annex V - Form of Opinion of Counsel to Company and Stockholders
Annex VI - Form of Founder Employment Agreement
-vi-
<PAGE>
SCHEDULES
5.1 Due Organization
5.2 Authorization
5.3 Capital Stock of the Company
5.4 Transactions in Capital Stock, Organization Accounting
5.5 No Bonus Shares
5.6 Subsidiaries
5.7 Predecessor Status; etc
5.8 Spin-off by the Company
5.9 Financial Statements
5.10 Liabilities and Obligations
5.11 Accounts and Notes Receivable
5.12 Permits and Intangibles
5.13 Environmental Matters
5.14 Personal Property
5.15 Significant Customers; Material Contracts and Commitments
5.16 Real Property
5.17 Insurance
5.18 Compensation; Employment Agreements; Labor Matters
5.19 Employee Plans
5.20 Compliance with ERISA
5.21 Conformity with Law; Litigation
5.22 Taxes
5.23 No Violations, Consents, etc.
5.24 Government Contracts
5.25 Absence of Changes
5.26 Deposit Accounts; Powers of Attorney
5.30 Prohibited Activities
5.31 No Warranties or Insurance
5.32 Related-Party Transactions
5.35 No Intention to Dispose of Pentacon Stock
6.3 Capital Stock of Pentacon and Newco
6.4 Options, Warrants and Rights
6.8 Litigation
6.9 No Violations
6.12 Side Agreements
7.2 Conduct of Business Pending Closing
7.3 Prohibited Activities
7.5 Notice to Bargaining Agents
7.6 Termination Agreements
7.15 Obligations to be Paid at Closing
9.7 Continuing Related Party Agreements
9.12 Employment Agreements
13.1 Prohibited Activities
18.5 Brokers and Agents
-vii-
<PAGE>
AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of
the 1st day of December, 1997, by and among PENTACON, INC., a Delaware
corporation ("Pentacon"), MAUMEE INDUSTRIES ACQUISITION COMPANY, a Delaware
corporation ("Newco"), MAUMEE INDUSTRIES, INC., an Indiana corporation (the
"Company"), and MICHAEL BLACK and MICHAEL PETERS (the "Stockholders"), who are
all the stockholders of the Company, who herein agree as follows:
RECITALS
WHEREAS, Newco is a corporation duly organized and existing under the laws
of the State of Delaware, having been incorporated on November 26, 1997, solely
for the purpose of completing the transactions set forth herein, and is a
wholly-owned subsidiary of Pentacon, a corporation organized and existing under
the laws of the State of Delaware;
WHEREAS, the respective boards of directors of Newco and the Company
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Newco merge with and into
the Company pursuant to this Agreement and the applicable provisions of the laws
of the States of Delaware and the State of Incorporation (as hereinafter
defined);
WHEREAS, Pentacon is entering into other separate agreements substantially
similar to this Agreement (the "Other Agreements"), each of which is entitled
"Agreement and Plan of Organization," with each of the Other Founding Companies
(as defined herein) and their respective stockholders in order to acquire
additional fasteners companies;
WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon
Plan of Organization;"
WHEREAS, the Stockholders and the boards of directors and the stockholders
of Pentacon, each of the Other Founding Companies and each of the subsidiaries
of Pentacon that are parties to the Other Agreements have approved and adopted
the Pentacon Plan of Organization as an integrated plan pursuant to which the
Stockholders and the stockholders of each of the other Founding Companies will
transfer the capital stock of each of the Founding Companies to Pentacon and the
Stockholders of each of the other Founding Companies will acquire the stock of
Pentacon (but not cash or other property) as a tax-free transfer of property
under Section 351 of the Code;
WHEREAS, the Board of Directors of the Company has approved this Agreement
as part of the Pentacon Plan of Organization in order to transfer the capital
stock of the Company to Pentacon;
-1-
<PAGE>
WHEREAS, unless the context otherwise requires, capitalized terms used in
this Agreement or in any schedule attached hereto and not otherwise defined
shall have the following meanings for all purposes of this Agreement:
"1933 ACT" means the Securities Act of 1933, as amended.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"ACQUIRED PARTY" means the Company, any subsidiary and any member of a
Relevant Group.
"ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware
companies wholly-owned by Pentacon prior to the Consummation Date.
"AFFILIATES" shall mean with respect to any person or entity, any other
person or entity that directly or indirectly, controls, is controlled, or is
under common control with such person or entity. For purposes hereof, control
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger
with respect to the Merger in such forms as may be required by the laws of the
State of Delaware and the State of Incorporation.
"BALANCE SHEET DATE" has means September 30, 1997.
"CHARTER DOCUMENTS" has the meaning set forth in Section 5.1.
"CLOSING" has the meaning set forth in Section 4.
"CLOSING DATE" has the meaning set forth in Section 4.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY STOCK" has the meaning set forth in Section 2.1.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital
of this Agreement.
"CONSUMMATION DATE" has the meaning set forth in Section 4.
"DELAWARE GCL" has the meaning set forth in Section 1.4.
-2-
<PAGE>
"DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of
the Registration Statement, and any corrections thereto and supplemental
information delivered by Pentacon to the Company for delivery to the
Stockholders prior to the time this Agreement is delivered by the Company and
the Stockholders to Pentacon.
"EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger
becomes effective, which shall occur on the Consummation Date.
"ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13.
"ERISA" has the meaning set forth in Section 5.19.
"EXPIRATION DATE" has the meaning set forth in Section 5(A).
"FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii).
"FOUNDING COMPANIES" means:
Alatec Products, Inc., a California corporation;
AXS Solutions, Inc., a Delaware corporation;
Capitol Bolt & Supply, Inc., a Texas corporation;
Maumee Industries, Inc., an Indiana corporation; and
Sales Systems, Limited, a Pennsylvania corporation.
"HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c).
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(ii).
"IPO" means the initial public offering of Pentacon Stock pursuant to the
Registration Statement described herein.
"LICENSES" has the meaning set forth in Section 5.12.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the business,
operations, properties, assets or condition (financial or otherwise), of the
subject entity and its subsidiaries taken as a whole.
-3-
<PAGE>
"MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a).
"MERGER" means the merger of Newco with and into the Company pursuant to
this Agreement and the applicable provisions of the laws of the State of
Delaware and the laws of the State of Incorporation.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"NEWCO STOCK" means the common stock, par value $.0l per share, of Newco.
"OTHER AGREEMENTS" has the meaning set forth in the third recital hereof.
"OTHER FOUNDING COMPANIES" means all of the Founding Companies other than
the Company.
"PBGC" has the meaning set forth in Section 5.19.
"PENTACON" has the meaning set forth in the first paragraph of this
Agreement.
"PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1
"PENTACON STOCK" means the common stock, par value $.01 per share, of
Pentacon.
"PERSON" means an individual, partnership, joint venture, corporation,
bank, trust, unincorporated organization or other entity.
"PRICING" means the date of determination by Pentacon and the Underwriters
of the public offering price of the shares of Pentacon Stock in the IPO; the
parties hereto contemplate that the Pricing shall take place on the Closing
Date.
"PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30.
"QUALIFIED PLANS" has the meaning set forth in Section 5.20.
"REGISTRATION STATEMENT" means that certain registration statement on Form
S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued
in the IPO and all amendments thereto.
"RELEVANT GROUP" means the Company and any affiliated, combined,
consolidated, unitary or similar group of which the Company is or was a member.
-4-
<PAGE>
"RETURNS" means any returns, reports or statements (including any
information returns) required to be filed for purposes of reporting, computing
or otherwise required in connection with a particular Tax.
"SCHEDULE" means each Schedule attached hereto, which shall reference the
relevant sections of this Agreement, on which parties hereto disclose
information as part of their respective representations, warranties and
covenants.
"SEC" means the United States Securities and Exchange Commission.
"STATE OF INCORPORATION" means the State of Indiana.
"STOCKHOLDERS" has the meaning set forth in the first paragraph of this
Agreement.
"SUBSIDIARIES" means with respect to a person or entity, any corporation
or other entity in which such person or entity owns a 5% or greater ownership
interest.
"SURVIVING CORPORATION" has the meaning set forth in Section 1.2.
"TAX" OR "TAXES" means all federal, state, local or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, withholding, employment, excise, property, deed, stamp, alternative
or add on minimum, or other taxes, assessments, duties, fees, levies or other
governmental charges, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"UNDERWRITERS" means the prospective underwriters identified in the Draft
Registration Statement.
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(i).
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and
delivered to Pentacon to be held for filing with the Secretary of State of the
State of Delaware and the Secretary of State (or other appropriate authority) of
the State of Incorporation on or effective as of the Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
Newco shall be merged with and into the Company in accordance with the Articles
of Merger and the separate existence of Newco shall cease. The Company shall be
the surviving party in the Merger and the Company is sometimes hereinafter
referred to as the "Surviving Corporation". As a result of the Merger, the
outstanding shares of capital stock of Newco and the Company shall be converted
or canceled in the manner provided in Section 2.
-5-
<PAGE>
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
(i) the Certificate of Incorporation of the Company then in effect
shall be the Certificate of Incorporation of the Surviving Corporation
until changed as provided by law;
(ii) the By-laws of Newco then in effect shall become the By-laws of
the Surviving Corporation; and subsequent to the Effective Time of the
Merger, such By-laws shall be the By-laws of the Surviving Corporation
until they shall thereafter be duly amended (and such By-laws shall be
amended, if necessary, to comply with applicable state law);
(iii) the Board of Directors of the Surviving Corporation shall
consist of the persons who are on the Board of Directors of the Company
immediately prior to the Effective Time of the Merger, provided that Bruce
Taten shall become an additional director of the Surviving Corporation
effective as of the Effective Time of the Merger, and the number of
directors constituting the entire Board of Directors of the Company shall
be increased, if necessary, to accommodate the addition of such additional
director; the Board of Directors of the Surviving Corporation shall hold
office subject to the provisions of the laws of the State of Incorporation
and of the Certificate of Incorporation and By-laws of the Surviving
Corporation; and
(iv) the officers of the Company immediately prior to the Effective
Time of the Merger shall continue as the officers of the Surviving
Corporation in the same capacity or capacities, and effective upon the
Effective Time of the Merger Brian Fontana shall become an additional Vice
President and Bruce Taten will become the Secretary of the Surviving
Corporation, such officers to serve, subject to the provisions of the
Certificate of Incorporation and By-laws of the Surviving Corporation,
until their respective successors are duly elected and qualified.
1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of
the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of
the State of Incorporation. Except as herein specifically set forth, the
identity, existence, purposes, powers, objects, franchises, privileges, rights
and immunities of the Company shall continue unaffected and unimpaired by the
Merger and the corporate franchises, existence and rights of Newco shall be
merged with and into the Company, and the Company, as the Surviving Corporation,
shall be fully vested therewith. At the Effective Time of the Merger, the
separate existence of Newco shall cease and, in accordance with the terms of
this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public, as well as of a private,
nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all taxes, including
those due and owing and those accrued, and all other choses in action, and all
and every other interest of or belonging to or due to the Company or Newco shall
be transferred to, and vested in, the Surviving Corporation without further act
or deed; and all property, rights and privileges, powers and
-6-
<PAGE>
franchises and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the Company and Newco;
and the title to any real estate, or interest therein, whether by deed or
otherwise, under the laws of the State of Incorporation vested in the Company or
Newco, shall not revert or be in any way impaired by reason of the Merger.
Except as otherwise provided herein, the Surviving Corporation shall thenceforth
be responsible and liable for all the liabilities and obligations of the Company
and Newco and any claim existing, or action or proceeding pending, by or against
the Company or Newco may be prosecuted as if the Merger had not taken place, or
the Surviving Corporation may be substituted in their place. Neither the rights
of creditors nor any liens upon the property of the Company or Newco shall be
impaired by the Merger, and all debts, liabilities and duties of the Company and
Newco shall attach to the Surviving Corporation, and may be enforced against
such Surviving Corporation to the same extent as if said debts, liabilities and
duties had been incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the Company ("Company Stock") into shares of
Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of
the Surviving Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of Company Stock issued and outstanding
immediately prior to the Effective Time of the Merger, by virtue of the
Merger and without any action on the part of the holder thereof,
automatically shall be deemed to represent (1) the right to receive the
number of shares of Pentacon Stock set forth on Annex I hereto with
respect to such holder and (2) the right to receive the amount of cash set
forth on Annex I hereto with respect to such holder;
(ii) all shares of Company Stock that are held by the Company as
treasury stock or which are otherwise issued but not outstanding shall be
canceled and retired and shall cease to exist and no shares of Pentacon
Stock or other consideration shall be delivered or paid in exchange
therefor; and
(iii) each share of Newco Stock issued and outstanding immediately
prior to the Effective Time of the Merger, shall, by virtue of the Merger
and without any action on the part of Pentacon, automatically be converted
into one fully paid and non-assessable share of common stock of the
Surviving Corporation which shall constitute all of the issued and
outstanding shares of common stock of the Surviving Corporation
immediately after the Effective Time of the Merger.
All Pentacon Stock received by the Stockholders pursuant to this Agreement
shall, except for restrictions on resale or transfer described in Sections 15
and 16 hereof, have the same rights as
-7-
<PAGE>
all the other shares of outstanding Pentacon Stock by reason of the provisions
of the Certificate of Incorporation of Pentacon or as otherwise provided by the
Delaware GCL. All Pentacon Stock received by the Stockholders shall be issued
and delivered to the Stockholders free and clear of any liens, claims or
encumbrances of any kind or nature. All voting rights of such Pentacon Stock
received by the Stockholders shall be fully exercisable by the Stockholders and
the Stockholders shall not be deprived nor restricted in exercising those
rights. At the Effective Time of the Merger, Pentacon shall have no class of
capital stock issued and outstanding other than the Pentacon Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date
the Stockholders, who are the holders of all of the outstanding capital stock of
the Company, shall, upon surrender of their certificates, receive the respective
number of shares of Pentacon Stock and the amount of cash described on Annex I
hereto, said cash to be payable by certified check, or if hereafter agreed by
the Stockholder and Pentacon, by wire transfer.
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders shall
deliver to Pentacon at the Closing the certificates representing Company Stock,
duly endorsed in blank by the Stockholders, or accompanied by blank stock
powers, and with all necessary transfer tax and other revenue stamps, acquired
at the Stockholders' expense, affixed and canceled. The Stockholders agree
promptly to cure any deficiencies with respect to the endorsement of the stock
certificates or other documents of conveyance with respect to such Company Stock
or with respect to the stock powers accompanying any Company Stock.
4. CLOSING
At or prior to the Pricing, the parties shall take all actions reasonably
necessary to prepare to (i) effect the Merger (including the execution of the
Articles of Merger which shall be placed in escrow with Pentacon for filing with
the appropriate authorities effective on the Consummation Date, subject,
however, to satisfaction or waiver of all conditions precedent) and (ii) effect
the conversion and delivery of shares referred to in Section 3 hereof; provided,
that such actions shall not include the actual completion of the Merger or the
conversion and delivery of the shares and certified check(s) (or wire transfers)
referred to in Section 3 hereof, each of which actions shall only be taken upon
the Consummation Date as herein provided. In the event that there is no
Consummation Date and this Agreement automatically terminates as provided in
this Section 4 the Articles of Merger shall not be filed and shall be promptly
returned to the Stockholders. The taking of the actions described in clauses (i)
and (ii) above (the "Closing") shall take place on the closing date (the
"Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce
Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between
the Stockholders and Pentacon. On the Consummation Date (x) the Articles of
Merger shall be filed with the appropriate state authorities so that they shall
be, as early as practicable on the Consummation Date, effective and the Merger
shall thereby be effected, (y) all transactions contemplated by this Agreement,
including the conversion and delivery of shares, the delivery of a certified
check or checks (or wire
-8-
<PAGE>
transfers) in an amount equal to the cash portion of the consideration which the
Stockholders shall be entitled to receive pursuant to Section 3 hereof shall
occur and be completed and (z) the closing with respect to the IPO shall occur
and be completed. The date on which the actions described in the preceding
clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date."
During the period from the Closing Date to the Consummation Date, this Agreement
may only be terminated by the parties if the underwriting agreement in respect
of the IPO is terminated pursuant to the terms of such underwriting agreement.
This Agreement shall also in any event automatically terminate if the
Consummation Date has not occurred within 15 business days following the Closing
Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
STOCKHOLDERS
(A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.
Each of the Stockholders, jointly and severally, and the Company represent
and warrant that all of the following representations and warranties in this
Section 5(A) are true at the date of this Agreement, and that such
representations and warranties shall survive the Consummation Date for a period
of twenty-four months (the last day of such period being the "Expiration Date"),
except that the warranties and representations set forth in Sections 5.13 and
5.22 hereof shall survive until such time as the applicable statute of
limitations period has run or for five (5) years if there is no applicable
statute of limitations, which shall be deemed to be the Expiration Date for
Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall
mean and refer to the Company and all of its Subsidiaries, if any.
5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and
organized, validly existing and in good standing under the laws of the State of
Incorporation, and has the requisite power and authority to carry on its
business as it is now being conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction in which failure to so
qualify would reasonably be expected to have a Material Adverse Effect on the
Company. Schedule 5.1 sets forth a list of all jurisdictions in which the
Company is authorized or qualified to do business. True, complete and correct
copies of (i) the Certificate of Incorporation and By-laws, each as amended, of
the Company (the "Charter Documents"), and (ii) the stock records of the Company
(including, without limitation, a copy of the Company's stock ledger), are all
attached to Schedule 5.1. The Company has delivered complete and correct copies
of all minutes of meetings, written consents and other written evidence, if any,
of deliberations of or actions taken by the Company's Board of Directors, any
Committees of the Board of Directors and stockholders during the last five
years.
-9-
<PAGE>
5.2 AUTHORIZATION. (i) The officers or other representatives of the
Company executing this Agreement have the authority to enter into and bind the
Company to the terms of this Agreement and (ii) the Company has the full legal
right, power and authority to enter into this Agreement and the Merger. The
directors and Stockholders have approved this Agreement and the transactions
contemplated hereby in all respects, and copies of all such resolutions,
certified by the Secretary or an Assistant Secretary of the Company as being in
full force and effect on the date hereof, are attached hereto as Schedule 5.2.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company is as set forth on Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the Company are owned by the Stockholders in the
amounts set forth in Annex II. Each Stockholder, severally, represents and
warrants that except as set forth on Schedule 5.3, the shares of capital stock
of the Company owned by such Stockholder are owned free and clear of all liens,
security interests, pledges, charges, voting trusts, restrictions, encumbrances
and claims of every kind. All of the issued and outstanding shares of the
capital stock of the Company have been duly authorized and validly issued, are
fully paid and nonassessable, are owned of record and beneficially by the
Stockholders and further, such shares were offered, issued, sold and delivered
by the Company in compliance with all applicable state and Federal laws
concerning the issuance of securities. Further, none of such shares were issued
in violation of any preemptive rights of any past or present stockholder.
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set
forth on Schedule 5.4, the Company has not acquired or redeemed any Company
Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option,
warrant, call, conversion right or commitment of any kind exists which obligates
the Company to issue any of its authorized but unissued capital stock; (ii) the
Company has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof; and (iii) neither
the voting stock structure of the Company nor the relative ownership of shares
among any of its respective Stockholders has been altered or changed in
contemplation of the Merger and/or the Pentacon Plan of Organization. Except as
set forth in Schedule 5.4, there are no voting trusts, proxies or other
agreements or understandings to which the Company or any of the Stockholders is
a party or is bound with respect to the voting of any shares of capital stock of
the Company.
5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the
shares of Company Stock was issued pursuant to awards, grants or bonuses in
contemplation of the Merger or the Pentacon Plan of Organization.
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on
Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule
5.6, the Company does not presently own, of record or beneficially, or control,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
-10-
<PAGE>
entity nor is the Company, directly or indirectly, a participant in any joint
venture, partnership or other non-corporate entity.
5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all
predecessor companies of the Company, including the names of any entities
acquired by the Company (by stock purchase, merger or otherwise) or owned by the
Company or from whom the Company previously acquired material assets, in any
case, from the earliest date upon which any Stockholder acquired his or her
stock in any Company. Except as disclosed on Schedule 5.7, the Company has not
been, within such period of time, a subsidiary or division of another
corporation or a part of an acquisition which was later rescinded.
5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
Company or any other person or entity that is an Affiliate of the Company since
January 1, 1995.
5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following
financial statements are attached hereto as Schedule 5.9:
(i) the balance sheets of the Company as of December 31, 1995 and
1996 and the related statements of operations, stockholder's equity and
cash flows for the two-year period ended December 31, 1996, together with
the related notes and schedules (such balance sheets, the related
statements of operations, stockholder's equity and cash flows and the
related notes and schedules are referred to herein as the "Year-end
Financial Statements"); and
(ii) the balance sheet of the Company as of September 30, 1997, (the
"Interim Balance Sheet") and the related statements of operations,
stockholder's equity and cash flows for the nine-month periods ended
September 30, 1997, together with the related notes and schedules (such
balance sheets, the related statements of operations, stockholder's equity
and cash flows and the related notes and schedules are referred to herein
as the "Interim Financial Statements"). The Year-end Financial Statements
and the Interim Financial Statements are collectively called the
"Financial Statements".
5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate
list as of the Balance Sheet Date of (i) all liabilities of the Company which
are not reflected on the Interim Balance Sheet of the Company at the Balance
Sheet Date or otherwise reflected in the Interim Financial Statements at the
Balance Sheet Date except for those liabilities not required to be reflected or
disclosed under generally accepted accounting principles or F.A.S.B. 5 and which
were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan
agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other
security agreements to which the Company is a party or by which its properties
may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet
Date, the Company has not incurred any liabilities or obligations of any kind,
character or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise,
-11-
<PAGE>
other than liabilities incurred in the ordinary course of business and
consistent with past practices. The Company has also delivered to Pentacon on
Schedule 5.10, in the case of those contingent liabilities related to pending or
threatened litigation, a good faith and reasonable estimate (to the extent the
Company can reasonably make an estimate) of the maximum amount which the Company
reasonably expects may be payable and the amount, if any, accrued or reserved
for each such potential liability on the Company's Financial Statements. If no
estimate is provided, the estimate shall for purposes of this Agreement be
deemed to be zero. For each such contingent liability or liability for which the
amount is not fixed or is contested, the Company has provided to Pentacon the
following information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation relating thereto;
(b) amounts claimed and any other action or relief sought; and
(c) name of claimant and all other parties to the claim, suit or
proceeding;
(ii) the name of each court or agency before which such claim, suit
or proceeding is pending; and
(iii) the date (if any) on which such claim, suit or proceeding was
instituted or the date (period) to which such claim relates.
5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate
list of the accounts and notes receivable of the Company, as of the Balance
Sheet Date, including any such amounts which are not reflected in the Interim
Balance Sheet as of the Balance Sheet Date, and including receivables from and
advances to employees and the Stockholders, which are identified as such. Except
to the extent reflected on Schedule 5.11, such accounts, notes and other
receivables are collectible in the amounts shown on Schedule 5.11, net of
reserves reflected in the Interim Balance Sheet of the Balance Sheet Date.
5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses,
franchises, permits and other governmental authorizations ("Licenses") necessary
to conduct the business of the Company and the Company has delivered to Pentacon
an accurate list and summary description (which is set forth on Schedule 5.12)
of all such material Licenses, including any material trademarks, trade names,
patents, patent applications and copyrights owned or held by the Company or any
of its employees (including interests in software or other technology systems,
programs and intellectual property). At or prior to the Closing, all rights to
such trademarks, trade names, patents, patent applications, copyrights and other
intellectual property held by the Stockholders or their Affiliates will be
assigned or licensed to the Company for no additional consideration. The
Licenses and other rights listed on Schedule 5.12 are valid, and the Company has
not received any notice that any person intends to cancel, terminate or not
renew any such License or other right. The Company has conducted and is
conducting its business in compliance with the requirements, standards, criteria
-12-
<PAGE>
and conditions set forth in the Licenses and other rights listed on Schedule
5.12 and is not in violation of any of the foregoing. Except as specifically
provided in Schedule 5.12, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded to the Company by, any such Licenses or other
rights.
5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached
hereto, (i) the Company has conducted its businesses in compliance with all
applicable Environmental Laws, including, without limitation, having all
environmental permits, licenses and other approvals and authorizations necessary
for the operation of its business as presently conducted, (ii) none of the
properties owned by the Company contain any Hazardous Substance as a result of
any activity of the Company in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) the Company has not received any notices,
demand letters or requests for information from any Federal, state, local or
foreign governmental entity or third party indicating that the Company may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of its business, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or to the knowledge of the Stockholders threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (vi) no Hazardous
Substance has been disposed of, released or transported in violation of any
applicable Environmental Law from any properties owned by the Company as a
result of any activity of the Company during the time such properties were
owned, leased or operated by the Company, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analysis regarding
compliance or non-compliance with any applicable Environmental Law conducted by
or which are in the possession of or readily available to the Company relating
to the activities of the Company which are not listed on Schedule 5.13 attached
hereto prior to the date hereof, (viii) there are no underground storage tanks
on, in or under any properties owned by the Company and no underground storage
tanks have been closed or removed from any of such properties during the time
such properties were owned, leased or operated by the Company, (ix) there is no
asbestos or asbestos containing material present in any of the properties owned
by the Company, and no asbestos has been removed from any of such properties
during the time such properties were owned, leased or operated by the Company,
and (x) neither the Company nor any of its respective properties are subject to
any material liabilities or expenditures (fixed or contingent) relating to any
suit, settlement, court order, administrative order, regulatory requirement,
judgment or claim asserted or arising under any Environmental Law.
(b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity which is
applicable where the Company conducts or conducted business or owns or owned
property or is applicable to any disposal, transportation or release of
Hazardous Substances by or for the Company and, in each case, relates to (x) the
protection, preservation or restoration of the
-13-
<PAGE>
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface land, subsurface land, plant and
animal life or any other natural resource) or to human health or safety or (y)
the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or disposal
of Hazardous Substances, in each case as amended and as in effect on the Closing
Date. The term Environmental Law includes, without limitation, (i) the Federal
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the
Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous
and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and
Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as
amended and as in effect on the Closing Date, and (ii) any common law or
equitable doctrine (including, without limitation, injunctive relief and tort
doctrines such as negligence, nuisance, trespass and strict liability) that may
impose liability or obligations for injuries or damages due to, or threatened as
a result of, the presence of, effects of or exposure to any Hazardous Substance.
(c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive, or
dangerous, or otherwise regulated, under any Environmental Law. Hazardous
Substance includes any substance to which exposure is regulated by any
government authority or any Environmental Law including, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate
list (which is set forth on Schedule 5.14) of (x) all personal property material
to the operations of the Company included in "plant, property and equipment" on
the Interim Balance Sheet of the Company, (y) all other personal property owned
by the Company with an individual fair market value in excess of $5,000 (i) as
of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z)
all material leases and agreements in respect of personal property, including,
in the case of each of (x), (y) and (z), (1) true, complete and correct copies
of all such leases and (2) an indication as to which assets are currently owned,
or were formerly owned, by Stockholders, relatives of Stockholders, or
Affiliates of the Company. Except as set forth on Schedule 5.14, (i) all
material personal property used by the Company in its business is either owned
by the Company or leased by the Company pursuant to a lease included on Schedule
5.14, (ii) all of the personal property listed on Schedule 5.14 is in working
order and condition sufficient for the operation of the Company's business,
ordinary wear and tear excepted and (iii) all leases and agreements included on
Schedule 5.14 are in full force and effect and constitute valid and binding
agreements of the Company and of the other parties (and their successors)
thereto in accordance with their respective terms.
-14-
<PAGE>
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.15) of all customers (persons or entities) representing 5%
or more of the Company's annual revenues for the period covered by any of the
most current Year-End Financial Statements. Except to the extent set forth on
Schedule 5.15, none of such customers have canceled or substantially reduced or,
to the knowledge of the Company and the Stockholders, are currently attempting
or threatening to cancel a contract or substantially reduce utilization of the
services provided by the Company.
(b) The Company has listed on Schedule 5.15 all material contracts,
commitments and similar agreements to which the Company is a party or by which
it or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, strategic alliances and options to purchase land),
other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence
as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date,
and in each case has delivered (or, in the case of supplier and distributor
contracts and customer contracts on standard purchase forms, has made available)
true, complete and correct copies of such agreements to Pentacon. The Company
has also indicated on Schedule 5.15 a summary description of all plans or
projects commenced or approved in the last six (6) months and involving the
opening of new operations, expansion of existing operations, the acquisition of
any personal property, business or assets requiring, in any event, the payment
of more than $20,000 by the Company during any 12-month period.
(c) Except as set forth on Schedule 5.15, since January 1, 1995, the
Company has not experienced any difficulties in obtaining any inventory items
necessary to the operation of its business, and, to the knowledge of the Company
and the Stockholders, no such shortage of supply of inventory items is
threatened or pending. To the knowledge of the Company and the Stockholders, no
customer or supplier of the Company will cease to do business with, or
substantially reduce its purchases from, the Company after the consummation of
the transactions contemplated hereby.
(d) The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property
owned or leased by the Company at the date hereof and all other real property,
if any, used by the Company in the conduct of its business. Except as set forth
on Schedule 5.16, any such real property owned by the Company will be sold or
distributed by the Company on terms acceptable to Pentacon and leased back by
the Company on terms no less favorable to the Company than those available from
an unaffiliated party and otherwise reasonably acceptable to Pentacon at or
prior to the Closing Date. The Company has good and insurable title to any real
property owned by it that is shown on Schedule 5.16, other than property
intended to be sold or distributed prior to the Closing Date,
-15-
<PAGE>
subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance
or charge, except for:
(i) liens reflected on Schedules 5.10 or 5.16 as securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title which do not adversely affect the current use of the property.
True, complete and correct copies of all leases and agreements in respect
of such real property leased by the Company are attached to Schedule 5.16, and
an indication as to which such properties, if any, are currently owned, or were
formerly owned, by Stockholders or Affiliates of the Company or Stockholders is
included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such
leases included on Schedule 5.16 are in full force and effect and constitute
valid and binding agreements of the Company and of the other parties (and their
successors) thereto in accordance with their respective terms.
5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the
Balance Sheet Date of all insurance policies carried by the Company, (ii) an
accurate list of all insurance loss runs (to the extent available) or workers
compensation claims received for the past three policy years. True, complete and
correct copies of all insurance policies currently in effect have been delivered
or made available to Pentacon. Such insurance policies evidence all of the
insurance that the Company is required to carry pursuant to all of its contracts
and other agreements and pursuant to all applicable laws, and, in the reasonable
judgment of the Company's management, provide adequate coverage against the
risks involved in the Company's business. All of such insurance policies are
currently in full force and effect and are scheduled to remain in full force and
effect through the Consummation Date. Since January 1, 1995, no insurance
carried by the Company has been canceled by the insurer and the Company has not
been denied coverage.
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS.
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.18) showing all officers, directors and key employees of the
Company, listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided
to Pentacon true, complete and correct copies of any existing employment
agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and
except as described in Schedule 5.18, there have been no increases in the
compensation payable or any special
-16-
<PAGE>
bonuses to any officer, director, key employee or other employee, except
ordinary salary increases implemented on a basis consistent with past practices
and bonuses, as described in Schedule 5.18.
(b) Except as set forth on Schedule 5.18, (i) the Company is not bound by
or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
Company are represented by any labor union or covered by any collective
bargaining agreement, (iii) to the best knowledge of the Company, no campaign to
establish such representation is in progress and (iv) there is no pending or, to
the knowledge of the Company and the Stockholders, threatened labor dispute
involving the Company and any group of its employees nor has the Company
experienced any labor interruptions over the past three years.
(c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no
significant controversies pending or, to the knowledge of the Company and the
Stockholders, threatened between the Company and any of its employees, (ii) the
Company has complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (iii) to the knowledge of the Company and the
Stockholders, no person has asserted that the Company is liable in any material
amount for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee
benefit plans of the Company, including all employment agreements and other
agreements or arrangements containing "golden parachute" or other similar
provisions, and deferred compensation agreements, together with true, complete
and correct copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19, the
Company does not sponsor, maintain or contribute to any plan program, fund or
arrangement that constitutes an "employee pension benefit plan", and neither the
Company nor any subsidiary has any obligation to contribute to or accrue or pay
any benefits under any deferred compensation or retirement funding arrangement
on behalf of any employee or employees (such as, for example, and without
limitation, any individual retirement account or annuity, any "excess benefit
plan" (within the meaning of Section 3(36) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred
compensation arrangement). For the purposes of this Agreement, the term
"employee pension benefit plan" shall have the same meaning as is given that
term in Section 3(2) of ERISA. The Company has not sponsored, maintained or
contributed to any employee pension benefit plan other than the plans set forth
on Schedule 5.19, and the Company is not or could not be required to contribute
to any retirement plan pursuant to the provisions of any collective bargaining
agreement establishing the terms and conditions or employment of any of the
Company's employees.
Except as set forth on Schedule 5.19, the Company is not now, or will not
as a result of its past activities become, liable to the Pension Benefit
Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit
plan under the provisions of Title IV of ERISA.
-17-
<PAGE>
All employee benefit plans listed on Schedule 5.19 and the administration
thereof are in compliance with their terms and all applicable provisions of
ERISA and the regulations issued thereunder, as well as with all other
applicable federal, state and local statutes, ordinances and regulations.
All accrued contribution obligations of the Company with respect to any
plan listed on Schedule 5.19 as of the Balance Sheet Date have either been
fulfilled in their entirety or are fully reflected on the Interim Balance Sheet
as of the Balance Sheet Date.
5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, All such
plans listed on Schedule 5.19 that are intended to qualify (the "Qualified
Plans") under Section 401 (a) of the Code are, and have been so qualified and
have been determined by the Internal Revenue Service to be so qualified, and
copies of the most recent determination letters with respect thereto are
attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and
other documents required to be filed with any governmental agency or distributed
to plan participants or beneficiaries (including, but not limited to, actuarial
reports, audits or tax returns) have been timely filed or distributed, and
copies of the most recent reports and filing relating thereto are included as
part of Schedule 5.19 hereof. Neither Stockholders, any such plan listed in
Schedule 5.19, nor the Company has engaged in any transaction prohibited under
the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan
listed in Schedule 5.19 has incurred an accumulated funding deficiency, as
defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the
Company has not incurred any liability for excise tax or penalty due to the
Internal Revenue Service nor any liability to the PBGC. The Stockholders further
represent that except as set forth on Schedule 5.19 hereto:
(i) there have been no terminations, partial terminations or
discontinuations of contributions to any Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and approval by
the Internal Revenue Service;
(ii) no plan listed in Schedule 5.19 subject to the provisions of
Title IV of ERISA has been terminated;
(iii) there have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such plan listed in
Schedule 5.19;
(iv) the Company (including any subsidiaries) has not incurred
liability under Section 4062 of ERISA; and
(v) to the knowledge of the Company and the Stockholders, no
circumstances exist pursuant to which the Company would be reasonably
likely to have any direct or indirect liability whatsoever (including, but
not limited to, any liability to any multiemployer plan or the PBGC under
Title IV of ERISA or to the Internal Revenue Service for any excise tax or
penalty, or being subject to any statutory lien to secure payment of any
such liability)
-18-
<PAGE>
with respect to any plan now or heretofore maintained or contributed to by
any entity other than the Company that is, or at any time was, a member of
a "controlled group" (as defined in Section 412(n)(6)(B) of the Code) that
includes the Company.
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is
not in violation of any law or regulation or any order of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality having jurisdiction over it; and except to the extent
set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or
proceedings, pending or, to the knowledge of the Company and the Stockholders,
threatened against or affecting, the Company, at law or in equity, or before or
by any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received by the Company, and, to the knowledge of the
Company and the Stockholders, there is no basis for any such claim, action, suit
or proceeding. The Company has conducted and is now conducting its business in
substantial compliance with the requirements, standards, criteria and conditions
set forth in applicable Federal, state and local statutes, ordinances, orders,
approvals, variances, rules and regulations.
5.22 TAXES.
Except as set forth in Schedule 5.22, the Company has timely filed
all requisite Federal, state and other Tax Returns or extension requests for all
fiscal periods ended on or before the Balance Sheet Date; and except as set
forth on Schedule 5.22, the Company has no notice that any examinations are in
progress or that any claims are pending against it for federal, state and other
Taxes (including penalties and interest) for any period or periods prior to and
including the Balance Sheet Date and no notice of any claim for Taxes, whether
pending or threatened, has been received. Except as set forth in Schedule 5.22,
all Tax, including interest and penalties (whether or not shown on any Tax
Return) owed by the Company has been paid or accrued in its financial accounts.
The amounts shown as accruals for Taxes on the Company Financial Statements are
sufficient for the payment of all Taxes of the kinds indicated (including
penalties and interest) for all fiscal periods ended on or before that date.
Copies of (i) any tax examinations, (ii) extensions of statutory limitations and
(iii) the federal and local income Tax Returns and franchise Tax Returns of
Company for their last three (3) fiscal years, or such shorter period of time as
any of them shall have existed, are attached hereto as Schedule 5.22 or have
otherwise been delivered to Pentacon. The Company has a taxable year ended
December 31. Except as set forth on Schedule 5.22, Company uses the accrual
method of accounting for income tax purposes, and the Company's methods of
accounting have not changed in the past five years. The Company is not an
investment Company as defined in Section 351(e)(1) of the Code. Except as set
forth in Schedule 5.22, the Company is not and has not during the last five
years been a party to any tax sharing agreement or agreement of similar effect.
The Company is not and has not during the last five years been a member of any
consolidated group. Except as set forth on Schedule 5.22, the Company has not
received, been denied, or applied for any private letter ruling during the last
ten years.
-19-
<PAGE>
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.
(a) The Company is not in violation of any Charter Document. Except as set
forth in Schedule 5.23, neither the Company nor, to the best knowledge of the
Company and the Stockholders, any other party thereto, is in default under any
lease, instrument, agreement, license, or permit set forth on Schedule 5.12,
5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party
or by which its properties are bound (the "Material Documents").
(b) Except as set forth in Schedule 5.23, the execution and delivery of
this Agreement by each of the Company and the Stockholders do not violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company under any of the terms,
conditions or provisions of (i) the Charter Documents (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Company or
any of its properties or assets, or (iii) any Material Document or other
material instrument, obligation or agreement of any kind to which the Company or
any of the Stockholders is now a party or by which any of the Stockholders or
the Company or any of its properties or assets may be bound or affected. The
consummation by the Company and the Stockholders of the transactions
contemplated hereby will not result in any violation, conflict, breach, right of
termination or acceleration or creation of liens under any of the terms,
conditions or provisions of the items described in clauses (i) through (iii) of
the preceding sentence, subject, in the case of the terms, conditions or
provisions of the items described in clause (iii) above, to obtaining (prior to
the Effective Time of the Merger) such consents as may be required from
commercial lenders, lessors or other third parties.
(c) Except as set forth on Schedule 5.23, none of the Material Documents
requires notice to, or the consent or approval of, any governmental agency or
other third party with respect to any of the transactions contemplated hereby in
order to remain in full force and effect, and consummation of the transactions
contemplated hereby will not give rise to any right to termination, cancellation
or acceleration or loss of any material right or benefit.
(d) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
for the making of the merger filings with the Secretary of State of the State of
Delaware and the State of Incorporation in connection with the Merger, (iv) for
filings in connection with listing on the NASDAQ National Market System or New
York Stock Exchange or other nationally recognized securities exchange; (v) for
possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13
and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholders
are required to make any declaration, filing or registration with, or notice to,
or obtain any authorization, consent or approval of, any governmental or
regulatory body or authority
-20-
<PAGE>
is necessary for the execution and delivery of this Agreement by the Company and
the Stockholders or the consummation by the Company and the Stockholders of the
transactions contemplated hereby.
(e) Except as set forth on Schedule 5.23, none of the Material Documents
prohibits the use or publication by the Company, Pentacon or Newco of the name
of any other party to such Material Document, and none of the Material Documents
prohibits or restricts the Company from freely providing services or selling
products to any other customer or potential customer of the Company, Pentacon,
Newco or any Other Founding Company.
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth
on Schedule 5.24, the Company is not now a party to any governmental contract
that, by its express terms, is subject to price redetermination or renegotiation
or that is customarily subject to price redetermination or renegotiations in the
ordinary course of business. Except as set forth on Schedule 5.24, the Company
is not now a party to any material contract based on minority ownership which
would be canceled or otherwise materially adversely impacted by completion of
the Pentacon Plan of Organization.
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth
on Schedule 5.25 or as otherwise contemplated hereby, there has not been:
(i) any Material Adverse Effect with respect to the Company;
(ii) any damage, destruction or loss (whether or not covered by
insurance), alone or in the aggregate, materially adversely affecting the
properties or business of the Company;
(iii) any change in the authorized capital of the Company or its
outstanding securities or any change in its ownership interests or any
grant of any options, warrants, calls, conversion rights or commitments;
(iv) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the Company
except for distributions that would have been permitted after the date
hereof under Section 7.3(iii) hereof,
(v) any increase in the compensation, bonus, sales commissions or
fee arrangement payable or to become payable by the Company to any of its
officers, directors, Stockholders, employees, consultants or agents,
except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice;
(vi) any work interruptions, labor grievances or claims filed, or
any event or condition of any character, materially adversely affecting
the business or future prospects of the Company;
-21-
<PAGE>
(vii) any sale or transfer, or any agreement to sell or transfer,
any material assets, property or rights of Company outside of the ordinary
course of business to any person, including, without limitation, the
Stockholders and their affiliates;
(viii)any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company, including without limitation any
indebtedness or obligation of any Stockholders or any affiliate thereof;
(ix) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside
of the ordinary course of the Company's business;
(xi) any waiver of any material rights or claims of the Company;
(xii) any amendment or termination of any Material Document;
(xiii)any transaction by the Company outside the ordinary course of
its business;
(xiv) any cancellation or termination of a Material Document or
material customer contract with a customer or client prior to the
scheduled termination date; or
(xv) any other distribution of property or assets by the Company
other than in the ordinary course of business and other than distributions
of real estate and other assets as permitted by this Agreement.
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an
accurate schedule as of the date of the Agreement of:
(i) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
-22-
<PAGE>
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the Company and
a description of the terms of such power.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
by the Company and the performance of the transactions contemplated herein have
been duly and validly authorized by the Board of Directors of the Company and
this Agreement has been duly and validly authorized by all necessary corporate
action and is a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the
Stockholders, or any Affiliate of any of them has given or offered anything of
value to any governmental official, political party or candidate for government
office in violation of any applicable laws, rules or regulations, nor has it or
any of them otherwise taken any action which would cause the Company to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended or any
applicable law of similar effect.
5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules
hereto, furnished to Pentacon by the Company and the Stockholders in connection
herewith, do not contain an untrue statement of a material fact or omit to state
a material fact necessary to make the statements herein and therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that the foregoing does not apply to statements contained in or omitted from any
of such documents made or omitted in reliance upon information furnished in
writing by Pentacon or Newco.
(b) The Company and the Stockholders acknowledge and agree (i) that there
exists no firm commitment, binding agreement, or promise or other assurance of
any kind, whether express or implied, oral or written, that a Registration
Statement will become effective or that the IPO pursuant thereto will occur at a
particular price or within a particular range of prices or occur at all; (ii)
that neither Pentacon or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the Company, the
Stockholders or any other person affiliated or associated with the Company for
any failure of the Registration Statement to become effective, the IPO to occur
at a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of Stockholders to enter into this Agreement, or to
vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to Pentacon or the
prospective IPO.
5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the
Company has not, between the Balance Sheet Date and the date hereof, taken any
of the actions which are prohibited ("Prohibited Activities") in Section 7.3.
-23-
<PAGE>
5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to
the knowledge of the Company or the Stockholders, the Company has no liability
or potential liability to any person under any product or service warranty and
the Company does not offer or sell insurance or consumer protection plans or
other similar arrangements that could result in the Company being required to
make any material payment to or perform any material service for any person
thereunder.
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS.
Except as described on Schedule 5.32, no Stockholder, officer, director or
Affiliate of the Company (i) possesses, directly or indirectly, any financial
interest in, or is a director, officer, employee or affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a
party to an agreement or relationship, that involves the receipt by such person
of compensation or property from the Company other than through a customary
employment relationship.
(B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS.
Each Stockholder severally, but not jointly, represents and warrants
that the representations and warranties set forth below are true as of the date
of this Agreement as they relate to such Stockholder and that the
representations and warranties set forth in this Sections 5(B) shall survive the
Consummation Date.
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Such Stockholder has
the full legal right, power and authority to enter into this Agreement. Such
Stockholder owns beneficially and of record all of the shares of the Company
stock identified on Annex II as being owned by such Stockholder, and, such
Company Stock is owned free and clear of all liens, encumbrances and claims of
every kind. This Agreement is a legal, valid, and binding obligation of each
Stockholder.
5.34 PREEMPTIVE RIGHTS. Such Stockholder does not have, or hereby waives,
any preemptive or other right to acquire shares of Company Stock or Pentacon
Stock that such Stockholder has or may have had. Nothing herein, however, shall
limit or restrict the rights of any Stockholder to acquire Pentacon Stock
pursuant to (i) this Agreement or (ii) any option granted by Pentacon.
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. No Stockholder is under
any binding commitment or contract to sell, exchange or otherwise dispose of
shares of Pentacon Stock received as described in Section 3.1.
-24-
<PAGE>
6. REPRESENTATIONS OF PENTACON AND NEWCO
Pentacon and Newco, jointly and severally, represent and warrant to the
Stockholders that all of the following representations and warranties in this
Section 6 are true at the date of this Agreement and, subject to Section 7.8
hereof, shall be true at the time of Closing and the Consummation Date, and that
such representations and warranties shall survive the Consummation Date for a
period of twenty-four months (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Consummation Date, which shall be
deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes
of determining whether a claim for indemnification under Section 11.2(iv) hereof
has been made on a timely basis, and solely to the extent that in connection
with the IPO, any of the Stockholders actually incurs liability under the 1933
Act, the 1934 Act, or any other Federal or state securities laws, the
representations and warranties of Pentacon and Newco set forth herein shall
survive until the expiration of any applicable limitations period, which shall
be deemed to be the Expiration Date for such purposes.
6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly
incorporated and organized, validly existing and in good standing under the laws
of the State of Delaware, and each has the requisite power and authority to
carry on its business as it is now being conducted. Pentacon and Newco are each
qualified to do business and are each in good standing in each jurisdiction in
which the nature of its business makes such qualification necessary. True,
complete and correct copies of the Certificate of Incorporation and By-laws,
each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter
Documents") are all attached hereto as Annex III.
6.2 AUTHORIZATION. (i) The respective officers or other representatives of
Pentacon and Newco executing this Agreement have the authority to enter into and
bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and
Newco have the full legal right, power and authority to enter into this
Agreement and the Other Agreements and consummate the Merger. All corporate acts
and other proceedings required to have been taken by Pentacon and Newco to
authorize the execution, delivery and performance of this Agreement and the
consummation of the Merger have been duly and properly taken.
6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of
Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration
Statement. All of the issued and outstanding shares of the capital stock of
Newco are owned by Pentacon and all of the issued and outstanding shares of the
capital stock of Pentacon are owned by the persons set forth on Schedule 6.3
hereof, in each case, free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of Pentacon and Newco
have been duly authorized and validly issued, are fully paid and nonassessable,
and further, such shares were offered, issued, sold and delivered by Pentacon
and Newco in compliance with all applicable state and Federal laws concerning
the issuance of
-25-
<PAGE>
securities. Further, none of such shares were issued in violation of the
preemptive rights of any past or present stockholder of Pentacon or Newco.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the
Other Agreements and except as set forth in the Draft Registration Statement or
in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates Pentacon or Newco to issue any of
their respective authorized but unissued capital stock; (ii) no voting trust,
voting agreement, proxy or other agreements or understandings exist with respect
to the voting of any shares of capital stock of Pentacon; and (iii) neither
Pentacon nor Newco has any obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its equity securities or any interests
therein or to pay any dividend or make any distribution in respect thereof.
Schedule 6.4 also includes a list of all outstanding options, warrants or other
rights to acquire shares of the stock of Pentacon.
6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries
except for Newco and each of the companies identified as "Newco" in each of the
Other Agreements. Except as set forth in the preceding sentence, neither
Pentacon nor Newco presently owns, of record or beneficially, or controls,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity, and neither Pentacon nor Newco, directly or indirectly, is a participant
in any joint venture, partnership or other non-corporate entity.
6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in
the Draft Registration Statement (the "Pentacon Financial Statements") have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated (except as noted thereon),
and the balance sheet included therein presents fairly the financial position of
Pentacon as of its date.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft
Registration Statement, Pentacon and Newco have no material liabilities,
contingent or otherwise, except as set forth in or contemplated by this
Agreement and the Other Agreements and except for fees generally described in
Part II of the Draft Registration Statement and incurred in connection with the
transactions contemplated hereby and thereby.
6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the
Draft Registration Statement, neither Pentacon nor Newco is in violation of any
law or regulation or any order of any court or Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them and except to the extent
set forth in Schedule 6.8, there are no material claims, actions, suits or
proceedings, pending or, to the knowledge of Pentacon or Newco, threatened
against or affecting, Pentacon or Newco, at law or in equity, or before or by
any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over either of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received.
-26-
<PAGE>
Pentacon and Newco have conducted and are conducting their respective businesses
in substantial compliance with the requirements, standards, criteria and
conditions set forth in applicable Federal, state and local statutes,
ordinances, permits, licenses, orders, approvals, variances, rules and
regulations and are not in violation, in any material respect, of any of the
foregoing.
6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any
Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of
Pentacon and Newco, any other party thereto, is in default under any lease,
instrument, agreement, license, or permit to which Pentacon or Newco is a party,
or by which Pentacon or Newco, or any of their respective properties, are bound
(collectively, the "Pentacon Documents"); and (a) the rights and benefits of
Pentacon and Newco under the Pentacon Documents will not be adversely affected
by the transactions contemplated hereby and (b) the execution and delivery of
this Agreement and the Other Agreements by Pentacon and Newco and the
performance of their obligations hereunder and thereunder do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation or default (with or without notice or lapse of time, or both), under
or give rise to a right of termination, cancellation, or acceleration of any
obligation or to loss of a material benefit under, or result in the creation of
any lien upon any of the assets of Pentacon or Newco under, any provision of (i)
the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the
comparable governing instruments of Newco, (ii) any note, bond, mortgage,
indenture or deed of trust or any license, lease, contract, commitment,
agreement or arrangement to which Pentacon or Newco is a party or by which any
of their respective properties or assets are bound or (iii) any judgment, order,
decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or
their respective properties or assets.
(b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the
Pentacon Documents requires notice to, or the consent or approval of, any
governmental agency or other third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect and consummation
of the transactions contemplated hereby will not give rise to any right to
termination, cancellation or acceleration or loss of any right or benefit.
(c) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
filings with blue sky authorities in connection with the transactions
contemplated by this Agreement, (iv) for the making of the merger filings with
the Secretary of State of the State of Delaware and the State of Incorporation
in connection with the Merger, (v) for filings in consideration for listing on
the NASDAQ National Market System or the New York Stock Exchange or other
nationally recognized securities exchange; and (vi) for possible filings under
the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not
required make any declaration, filing or registration with, or notice to, or
obtain any authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the
transactions contemplated hereby.
-27-
<PAGE>
6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
and the Other Agreements by Pentacon and Newco and the performance of the
transactions contemplated herein and therein have been duly and validly
authorized by the respective Boards of Directors and stockholders of Pentacon
and Newco and this Agreement and the Other Agreements have been duly and validly
authorized by all necessary corporate action and are legal, valid and binding
obligations of Pentacon and Newco, enforceable against them in accordance with
their respective terms.
6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the
Stockholders, the Pentacon Stock to be delivered to the Stockholders pursuant to
this Agreement will constitute valid and legally issued shares of Pentacon,
fully paid and nonassessable, and with the exception of restrictions upon resale
set forth in Sections 15 and 16 hereof, will be identical in all substantive
respects (which do not include the form of certificate upon which it is printed
or the presence or absence of a CUSIP number on any such certificate) to the
Pentacon Stock issued and outstanding as of the date hereof by reason of the
provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the
Stockholders shall at the time of such issuance and delivery be free and clear
of any liens, claims or encumbrances of any kind or character. The shares of
Pentacon Stock to be issued to the Stockholders pursuant to this Agreement will
not be registered under the 1933 Act, except as provided in Section 17 hereof.
6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither
Pentacon nor Newco has entered or will enter into any agreement with any of the
Founding Companies or any of the Stockholders of the Founding Companies or
Pentacon other than the Other Agreements and the agreements contemplated by each
of the Other Agreements, including the employment agreements and real property
leases referred to herein or entered into in connection with the transactions
contemplated hereby and thereby.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on
March 20, 1997 and has conducted only limited operations since that time.
Neither Pentacon nor Newco has conducted any material business since the date of
its inception, except in connection with this Agreement, the Other Agreements
and the IPO. Except as described in the Draft Registration Statement, neither
Pentacon nor Newco owns or has at any time owned any real property or any
material personal property or is a party to any other material agreement other
than the Other Agreements, the agreements contemplated thereby and such
agreements as will be filed as Exhibits to the Registration Statement.
6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company
and the Stockholders, together with this Agreement and the information furnished
to the Company and the Stockholders in connection herewith, does not contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing does not apply
to statements contained in or omitted from any of such documents made or omitted
in reliance upon information furnished in writing by the Company or the
Stockholders or information pertaining to the Company or a Stockholder which is
confirmed in writing by the Company or such Stockholder.
-28-
<PAGE>
7. COVENANTS PRIOR TO CLOSING
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.
(a) Between the date of this Agreement and the Consummation Date, the
Company will afford to the officers and authorized representatives of Pentacon
and the Other Founding Companies access to all of the Company's sites,
properties, books and records and will furnish Pentacon with such additional
financial and operating data and other information as to the business and
properties of the Company as Pentacon or the Other Founding Companies may from
time to time reasonably request; provided, however, that the Company shall not
prior to the Closing Date be required to disclose to the Other Founding
Companies, and Pentacon shall not without first obtaining the written approval
of the Company disclose to the Other Founding Companies, information relating to
pricing or profitability on an account-by-account basis or any pricing
information relating to the Company's suppliers on a supplier-by-supplier basis.
The Company will cooperate with Pentacon, its representatives, auditors and
counsel and the Other Founding Companies in the preparation of any documents or
other material which may be required in connection with any documents or
materials required by this Agreement. Pentacon, Newco, the Stockholders and the
Company will treat all information obtained in connection with the negotiation
and performance of this Agreement or the due diligence investigations conducted
with respect to the Other Founding Companies as confidential in accordance with
the provisions of Section 14 hereof. In addition, Pentacon will cause each of
the Other Founding Companies to enter into a provision similar to this Section
7.1(a) requiring each such Other Founding Company, its stockholders, directors,
officers, representatives, employees and agents to keep confidential any
information obtained by such Other Founding Company.
(b) Between the date of this Agreement and the Consummation Date, Pentacon
will afford to the officers and authorized representatives of the Company and
the Stockholders access to all of Pentacon's and Newco's sites, properties,
books and records and will furnish the Company with such additional financial
and operating data and other information as to the business and properties of
Pentacon and Newco as the Company may from time to time reasonably request.
Pentacon and Newco will cooperate with the Company, its representatives,
auditors and counsel in the preparation of any documents or other material which
may be required in connection with any documents or materials required by this
Agreement. The Company will cause all information obtained in connection with
the negotiation and performance of this Agreement to be treated as confidential
in accordance with the provisions of Section 14 hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Consummation Date, the Company will, except as set forth on
Schedule 7.2 or as otherwise expressly contemplated by this Agreement:
(i) carry on its respective businesses in substantially the same
manner as it has heretofore and not introduce any material new method of
management, operation or accounting;
-29-
<PAGE>
(ii) use commercially reasonable efforts to maintain its respective
properties and facilities, including those held under leases, in as good
working order and condition as at present, ordinary wear and tear
excepted;
(iii) perform in all material respects all of its respective
obligations under agreements relating to or affecting its respective
assets, properties or rights;
(iv) use commercially reasonable efforts to keep in full force and
effect present insurance policies or other comparable insurance coverage;
(v) use commercially reasonable efforts to maintain and preserve its
business organization intact, retain its respective present key employees
and maintain its respective relationships with material suppliers,
customers and others having business relations with the Company;
(vi) use commercially reasonable efforts to maintain compliance with
all material permits, laws, rules and regulations, consent orders, and all
other orders of applicable courts, regulatory agencies and similar
governmental authorities;
(vii) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments without the knowledge and consent
of Pentacon (which consent shall not be unreasonably withheld, delayed or
conditioned), provided that debt and/or lease instruments may be replaced
without the consent of Pentacon if such replacement instruments are on
terms at least as favorable to the Company as the instruments being
replaced; and
(viii)maintain or reduce present salaries and commission levels for
all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with the
Company's past practices.
7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3 or as
otherwise expressly contemplated by this Agreement, between the date hereof and
the Consummation Date, the Company will not, without prior written consent of
Pentacon:
(i) make any change in its Articles of Incorporation or By-laws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed in Schedule
5.4;
-30-
<PAGE>
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures, except if it is in
the normal course of business (consistent with past practice) or involves
an amount not in excess of $25,000;
(v) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens
incurred in connection with the acquisition of equipment with an aggregate
cost not in excess of $25,000 necessary or desirable for the conduct of
the businesses of the Company, (2) (A) liens for Taxes either not yet due
or being contested in good faith and by appropriate proceedings (and for
which contested Taxes adequate reserves have been established and are
being maintained) or (B) materialmen's, mechanics', workers', repairmen's,
employees' or other like liens arising in the ordinary course of business
(the liens set forth in clause (2) being referred to herein as "Statutory
Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16
hereto;
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the normal course of business and other
than distributions of real estate and other assets as permitted in this
Agreement (including the Schedules hereto);
(vii) negotiate for the acquisition of any business or the start-up
of any new business;
(viii)merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(ix) waive any material rights or claims of the Company, provided
that the Company may negotiate and adjust bills and accounts in the course
of good faith disputes with customers in a manner consistent with past
practice, provided, further, that such adjustments shall not be deemed to
be included in Schedule 5.11 to the extent they exceed the reserves, if
any, established therefor, or unless specifically listed thereon;
(x) amend or terminate any material agreement, permit, license or
other right of the Company provided that the Company may continue to
administer vendor and supplier contracts in the ordinary course of
business provided written notice of any such material amendments or
terminations is provided to Pentacon as soon as possible following such
action and in any event prior to the Closing; or
(xi) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
-31-
<PAGE>
7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the
Company, nor any agent, officer, director, trustee or any representative of any
of the foregoing will, during the period commencing on the date of this
Agreement and ending with the earlier to occur of the Consummation Date or the
termination of this Agreement in accordance with its terms, directly or
indirectly:
(i) solicit or initiate the submission of proposals or offers from
any person for,
(ii) participate in any discussions pertaining to, or
(iii) furnish any information to any person other than Pentacon,
Newco or their authorized agents relating to, any acquisition or purchase
of all or a material amount of the assets of, or any equity interest in,
the Company or a merger, consolidation or business combination of the
Company.
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide Pentacon on Schedule 7.5 with proof that any required notice has been
sent.
7.6 AGREEMENTS. The Stockholders and the Company shall terminate (i) any
stockholders agreements, voting agreements, voting trusts, options, warrants and
employment agreements between the Company and any employee listed on Schedule
9.12 hereto and (ii) any existing agreement between the Company and any
Stockholder, on or prior to the Consummation Date provided that nothing herein
shall prohibit or prevent the Company from paying (either prior to or on the
Closing Date) notes or other obligations from the Company to the Stockholders in
accordance with the terms thereof, which terms have been disclosed to Pentacon.
Such termination agreements are listed on Schedule 7.6 and copies thereof shall
be attached thereto.
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.
The Stockholders and the Company shall give prompt notice to Pentacon of (i) the
occurrence or non-occurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty of the Company or
the Stockholders contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of any
Stockholder or the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such person hereunder. Pentacon
and Newco shall give prompt notice to the Company of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of Pentacon or Newco contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of Pentacon or Newco to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder. The delivery or deemed delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
-32-
<PAGE>
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
If, prior to the Closing Date, the Chief Executive Officer, the Chief
Financial Officer or the General Counsel of Pentacon shall determine that any of
Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder
for indemnification against any Stockholder(s) (whether or not such claim might
exceed the Indemnification Threshold), then Pentacon shall promptly advise the
affected Stockholder(s), in writing, of such potential claim and provide
information supporting the basis and potential amount of such claim (a
"Potential Claim Notice"). This procedure with respect to Potential Claim
Notices is intended to afford the affected Stockholder(s) notice so that it may
attempt to cure or otherwise address the claim prior to Closing; provided,
however, that (i) this procedure shall not affect or delay Closing and (ii)
neither the failure or delay by Pentacon to give a Potential Claim Notice nor
the information included or omitted from a Potential Claim Notice shall
constitute a waiver of, or shall otherwise adversely affect the right to receive
indemnification for, any such claim paid by Pentacon, Newco, the Surviving
Corporation or the company hereunder after the Closing Date.
7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until 24 hours prior to the
anticipated effectiveness of the Registration Statement to supplement or amend
promptly the Schedules hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules, provided however,
that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall
only have to be delivered at the Closing Date, unless such Schedule is to be
amended to reflect an event occurring other than in the ordinary course of
business. Notwithstanding the foregoing sentence, no amendment or supplement to
a Schedule prepared by the Company that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect with respect to the Company
may be made unless Pentacon and a majority of the Founding Companies other than
the Company consent to such amendment or supplement; and provided further, that
no amendment or supplement to a Schedule prepared by Pentacon or Newco that
constitutes or reflects an event or occurrence that would have a Material
Adverse Effect with respect to Pentacon or Newco may be made unless a majority
of the Founding Companies consent to such amendment or supplement. For all
purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in Sections 8.1 and 9.1 have been
fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended
or supplemented pursuant to this Section 7.8. In the event that one of the Other
Founding Companies seeks to amend or supplement a Schedule pursuant to Section
7.8 of one of the Other Agreements, and such amendment or supplement constitutes
or reflects an event or occurrence that would have a Material Adverse Effect on
such Other Founding Company, Pentacon shall give the Company written notice
promptly after it has knowledge thereof. If Pentacon and a majority of the
Founding Companies consent to such amendment or supplement, which consent shall
have been deemed given by Pentacon or any Founding Company if no response is
received within 24 hours
-33-
<PAGE>
following receipt of written notice of such amendment or supplement (or sooner
if reasonable and if required by the circumstances under which such consent is
requested), but the Company does not give its consent, the Company may terminate
this Agreement pursuant to Section 12.1(iv) hereof. In the event that the
Company seeks to amend or supplement a Schedule pursuant to this Section 7.8,
and Pentacon and a majority of the Other Founding Companies do not consent to
such amendment or supplement, this Agreement shall be deemed terminated by
mutual consent as set forth in Section 12.1(i) hereof. In the event that
Pentacon or Newco seeks to amend or supplement a Schedule pursuant to this
Section 7.8 and a majority of the Founding Companies do not consent to such
amendment or supplement, this Agreement shall be deemed terminated by mutual
consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall
be liable to any other party if this Agreement shall be terminated pursuant to
the provisions of this Section 7.8. No amendment of or supplement to a Schedule
shall be made later than 24 hours prior to the anticipated effectiveness of the
Registration Statement.
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and
Stockholders shall furnish or cause to be furnished to Pentacon and the
Underwriters all of the information concerning the Company and the Stockholders
reasonably required for inclusion in, and will cooperate with Pentacon and the
Underwriters in the preparation of, the Registration Statement and the
prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement, except
that the cost of the preparation of any such audited and unaudited Financial
Statements shall be borne by Pentacon). The Company and the Stockholders agree
promptly to advise Pentacon if at any time during the period in which a
prospectus relating to the IPO is required to be delivered under the Securities
Act, any information contained in the prospectus concerning the Company or the
Stockholders becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy. Insofar as the
information relates solely to the Company or the Stockholders, the Company
represents and warrants as to such information with respect to itself, and each
Stockholder represents and warrants, as to such information with respect to the
Company and himself or herself, severally, but not jointly, that the information
expressly provided for inclusion in the Registration Statement or otherwise
confirmed in writing by such Stockholder will not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the
Consummation Date, and Pentacon shall have had sufficient time to review the
unaudited consolidated balance sheets of the Company as of the end of all fiscal
quarters following the Balance Sheet Date, and the unaudited consolidated
statement of income, cash flows and retained earnings of the Company for all
fiscal quarters ended after the Balance Sheet Date. Such financial statements
shall have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated
(except as noted therein). Except as noted in such financial statements, all of
such financial statements will present fairly the results of operations of the
Company for the periods indicated therein.
-34-
<PAGE>
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver,
or cause to be executed and delivered, such further instruments or documents or
take such other action as may be reasonably necessary or convenient to carry out
the transactions contemplated hereby.
7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall
maintain its authorized capital stock as set forth in the Registration Statement
filed with the SEC except for such changes in authorized capital stock as are
made to respond to comments made by the SEC or requirements of any exchange or
automated trading system for which application is made to register the Pentacon
Stock and any changes necessary or advisable in order to permit the delivery of
the opinion contemplated by Section 8.12 hereof.
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS
ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby
recognize that one or more filings under the Hart-Scott-Rodino Act may be
required in connection with the transactions contemplated herein. If it is
determined by the parties to this Agreement that filings under the
Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees
to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act,
(ii) such compliance by the Stockholders and the Company shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
9 of this Agreement, and (iii) the parties agree to cooperate and use their best
efforts to cause all filings required under the Hart-Scott-Rodino Act to be
made. If filings under the Hart-Scott-Rodino Act are required, the costs and
expenses thereof (including filing fees) shall be borne by Pentacon. The
obligation of each party to consummate the transactions contemplated by this
Agreement is subject to the expiration or termination of the waiting period
under the Hart-Scott-Rodino Act, if applicable.
7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date
of the final prospectus of Pentacon utilized in connection with the IPO, the
Company or the Stockholders become aware of any fact or circumstance which would
materially affect the accuracy of a representation or warranty of Company or
Stockholders in this Agreement, the Company and the Stockholders shall promptly
give notice of such fact or circumstance to Pentacon. However, subject to the
provisions of Section 7.8, such notification shall not relieve either the
Company or the Stockholders of their respective obligations under this
Agreement, and, subject to the provisions of Section 7.8, at the sole option of
Pentacon, the truth and accuracy of any and all warranties and representations
of the Company, or on behalf of the Company and of Stockholders at the date of
this Agreement and on the Closing Date and on the Consummation Date, shall be a
precondition to the consummation of this transaction.
7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately
following the Effective Time of the Merger, Pentacon will pay, or cause to be
paid, all of the outstanding liabilities, obligations and indebtedness of
Company to the lenders identified on Schedule 7.15 hereto. In connection with
such repayment of indebtedness, all associated guaranties of Founder
Stockholders shall be terminated and cancelled.
-35-
<PAGE>
7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that
one of the conditions to the Stockholders consummating the transactions
contemplated herein is that the IPO shall be closed and the Stockholders (as a
group) shall be entitled to receive consideration not less than the Minimum
Value set forth on Annex I attached hereto.
7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon
shall not exceed nine members immediately following the IPO unless the Founding
Stockholder representatives to serve on such board agree in writing to a larger
number of directors.
7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise
required by applicable law, Pentacon will describe or report the transaction in
any required tax reports of Pentacon as a tax-free transaction (insofar as its
relates to the delivery of Pentacon Stock for Company Stock) in a manner
consistent with the tax opinion referenced in Section 8.12.
7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain
all material Licenses necessary for Pentacon to commence the conduct of business
on the Consummation Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND
COMPANY
The obligations of Stockholders and the Company with respect to actions to
be taken on the Closing Date are subject to the satisfaction or waiver on or
prior to the Closing Date of all of the following conditions. The obligations of
the Stockholders and the Company with respect to actions to be taken on the
Consummation Date are subject to the satisfaction or waiver on or prior to the
Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and
8.12. As of the Closing Date or, with respect to the conditions set forth in
Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such
conditions have not been satisfied, the Stockholders (acting in unison) shall
have the right to terminate this Agreement, or in the alternative, waive any
condition not so satisfied. The delivery of certificates representing Company
Stock to Pentacon as of the Consummation Date shall constitute a waiver of any
conditions not so satisfied. However, no such waiver shall be deemed to affect
the survival of the representations and warranties of Pentacon and Newco
contained in Section 6 hereof or the rights of the Stockholders pursuant to
Section 11 hereof.
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All
representations and warranties of Pentacon and Newco contained in Section 6
shall be true and correct in all material respects as of the Closing Date and
the Consummation Date as though such representations and warranties had been
made as of that time; all of the terms, covenants and conditions of this
Agreement to be complied with and performed by Pentacon and Newco on or before
the Closing Date and the Consummation Date shall have been duly complied with
and performed in all material respects; and certificates to the foregoing effect
dated the Closing Date and the Consummation Date, respectively, and signed by
the President or any Vice President of Pentacon shall have been delivered to the
Stockholders.
-36-
<PAGE>
8.2 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be reasonably satisfactory to the Company and its counsel.
The Stockholders and the Company shall be satisfied that the Registration
Statement and the prospectus forming a part thereof, including any amendments
thereof or supplements thereto, shall not contain any untrue statement of a
material fact, or omit to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that, subject to the provisions set forth in the introductory paragraph of this
Section 8, the condition contained in this sentence shall be deemed waived if
the Company or Stockholders shall have failed to inform Pentacon in writing
prior to the effectiveness of the Registration Statement of the existence of an
untrue statement of a material fact or the omission of such a statement of a
material fact.
8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the Company as a result of which
the management of the Company deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion
from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed
hereto as Annex IV.
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis, subject to the conditions set
forth in the underwriting agreement, on terms such that the aggregate value of
the cash and the number of shares of Pentacon Stock to be received by the
Stockholders is not less than the Minimum Value set forth on Annex I.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency or any third party relating to the consummation
of the transactions contemplated herein or set forth in Schedule 5.23 hereto
shall have been obtained and made and no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger and no governmental
agency or body shall have taken any other action or made any request of Company
as a result of which Company deems it inadvisable to proceed with the
transactions hereunder.
8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have
delivered to the Company a certificate, dated as of a date no later than ten
days prior to the Closing Date, duly issued by the Delaware Secretary of State
and in each state in which Pentacon or Newco is authorized to do business,
showing that each of Pentacon and Newco is in good standing and authorized to do
business and that all state franchise and/or income tax returns and taxes for
Pentacon and Newco, respectively, for all periods prior to the Closing have been
filed and paid.
-37-
<PAGE>
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to Pentacon or Newco which would constitute a Material
Adverse Effect.
8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a
certificate or certificates, dated the Closing Date and signed by the secretary
of Pentacon and of Newco, certifying the truth and correctness of attached
copies of the Pentacon's and Newco's respective Certificates of Incorporation
(including amendments thereto), By-Laws (including amendments thereto), and
resolutions of the boards of directors and, if required, the Stockholders of
Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement
and the consummation of the transactions contemplated hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VI hereto.
8.12 TAX MATTERS. The Stockholders shall have received an opinion of Ernst
& Young, L.L.P. or other tax advisor of national recognition reasonably
acceptable to the Stockholders that the Pentacon Plan of Organization will
qualify as a tax-free transfer of property under Section 351 of the Code and
that the Stockholders will not recognize gain to the extent the Stockholders
exchange stock of the Company for Pentacon stock (but not cash or other
property) pursuant to the Pentacon Plan of Organization.
8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for
listing on the New York Stock Exchange, NASDAQ National Market System or the
American Stock Exchange.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO
The obligations of Pentacon and Newco with respect to actions to be taken
on the Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of all of the following conditions. The obligations of Pentacon and
Newco with respect to actions to be taken on the Consummation Date are subject
to the satisfaction or waiver on or prior to the Consummation Date of the
conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or,
with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of
the Consummation Date, if any such conditions have not been satisfied, Pentacon
and Newco shall have the right to terminate this Agreement, or waive any such
condition, but no such waiver shall be deemed to affect the survival of the
representations and warranties contained in Section 5 hereof.
-38-
<PAGE>
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the
representations and warranties of the Stockholders and the Company contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date and the Consummation Date with the same effect as though such
representations and warranties had been made on and as of such date; all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by the Stockholders and the Company on or before the Closing Date or
the Consummation Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the Stockholders shall have
delivered to Pentacon certificates dated the Closing Date and the Consummation
Date, respectively, and signed by them to such effect.
9.2 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of Pentacon as a result of which the
management of Pentacon deems it inadvisable to proceed with the transactions
hereunder.
9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate,
dated the Closing Date and signed by the secretary of the Company, certifying
the truth and correctness of attached copies of the Company's Certificate of
Incorporation (including amendments thereto), By-Laws (including amendments
thereto), and resolutions of the board of directors and the Stockholders
approving the Company's entering into this Agreement and the consummation of the
transactions contemplated hereby.
9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have
occurred with respect to the Company which would constitute a Material Adverse
Effect, and the Company shall not have suffered any material loss or damages to
any of its properties or assets, whether or not covered by insurance, which
change, loss or damage materially affects or impairs the ability of the Company
to conduct its business.
9.5 STOCKHOLDERS' RELEASE. The Stockholders shall have delivered to
Pentacon an instrument dated the Closing Date, which shall be effective only
upon the occurrence of the Consummation Date and shall relate only to matters
accruing on or prior to the Consummation Date, releasing the Company and
Pentacon from (i) any and all claims of the Stockholders against the Company and
Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders,
except for (w) items specifically identified on Schedules 5.10 and 5.15 as being
claims of or obligations to the Stockholders, (x) continuing obligations to
Stockholders relating to their employment by the Company or Pentacon, (y) any
obligations or liabilities arising under this Agreement or the transactions
contemplated hereby and (z) real estate lease agreements between the Company and
Stockholders, as amended which have been accepted or approved by Pentacon. In
the event that the Consummation Date does not occur, then the release instrument
referenced herein shall be void and of no further force or effect.
-39-
<PAGE>
9.6 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to Pentacon.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, all existing agreements between the Company and the Stockholders
(and entities controlled by the Stockholders) shall have been canceled effective
prior to or as of the Consummation Date.
9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from
Counsel to the Company and the Stockholders, dated the Closing Date,
substantially in the form annexed hereto as Annex V.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; all consents
and approvals of third parties listed on Schedule 5.23 shall have been obtained;
and no action or proceeding shall have been instituted or threatened to restrain
or prohibit the Merger and no governmental agency or body shall have taken any
other action or made any request of Pentacon as a result of which Pentacon deems
it inadvisable to proceed with the transactions hereunder.
9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to
Pentacon a certificate, dated as of a date no earlier than ten days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's state of incorporation and, unless waived by Pentacon, in each state
in which the Company is authorized to do business, showing the Company is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for the Company for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall enter into an employment agreement substantially in the form of Annex VI
hereto.
9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon
a certificate to the effect that he is not a foreign person pursuant to Section
1.1445-2(b) of the Treasury regulations.
-40-
<PAGE>
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated
by this Agreement or the Registration Statement, after the Consummation Date,
Pentacon shall not and shall not permit any of its subsidiaries to undertake any
act that would jeopardize the tax-free status of the organization, including
without limitation:
(a) the retirement or reacquisition, directly or indirectly, of all
or part of the Pentacon Stock issued in connection with the transactions
contemplated hereby; or
(b) the entering into of financial arrangements for the benefit of
the Stockholders.
10.2 PREPARATION AND FILING OF TAX RETURNS.
(i) The Company, if possible, or otherwise the Stockholders shall
file or cause to be filed all Tax Returns (federal, state, local or
otherwise) of any Acquired Party for all taxable periods that end on or
before the Consummation Date, and shall permit Pentacon to review all such
Returns prior to such filings. Unless the Company is a C corporation, the
Stockholders shall pay or cause to be paid all Tax liabilities (in excess
of all amounts already paid with respect thereto or properly accrued or
reserved with respect thereto on the Financial Statements) shown by such
Returns to be due.
(ii) Pentacon shall file or cause to be filed all separate Returns
of, or that include, any Acquired Party for all taxable periods ending
after the Consummation Date.
(iii) Each party hereto shall, and shall cause its Subsidiaries and
Affiliates to, provide to each of the other parties hereto such
cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any
audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies, at the expense of the
requesting party, of all relevant portions of relevant Returns, together
with relevant accompanying schedules and relevant work papers, relevant
documents relating to rulings or other determinations by Taxing
Authorities and relevant records concerning the ownership and Tax basis of
property, which such party may possess. Each party shall make its
employees reasonably available on a mutually convenient basis at its cost
to provide explanation of any documents or information so provided.
Subject to the preceding sentence, each party required to file Returns
pursuant to this Agreement shall bear all costs of filing such Returns.
(iv) Each of the Company, Newco, Pentacon and each Stockholder shall
comply with the tax reporting requirements of Section 1.351-3 of the
Treasury Regulations promulgated under the Code, and treat the transaction
as a tax-free contribution under Section 351(a) of the Code subject to
gain, if any, recognized on the receipt of cash or other
-41-
<PAGE>
property under Section 351(b) of the Code subject to gain, if any,
recognized on the receipt of cash or other property under Section 351(b)
of the Code.
10.3 DIRECTORS. The persons named in the Draft Registration Statement
shall be appointed as directors and elected as officers of Pentacon, as and to
the extent set forth in the Draft Registration Statement, promptly following the
Consummation Date.
11. INDEMNIFICATION
The Stockholders, Pentacon and Newco each make the following covenants
that are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders
covenant and agree that they, jointly and severally, will indemnify, defend,
protect and hold harmless Pentacon, Newco, the Company and the Surviving
Corporation at all times, from and after the date of this Agreement until the
Expiration Date (provided that for purposes of Section 11.1(iii) below, the
Expiration Date shall be the date on which the applicable statute of limitations
expires), from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by Pentacon, Newco, the Company or the Surviving
Corporation as a result of or arising from (i) any breach of the representations
and warranties of the Stockholders or the Company set forth herein or on the
definitive, final schedules or certificates delivered by them in connection
herewith, (ii) any breach of any agreement on the part of the Stockholders or,
prior to Closing, the Company under this Agreement, or (iii) any liability under
the 1933 Act, the 1934 Act or other Federal or state law or regulation, at
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact relating to the Company or the
Stockholders, and provided in writing to Pentacon or its counsel by the Company
or the Stockholders for inclusion in the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact relating to the Company or the Stockholders
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that such indemnity shall not inure to the
benefit of Pentacon, Newco, the Company or the Surviving Corporation to the
extent that such untrue statement (or alleged untrue statement) was made in, or
omission (or alleged omission) occurred in, any preliminary prospectus and the
Stockholders provided, in writing, corrected information to Pentacon counsel and
to Pentacon for inclusion in the final prospectus, and such information was not
so included or properly delivered, and provided further, that no Stockholder
shall be liable for any indemnification obligation pursuant to this Section
11.1(iii) to the extent attributable to a breach of any representation, warranty
or agreement made herein individually by any other Stockholder.
Pentacon and Newco acknowledge and agree that other than the
representations and warranties of Company or Stockholders specifically contained
in this Agreement, there are no representations or warranties of Company or
Stockholders, either express or implied, with respect
-42-
<PAGE>
to the transactions contemplated by this Agreement, the Company or its assets,
liabilities and business.
Pentacon, Newco and the Company further acknowledge and agree that, should
the Closing occur, their sole and exclusive remedy with respect to any and all
claims relating to this Agreement and the transactions contemplated in this
Agreement, shall be pursuant to the indemnification provisions set forth in this
Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the
Closing, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action they or any indemnified person may have
against the Company or any Stockholder relating to this Agreement or the
transactions contemplated hereby arising under or based upon any federal, state,
local or foreign statute, law, rule, regulation or otherwise (and other than
pursuant to the terms of this Agreement).
11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it
will indemnify, defend, protect and hold harmless the Stockholders at all times
from and after the date of this Agreement until the Expiration Date, from and
against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
Stockholders as a result of or arising from (i) any breach by Pentacon or Newco
of their representations and warranties set forth herein or on the definitive,
final schedules or certificates attached delivered by them pursuant hereto, (ii)
any breach of any agreement on the part of Pentacon or Newco under this
Agreement or any other agreement delivered pursuant hereto, (iii) any
liabilities which the Stockholders may incur due to Pentacon's or Newco's or the
Surviving Corporation's failure to pay, perform or discharge when due any of the
liabilities and obligations of the Company for which Pentacon, Newco or the
Surviving Corporation is responsible pursuant to this Agreement (except to the
extent that Pentacon or Newco has bona fide claims hereunder against the
Stockholders by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to Pentacon, Newco or any of the
Other Founding Companies contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to
Pentacon or Newco or any of the Other Founding Companies required to be stated
therein or necessary to make the statements therein not misleading.
11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the
"Indemnified Party") has received notice of or has actual knowledge of any claim
by a Person (including a governmental agency) not a party to this Agreement
("Third Person"), or the commencement of any action or proceeding by a Third
Person, with respect to which the Indemnified Person would be entitled to
receive indemnification pursuant to Section 11, the Indemnified Party shall, as
a condition precedent to a claim with respect thereto being made against any
party obligated to provide indemnification pursuant to Section 11.1 or 11.2
hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party
written notice of such claim or the commencement of such action or
-43-
<PAGE>
proceeding. Such notice shall state the nature and the basis of such claim and a
reasonable estimate of the amount thereof. The Indemnifying Party shall have the
right to defend and settle, at its own expense and by its own counsel, any such
matter so long as the Indemnifying Party pursues the same in good faith and
diligently, provided that the Indemnifying Party shall not settle any criminal
proceeding without the written consent of the Indemnified Party. If the
Indemnifying Party undertakes to defend or settle, it shall promptly notify the
Indemnified Party of its intention to do so, and the Indemnified Party shall
cooperate with the Indemnifying Party and its counsel in the defense thereof and
in any settlement thereof. Such cooperation shall include, but shall not be
limited to, furnishing the Indemnifying Party with any books, records or
information reasonably requested by the Indemnifying Party that are in the
Indemnified Party's possession or control. All Indemnified Parties shall use the
same counsel, which shall be the counsel selected by Indemnifying Party,
provided that if counsel to the Indemnifying Party shall have a conflict of
interest that prevents counsel for the Indemnifying Party from representing
Indemnified Party, Indemnified Party shall have the right to participate in such
matter through counsel of its own choosing and Indemnifying Party will reimburse
the Indemnified Party for the reasonable expenses of its counsel. After the
Indemnifying Party has notified the Indemnified Party of its intention to
undertake to defend or settle any such asserted liability, and for so long as
the Indemnifying Party diligently pursues such defense through appropriate
proceedings, the Indemnifying Party shall not be liable for any additional legal
expenses incurred by the Indemnified Party in connection with any defense or
settlement of such asserted liability, except (i) as set forth in the preceding
sentence and (ii) to the extent such participation is requested by the
Indemnifying Party, in which event the Indemnified Party shall be reimbursed by
the Indemnifying Party for reasonable additional legal expenses and
out-of-pocket expenses. If the Indemnifying Party desires to accept a final and
complete settlement of any such Third Person claim and the Indemnified Party
refuses to consent to such settlement, then the Indemnifying Party's liability
under this Section with respect to such Third Person claim shall be limited to
the amount so offered in settlement by said Third Person. Upon agreement as to
such settlement between said Third Person and the Indemnifying Party, the
Indemnifying Party shall, in exchange for a complete release from the
Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in
such settlement and the Indemnified Party shall, from that moment on, bear full
responsibility for any additional costs of defense which it subsequently incurs
with respect to such claim and all additional costs of settlement or judgment.
If the Indemnifying Party does not undertake to defend such matter to which the
Indemnified Party is entitled to indemnification hereunder, or fails diligently
to pursue such defense, the Indemnified Party may undertake such defense through
counsel of its choice, at the cost and expense of the Indemnifying Party, and
the Indemnified Party may settle such matter, and the Indemnifying Party shall
reimburse the Indemnified Party for the amount paid in such settlement and any
other liabilities or expenses incurred by the Indemnified Party in connection
therewith, provided, however, that under no circumstances shall the Indemnified
Party settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
All settlements hereunder shall effect a complete release of the Indemnified
Party, unless the Indemnified Party otherwise agrees in writing. The parties
hereto will make appropriate adjustments for insurance proceeds in determining
the amount of any indemnification obligation under this Section.
-44-
<PAGE>
11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this
Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any
action seeking damages or any other form of monetary relief brought by any party
to this Agreement against another party, provided that, nothing herein shall be
construed to limit the right of a party, in a proper case pursuant to Section
14.3 or otherwise, to seek injunctive or other equitable relief (except for
rescission which shall not be available) for a breach or threatened breach of
this Agreement. Any indemnity payment under this Section 11 shall be treated as
an adjustment to the exchange consideration for tax purposes unless a final
determination (which shall include the execution of a Form 870-AD or successor
form) with respect to the indemnified party or any of its affiliate causes any
such payment not to be treated as an adjustment to the exchange consideration
for U.S. Federal Income Tax purposes.
(b) Nothing in this Article 11 shall restrict the Stockholders from
subrogation or seeking reimbursement from third parties other than the Company.
11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim for indemnification hereunder against
the Stockholders after the applicable Expiration Date and in no event until such
time as, and solely to the extent that, the aggregate of all claims which such
persons may have against the Stockholders shall exceed the greater of 1% of the
value of the total consideration (including stock and cash) received by the
Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and
then only to the extent of the excess over the Indemnification Threshold.
Stockholders shall not assert any claim for indemnification hereunder against
Pentacon or Newco after the applicable Expiration Date and in no event until
such time as, and solely to the extent that, the aggregate of all claims which
Stockholders may have against Pentacon or Newco shall exceed the Indemnification
Threshold, and then only to the extent of the excess over the Indemnification
Threshold.
The Indemnification Threshold and the other limitations contained in this
Section 11.5 shall not be applicable to any breach of covenants made by the
Stockholders in this Agreement which require an action or inaction by such
Stockholders from and after the Closing Date (i.e., Article 10, Article 11,
Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall
be entitled to indemnification under this Section 11 if, and only to the extent
that such person's claim for indemnification is directly related to a breach by
such person of any representation, warranty, covenant or other agreement set
forth in this Agreement.
The pursuit by Pentacon, the Surviving Corporation, Newco or the Company,
of any claim for indemnification hereunder against a Stockholder shall require a
majority vote of the board of directors of Pentacon excluding for the purposes
of such acts any directors who was previously a stockholder of the Company or is
a representative of the stockholders of the Company as existing prior to the
closing of the transactions contemplated at this Agreement.
Notwithstanding any other term of this Agreement, no Stockholder shall be
liable (in the aggregate from time to time taking into account all
indemnification payments made hereunder) under
-45-
<PAGE>
Section 11 (i) for any amount which is less than or equal to the Indemnification
Threshold (and then only to the extent of the excess over the Indemnification
Threshold) or (ii) for any amount which exceeds the amount of proceeds
(including cash and stock) received by such Stockholder in connection with the
Merger. Each Stockholder shall have the option of satisfying his or her
indemnity obligation in cash and/or by returning or transferring shares of
Pentacon Stock to Pentacon or any other Indemnified Party. For purposes of
calculating the value of the Pentacon Stock received by a Stockholder and
satisfying any indemnity claim by returning or transferring Pentacon Stock,
Pentacon Stock shall be valued at its initial public offering price as set forth
in the Registration Statement.
Notwithstanding any of the foregoing provisions of this Section 11 that
might be read to the contrary, it is the agreement of the parties that the
Indemnification Threshold be given full effect under all circumstances.
Accordingly, insofar as any of the foregoing provisions of this Section 11 may
hold harmless an Indemnified Party before the Indemnification Threshold has been
met, then Pentacon and the Stockholders shall cooperate in good faith to
establish an equitable procedure pursuant to which Pentacon reimburses or causes
the reimbursement to the affected Stockholder(s) of all expenditures and
payments by Stockholders that are intended to be absorbed and borne by any
Indemnified Parties as a result of the prior application of the Indemnification
Threshold or otherwise takes such action as may be reasonably necessary to give
effect to the Indemnification Threshold.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION. This Agreement may be terminated at any time prior to
the Consummation Date solely:
(i) by mutual consent of the boards of directors of Pentacon and
the Company;
(ii) by the Stockholders or the Company (acting through its board of
directors), on the one hand, or by Pentacon (acting through its board of
directors), on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated by
February 28, 1998, unless the failure of such transactions to be
consummated is due to the willful failure of the party seeking to
terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Consummation Date;
(iii) by the Stockholders or Company, on the one hand, or by
Pentacon, on the other hand, if a material breach or default shall be made
by the other party in the observance or in the due and timely performance
of any of the covenants or agreements contained herein, and the curing of
such default shall not have been made on or before the Consummation Date
or by the Stockholders or the Company, if the conditions set forth in
Section 8 hereof have not been satisfied or waived as of the Closing Date
or the Consummation Date, as applicable, or by Pentacon, if the conditions
set forth in Section 9 hereof have not been satisfied or waived as of the
Closing Date or the Consummation Date, as applicable;
-46-
<PAGE>
(iv) pursuant to Section 7.8 hereof;
(v) pursuant to the termination provisions contained in Section 4
hereof; or
(vi) pursuant to the other express terms of this Agreement.
12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of
five (5) years following the Consummation Date, for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) except as disclosed in Schedule 13.1, engage, as an officer,
director, shareholder, owner, partner, joint venturer, or in a managerial
capacity, whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any fastener business or
operation or related services business in direct competition with Pentacon
or any of the subsidiaries thereof, within 100 miles of where the Company
or any of its subsidiaries conducted business prior to the effectiveness
of the Merger (the "Territory");
(ii) except with the prior written consent of Pentacon, call upon
any person who is, at that time, within the Territory, an employee of
Pentacon or any subsidiary thereof for the purpose or with the intent of
enticing such employee away from or out of the employ of Pentacon or any
subsidiary thereof;
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to the Consummation Date, a
customer of Pentacon or any subsidiary thereof, of the Company or of any
of the Other Founding Companies within the Territory for the purpose of
soliciting or selling products or services that are in direct competition
with Pentacon within the Territory;
(iv) call upon any prospective acquisition candidate, on any
Stockholder's own behalf or on behalf of any competitor in the fastener
business, which candidate, to the actual knowledge of such Stockholder
after due inquiry, was called upon by Pentacon or any subsidiary thereof
or for which, to the actual knowledge of such Stockholder after due
-47-
<PAGE>
inquiry, Pentacon or any subsidiary thereof made an acquisition analysis,
for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of the
Company to any person, firm, partnership, corporation or business for any
reason or purpose relating to the fastener business except to the extent
that the Company has in the past disclosed such information to the public
for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit any Stockholder from acquiring as a passive investment not more than
one percent (1%) of the capital stock of a competing business whose stock is
traded on a national securities exchange or over-the counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
Pentacon as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to Pentacon for which it
would have no other adequate remedy, each Stockholder agrees that the foregoing
covenant may be enforced by Pentacon in the event of breach by such Stockholder,
by injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
Stockholders in light of the activities and business of Pentacon and the
subsidiaries thereof on the date of the execution of this Agreement and the
current plans of Pentacon; but it is also the intent of Pentacon and the
Stockholders that such covenants be construed and enforced in accordance with
the changing activities; business and locations of Pentacon and its subsidiaries
throughout the term of this covenant. During the term of this covenant, if
Pentacon or one of its subsidiaries engages in new and different activities,
enters a new business or establishes new locations for its current activities or
business in addition to or other than the activities or business it is currently
conducting in the locations currently established therefor, then the
Stockholders will be precluded from soliciting the customers or employees of
such new activities or business or from such new location and from directly
competing with such new activities or business within 100 miles of its
then-established operating location(s) through the term of this covenant.
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
-48-
<PAGE>
13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any Stockholder
against Pentacon or any subsidiary thereof, whether predicated on this Agreement
or otherwise (except for a claim or cause of action based upon Pentacon's
failure to pay or otherwise tender any of the consideration due to the
Stockholders hereunder), shall not constitute a defense to the enforcement by
Pentacon of such covenants. It is specifically agreed that the period of five
(5) years stated at the beginning of this Section 13, during which the
agreements and covenants of each Stockholder made in this Section 13 shall be
effective, shall be computed by excluding from such computation any time during
which such Stockholder is in violation of any provision of this Section 13. The
covenants contained in Section 13 shall not be affected by any breach of any
other provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The Company and the Stockholders hereby agree that this
covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDERS. The Stockholders recognize and acknowledge that they
had in the past, currently have, and in the future may possibly have, access to
certain confidential information of the Company, the Other Founding Companies,
and/or Pentacon, such as operational policies, and pricing and cost policies
that are valuable, special and unique assets of the Company's, the Other
Founding Companies' and/or Pentacon's respective businesses. The Stockholders
agree that they will not disclose such confidential information to any person,
firm, corporation, association or other entity for any purpose or reason
whatsoever, except (a) to authorized representatives of Pentacon, (b) following
the Closing, such information may be disclosed by the Stockholders as is
required in the course of performing their duties for Pentacon or the Surviving
Corporation and (c) to counsel and other advisers, provided that such advisers
(other than counsel) agree to the confidentiality provisions of this Section
14.1, unless (i) such information becomes known to the public generally through
no fault of the Stockholders, (ii) disclosure is required by law or the order of
any governmental authority under color of law, provided, that prior to
disclosing any information pursuant to this clause (ii), the Stockholders shall,
if possible, give prior written notice thereof to Pentacon and provide Pentacon
with the opportunity to contest such disclosure, or (iii) the disclosing party
reasonably believes that such disclosure is required in connection with the
defense of a lawsuit against the disclosing party. In the event of a breach or
threatened breach by any of the Stockholders of the provisions of this Section,
Pentacon shall be entitled to an injunction restraining such Stockholders from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting Pentacon from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
In the event the transactions contemplated by this Agreement are not
consummated, Stockholders shall have none of the above-mentioned restrictions on
their ability to disseminate confidential information with respect to the
Company.
-49-
<PAGE>
14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that
they had in the past and currently have access to certain confidential
information of the Company, including, but not limited to, customer and prospect
lists, financial information, operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company's business.
Pentacon and Newco agree that, prior to the Consummation Date, or if the
transactions contemplated by this Agreement are not consummated, they will not,
appropriate or make use of any such information, whether for its own benefit or
the benefit of any other person or entity, for any purpose whatsoever (except
pending the Consummation Date, effecting the transactions contemplated hereby)
disclose such confidential information to any person, firm, corporation,
association or other entity for any purpose or reason whatsoever, except (a) to
authorized representatives of the Company, (b) to counsel and other advisers,
provided that such advisers (other than counsel) agree to the confidentiality
provisions of this Section 14.2, (c) to the Other Founding Companies and their
representatives pursuant to Section 7.1(a), unless (i) such information becomes
known to the public generally through no fault of Pentacon or Newco, (ii)
disclosure is required by law or the order of any governmental authority under
color of law, provided, that prior to disclosing any information pursuant to
this clause (ii), Pentacon and Newco shall, if possible, give prior written
notice thereof to the Company and the Stockholders and provide the Company and
the Stockholders with the opportunity to contest such disclosure, or (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party, and (d)
to the public to the extent necessary or advisable in connection with the filing
of the Registration Statement and the IPO and the securities laws applicable
thereto and to the operation of Pentacon as a publicly held entity after the
IPO. In the event of a breach or threatened breach by Pentacon or Newco of the
provisions of this Section, the Company and the Stockholders shall be entitled
to an injunction restraining Pentacon and Newco from disclosing, in whole or in
part, such confidential information. Nothing herein shall be construed as
prohibiting the Company and the Stockholders from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach or threatened breach by any of them of the foregoing
covenants, the covenant may be enforced against the other parties by injunctions
and restraining orders or other appropriate equitable relief, without posting
any bond or other security or having to prove irreparable harm or injury.
14.4 SURVIVAL. The obligations of the parties under this Article 14 shall
survive the termination of this Agreement for a period of five years from the
Consummation Date, or without limitation if the transactions contemplated hereby
are not consummated.
-50-
<PAGE>
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except
for transfers to immediate family members who agree to be bound by the
restrictions set forth in this Section 15.1 (or trusts or partnerships for the
benefit of charities, the Stockholders, family members, the trustees or partners
of which so agree), for a period of one year from the Closing, except pursuant
to Section 17 hereof, none of the Stockholders shall sell, assign, exchange,
transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any
shares of Pentacon Stock received by the Stockholders in the Merger. The
certificates evidencing the Pentacon Stock delivered to the Stockholders
pursuant to Section 3 of this Agreement will bear a legend substantially in the
form set forth below and containing such other information as Pentacon may deem
necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE
WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT)
AFTER THE DATE SPECIFIED ABOVE.
16. FEDERAL SECURITIES ACT REPRESENTATIONS
16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of
Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement
have not been and will not be registered under the 1933 Act (except as provided
in Section 17 hereof) and therefore may not be resold without compliance with
the 1933 Act. The Pentacon Stock to be acquired by such Stockholders pursuant to
this Agreement is being acquired solely for their own respective accounts, for
investment purposes only, and with no present intention of distributing, selling
or otherwise disposing of it in connection with a distribution. The Stockholders
covenant, warrant and represent that none of the shares of Pentacon Stock issued
to such Stockholders will be offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the 1933 Act and the rules and regulations of the
SEC. All the Pentacon Stock shall bear the following legend in addition to the
legend required under Section 15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER
HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW.
-51-
<PAGE>
16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the
economic risk of an investment in the Pentacon Stock to be acquired pursuant to
this Agreement and can afford to sustain a total loss of such investment and
have such knowledge and experience in financial and business matters that they
are capable of evaluating the merits and risks of the proposed investment in the
Pentacon Stock. The Stockholders party hereto have had an adequate opportunity
to ask questions and receive answers from the officers of Pentacon concerning
any and all matters relating to the transactions described herein including,
without limitation, the background and experience of the current and proposed
officers and directors of Pentacon, the plans for the operations of the business
of Pentacon, the business, operations and financial condition of the Founding
Companies other than the Company, and any plans for additional acquisitions and
the like. The Stockholders have asked any and all questions in the nature
described in the preceding sentence and all questions have been answered to
their satisfaction.
17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing,
whenever Pentacon proposes to register any Pentacon Stock for its own or others
account under the 1933 Act for a public offering, other than (i) any shelf or
other registration of shares to be used as consideration for acquisitions of
additional businesses by Pentacon and (ii) registrations relating to employee
benefit plans, Pentacon shall give each of the Stockholders prompt written
notice of its intent to do so. Upon the written request of any of the
Stockholders given within 30 days after receipt of such notice, Pentacon shall
cause to be included in such registration all of the Pentacon Stock issued to
the Stockholders pursuant to this Agreement (including any stock issued as (or
issuable upon the conversion or exchange of any convertible security, warrant,
right or other security which is issued by Pentacon as) a dividend or other
distribution with respect to, or in exchange for, or in replacement of such
Pentacon Stock) which any such Stockholder requests, provided that Pentacon
shall have the right to reduce the number of shares included in such
registration to the extent that inclusion of such shares would, in the written
opinion of tax counsel to Pentacon or its independent auditors, reasonably be
likely to jeopardize the status of the transactions contemplated hereby and by
the Registration Statement as a tax-free organization under Section 351 of the
Code. In addition, if Pentacon is advised in writing in good faith by any
managing underwriter of an underwritten offering of the securities being offered
pursuant to any registration statement under this Section 17.1 that the number
of shares to be sold by persons other than Pentacon is greater than the number
of such shares which can be offered without adversely affecting the offering,
Pentacon may reduce pro rata the number of shares offered for the accounts of
such persons (based upon the number of shares held by such person) to a number
deemed satisfactory by such managing underwriter, provided, that, for each such
offering made by Pentacon after the IPO, such reduction shall be made first by
reducing the number of shares to be sold by persons other than Pentacon, the
Stockholders and the Stockholders of the Other Founding Companies (collectively,
the Stockholders and the Stockholders of the other Founding Companies being
referred to herein as the "Founding Stockholders"), and thereafter, if a further
reduction is required, by reducing the number of shares to be sold by the
Founding Stockholders.
-52-
<PAGE>
17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register
shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements or term sheets
thereto, Pentacon will furnish a representative of the Stockholders with
copies of all such documents proposed to be filed) as promptly as
practical;
(ii) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 120 days;
(iii) Furnish to each Stockholder who so requests such number of
copies of such registration statement, each amendment and supplement
thereto and the prospectus included in such registration statement
(including each preliminary prospectus and any term sheet associated
therewith), and such other documents as such Stockholder may reasonably
request in order to facilitate the disposition of the relevant shares;
(iv) Use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Stockholders, and to keep such registration or qualification effective
during the period such registration statement is to be kept effective,
provided that Pentacon shall not be required to become subject to
taxation, to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;
(v) Cause all such shares of Pentacon Stock to be listed or included
on any securities exchanges or trading systems on which similar securities
issued by Pentacon are then listed or included;
(vi) Notify each Stockholder at any time when a prospectus relating
thereto is required to be delivered under the 1933 Act within the period
that Pentacon is required to keep the registration statement effective of
the happening of any event as a result of which the prospectus included in
such registration statement, together with any associated term sheet,
contains an untrue statement of a material fact or omits any fact
necessary to make the statement therein not misleading, and, at the
request of such Stockholder, Pentacon will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the
purchasers of the covered shares, such prospectus will not contain an
untrue statement of material fact or omit to state any fact necessary to
make the statements therein not misleading.
-53-
<PAGE>
All expenses incurred in connection with the registration under this
Article 17 (including all registration, filing, qualification, legal, printer
and accounting fees, but excluding underwriting commissions and discounts),
shall be borne by Pentacon.
17.3 INDEMNIFICATION.
(a) In connection with any registration hereunder, Pentacon shall
indemnify, to the extent permitted by law, each Stockholder against all losses,
claims, damages, liabilities and expenses arising out of or resulting from any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or associated term
sheet or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading except insofar as the same are caused by or contained in or omitted
from any information furnished in writing to Pentacon by such indemnified party
expressly for use therein or by any indemnified parties' failure to deliver a
copy of the registration statement or prospectus or any amendment or supplements
thereto after Pentacon has furnished such Indemnified Party with a sufficient
number of copies of the same.
(b) In connection with any registration hereunder, each Stockholder
shall furnish to Pentacon in writing such information as is reasonably requested
by Pentacon for use in any such registration statement or prospectus and will
indemnify, to the extent permitted by law, Pentacon, its directors and officers
and each person who controls Pentacon (within the meaning of the 1933 Act)
against any losses, claims, damages, liabilities and expenses resulting from any
untrue or alleged untrue statement or material fact or any omission or alleged
omission of a material fact required to be stated in the registration statement
or prospectus or any amendment thereof or supplement thereto necessary to make
the statements therein not misleading, but only to the extent that such untrue
statement or omission is contained in information so furnished in writing by
such Stockholder specifically for use in preparing the registration statement.
Notwithstanding the foregoing, the liability of a Stockholder under this Section
17.3 shall be limited to an amount equal to the net proceeds actually received
by such Stockholder from the sale of the relevant shares covered by the
registration statement.
(c) Any person entitled to indemnification under this Section will
(i) give prompt notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified parties'
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. Any failure to give prompt notice shall
deprive a party of its right to indemnification hereunder only to the extent
that such failure shall have adversely affected the indemnifying party. If the
defense of any claim is assumed, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
or elects not to assume the defense of a claim, will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the
-54-
<PAGE>
reasonable judgment of any indemnified party, a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim.
17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant
to Section 17.1 covering an underwritten registered offering, Pentacon and each
participating holder agree to enter into a written agreement with the managing
underwriters in such form and containing such provisions as are customary in the
securities business for such an arrangement between such managing underwriters
and companies of Pentacon's size and investment stature, including
indemnification.
17.5 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of Pentacon
stock to the public without registration, Pentacon agrees to use its
commercially reasonable efforts to:
(i) make and keep public information regarding Pentacon available as
those terms are understood and defined in Rule 144 under the 1933 Act for
a period of four years beginning 90 days following the effective date of
the Registration Statement;
(ii) file with the SEC in a timely manner all reports and other
documents required of Pentacon under the 1933 Act and the 1934 Act at any
time after it has become subject to such reporting requirements; and
(iii) so long as a Stockholder owns any restricted Pentacon Common
Stock, furnish to each Stockholder forthwith upon written request a
written statement by Pentacon as to its compliance with the reporting
requirements of Rule 144 (at any time from and after 90 days following the
effective date of the Registration Statement, and of the 1933 Act and the
1934 Act (any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of
Pentacon, and such other reports and documents so filed as a Stockholder
may reasonably request in availing itself of any rule or regulation of the
SEC allowing a Stockholder to sell any such shares without registration.
18. GENERAL
18.1 COOPERATION. The Company, Stockholders, Pentacon and Newco shall each
deliver or cause to be delivered to the other on the Consummation Date, and at
such other times and places as shall be reasonably agreed to, such additional
instruments as the other may reasonably request for the purpose of carrying out
this Agreement. The Company will cooperate and use its reasonable efforts to
have the present officers, directors and employees of the Company cooperate with
Pentacon on and after the Consummation Date in furnishing information, evidence,
testimony and other assistance in connection with any tax return filing
obligations, actions, proceedings, arrangements or disputes of any nature with
respect to matters pertaining to all periods prior to the Consummation Date.
-55-
<PAGE>
18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
Pentacon, and the heirs and legal representatives of the Stockholders.
18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Stockholders, the
Company, Newco and Pentacon and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only (i)
pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a
written instrument executed by the Stockholders, the Company, Newco and
Pentacon, acting through their respective officers or trustees, duly authorized
by their respective Boards of Directors. Any disclosure made on any Schedule
delivered pursuant hereto shall be deemed to have been disclosed for purposes of
any other Schedule required hereby, provided that the Company shall make a good
faith effort to cross reference disclosure, as necessary or advisable, between
related Schedules, and provided further that the failure to do so will not
affect the validity of such disclosure.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other parties hereto against all
loss, cost, damages or expense arising out of claims for fees or commission of
brokers employed or alleged to have been employed by such indemnifying party.
18.6 EXPENSES. Whether or not the transactions herein contemplated shall
be consummated, Pentacon will pay the fees, expenses and disbursements of
Pentacon and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by Pentacon under this Agreement, including the
fees and expenses of Ernst & Young, L.L.P., Andrews & Kurth L.L.P., and any
other person or entity retained by Pentacon or by McFarland Grossman Capital
Ventures II, L.C., and the costs of preparing the Registration Statement. Except
as otherwise agreed in writing by Pentacon, each Stockholder shall pay their
respective fees, expenses and disbursements of counsel and other professionals
in connection with this transaction and shall pay all sales, use, transfer, real
property transfer, recording, gains, stock transfer and other similar taxes and
fees ("Transfer Taxes") imposed in connection with the Merger, other than
Transfer Taxes, if any, imposed by the State of Delaware. Each Stockholder shall
file all necessary documentation and Returns with respect to such Transfer
Taxes. In addition, each Stockholder acknowledges that he, and not the Company
or Pentacon, will
-56-
<PAGE>
pay all taxes due upon receipt of the consideration payable pursuant to Section
2 hereof. The Stockholders acknowledge that the risks of the transactions
contemplated hereby include tax risks, with respect to which the Stockholders
are relying solely on the opinion contemplated by Section 8.12 hereof.
18.7 NOTICES. All notices of communication required or permitted hereunder
shall be in writing and may be given by depositing the same in United States
mail, addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person to
an officer or agent of such party.
(a) If to Pentacon, or Newco, addressed to them at:
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
with copies to:
Bruce Taten, Esquire
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
and
Christopher S. Collins, Esquire
Andrews & Kurth L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
(b) If to the Stockholders, addressed to them at their addresses set
forth on Annex II, with copies to:
F. L. Dennis Logan
Rothberg & Logan
P. O. Box 11647
Fort Wayne, Indiana 46859
(c) If to the Company, addressed to it at:
Michael Peters
Maumee Industries, Inc.
3010 Independence Drive
-57-
<PAGE>
Fort Wayne, Indiana 46808
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware.
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties made herein and at the time
of the Closing or in writing delivered pursuant to the provisions of this
Agreement shall survive the consummation of the transactions contemplated hereby
and any examination on behalf of the parties until the applicable Expiration
Date.
18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 TIME. Time is of the essence with respect to this Agreement.
18.12 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4,
no right, remedy or election given by any term of this Agreement shall be deemed
exclusive but each shall be cumulative with all other rights, remedies and
elections available at law or in equity.
18.14 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
-58-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PENTACON, INC.
By: _________________________
Mark E. Baldwin
Chief Executive Officer
MAUMEE INDUSTRIES ACQUISITION
COMPANY
By: _________________________
Name: Mark E. Baldwin
Title: President
MAUMEE INDUSTRIES, INC.
By: _________________________
Name: Michael Black
Title: President
STOCKHOLDERS:
_____________________________
MICHAEL BLACK
_____________________________
MICHAEL PETERS
-59-
<PAGE>
ANNEX I (Maumee Industries, Inc.)
CONSIDERATION TO BE PAID TO THE STOCKHOLDERS
Stockholder Shares of Common Stock of Merger Cash*
PENTACON, INC.
- ------------------- -------------------------- ------------------
Michael Black 901,321 $3,844,348.50
Michael Peters 300,441 $1,281,449.50
-------------------------- ------------------
1,201,762 $5,125,798
========================== ==================
MINIMUM VALUE: $17,419,823
*Merger Cash is fixed and will not be adjusted as a result of changes in the
size of the IPO.
<PAGE>
ANNEX II
MAUMEE INDUSTRIES, INC. STOCK OWNERSHIP
Michael Black 75 Shares
Michael Peters 25 Shares
See attached for Stockholders' addresses.
EXHIBIT 10.5
AGREEMENT AND PLAN OF ORGANIZATION
dated as of the 1st day of December 1997
by and among
PENTACON, INC.
SALES SYSTEMS LIMITED ACQUISITION COMPANY
(a subsidiary of Pentacon, Inc.)
SALES SYSTEMS, LIMITED
and
the STOCKHOLDERS named herein
<PAGE>
TABLE OF CONTENTS
Page
RECITALS.....................................................................1
1. THE MERGER.............................................................6
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................6
1.2 EFFECTIVE TIME OF THE MERGER.....................................6
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION............................................6
1.4 EFFECT OF MERGER.................................................7
2. CONVERSION OF STOCK....................................................7
2.1 MANNER OF CONVERSION.............................................7
3. DELIVERY OF MERGER CONSIDERATION.......................................8
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8
4. CLOSING................................................................9
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.....9
5.1 DUE ORGANIZATION................................................10
5.2 AUTHORIZATION...................................................10
5.3 CAPITAL STOCK OF THE COMPANY....................................10
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10
5.5 NO BONUS SHARES.................................................11
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................11
5.7 PREDECESSOR STATUS; ETC.........................................11
5.8 SPIN-OFF BY THE COMPANY.........................................11
5.9 FINANCIAL STATEMENTS............................................11
5.10 LIABILITIES AND OBLIGATIONS.....................................12
5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12
5.12 PERMITS AND INTANGIBLES.........................................13
5.13 ENVIRONMENTAL MATTERS...........................................13
5.14 PERSONAL PROPERTY...............................................15
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15
5.16 REAL PROPERTY...................................................16
5.17 INSURANCE.......................................................16
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............17
-i-
<PAGE>
5.19 EMPLOYEE PLANS..................................................17
5.20 COMPLIANCE WITH ERISA...........................................18
5.21 CONFORMITY WITH LAW; LITIGATION.................................19
5.22 TAXES...........................................................19
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21
5.25 ABSENCE OF CHANGES..............................................22
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................23
5.27 VALIDITY OF OBLIGATIONS.........................................23
5.28 RELATIONS WITH GOVERNMENTS......................................23
5.29 DISCLOSURE......................................................24
5.30 PROHIBITED ACTIVITIES...........................................24
5.31 NO WARRANTIES OR INSURANCE......................................24
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY
TRANSACTIONS....................................................24
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................25
5.34 PREEMPTIVE RIGHTS...............................................25
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................25
6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25
6.1 DUE ORGANIZATION................................................26
6.2 AUTHORIZATION...................................................26
6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................26
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26
6.5 SUBSIDIARIES....................................................27
6.6 FINANCIAL STATEMENTS............................................27
6.7 LIABILITIES AND OBLIGATIONS.....................................27
6.8 CONFORMITY WITH LAW; LITIGATION.................................27
6.9 NO VIOLATIONS...................................................27
6.10 VALIDITY OF OBLIGATIONS.........................................28
6.11 PENTACON STOCK..................................................28
6.12 NO SIDE AGREEMENTS..............................................29
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................29
6.14 DISCLOSURE......................................................29
7. COVENANTS PRIOR TO CLOSING............................................29
7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29
7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................30
7.3 PROHIBITED ACTIVITIES...........................................31
7.4 NO SHOP.........................................................32
7.5 NOTICE TO BARGAINING AGENTS.....................................33
7.6 AGREEMENTS......................................................33
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE
COMPANY.........................................................33
7.8 AMENDMENT OF SCHEDULES..........................................34
-ii-
<PAGE>
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............35
7.10 FINAL FINANCIAL STATEMENTS......................................35
7.11 FURTHER ASSURANCES..............................................35
7.12 AUTHORIZED CAPITAL..............................................36
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST
IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........36
7.14 PRE-CLOSING NOTIFICATIONS.......................................36
7.15 PAYMENT OF INDEBTEDNESS.........................................36
7.16 MINIMUM VALUE...................................................37
7.17 DIRECTORS. ....................................................37
7.18 TRANSACTION REPORTING...........................................37
7.19 PERMITS.........................................................37
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.......37
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......37
8.2 SATISFACTION....................................................38
8.3 NO LITIGATION...................................................38
8.4 OPINION OF COUNSEL..............................................38
8.5 REGISTRATION STATEMENT..........................................38
8.6 CONSENTS AND APPROVALS..........................................38
8.7 GOOD STANDING CERTIFICATES......................................38
8.8 NO MATERIAL ADVERSE CHANGE......................................39
8.9 CLOSING OF IPO..................................................39
8.10 SECRETARY'S CERTIFICATE.........................................39
8.11 EMPLOYMENT AGREEMENTS...........................................39
8.12 TAX MATTERS.....................................................39
8.13 EXCHANGE LISTING................................................39
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO.............39
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....40
9.2 NO LITIGATION...................................................40
9.3 SECRETARY'S CERTIFICATE.........................................40
9.4 NO MATERIAL ADVERSE EFFECT......................................40
9.5 STOCKHOLDERS' RELEASE...........................................40
9.6 SATISFACTION....................................................41
9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................41
9.8 OPINION OF COUNSEL..............................................41
9.9 CONSENTS AND APPROVALS..........................................41
9.10 GOOD STANDING CERTIFICATES......................................41
9.11 REGISTRATION STATEMENT..........................................41
9.12 EMPLOYMENT AGREEMENTS...........................................41
-iii-
<PAGE>
9.13 CLOSING OF IPO..................................................41
9.14 FIRPTA CERTIFICATE..............................................42
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............42
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................42
10.2 PREPARATION AND FILING OF TAX RETURNS...........................42
10.3 DIRECTORS.......................................................43
11. INDEMNIFICATION.......................................................43
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.....................43
11.2 INDEMNIFICATION BY PENTACON.....................................44
11.3 THIRD PERSON CLAIMS.............................................45
11.4 EXCLUSIVE REMEDY................................................46
11.5 LIMITATIONS ON INDEMNIFICATION..................................46
12. TERMINATION OF AGREEMENT..............................................47
12.1 TERMINATION.....................................................47
12.2 LIABILITIES IN EVENT OF TERMINATION.............................48
13. NONCOMPETITION........................................................48
13.1 PROHIBITED ACTIVITIES...........................................48
13.2 DAMAGES.........................................................49
13.3 REASONABLE RESTRAINT............................................49
13.4 SEVERABILITY; REFORMATION.......................................50
13.5 INDEPENDENT COVENANT............................................50
13.6 MATERIALITY.....................................................50
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................50
14.1 STOCKHOLDERS....................................................50
14.2 PENTACON AND NEWCO..............................................51
14.3 DAMAGES.........................................................51
14.4 SURVIVAL........................................................52
15. TRANSFER RESTRICTIONS.................................................52
15.1 TRANSFER RESTRICTIONS...........................................52
16. FEDERAL SECURITIES ACT REPRESENTATIONS................................52
16.1 COMPLIANCE WITH LAW.............................................52
16.2 ECONOMIC RISK; SOPHISTICATION...................................53
17. REGISTRATION RIGHTS...................................................53
17.1 PIGGYBACK REGISTRATION RIGHTS...................................53
-iv-
<PAGE>
17.2 REGISTRATION PROCEDURES.........................................54
17.3 INDEMNIFICATION.................................................55
17.4 UNDERWRITING AGREEMENT..........................................56
17.5 RULE 144 REPORTING..............................................56
18. GENERAL...............................................................57
18.1 COOPERATION.....................................................57
18.2 SUCCESSORS AND ASSIGNS..........................................57
18.3 ENTIRE AGREEMENT................................................57
18.4 COUNTERPARTS....................................................57
18.5 BROKERS AND AGENTS..............................................57
18.6 EXPENSES........................................................58
18.7 NOTICES.........................................................58
18.8 GOVERNING LAW...................................................60
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................60
18.10 EXERCISE OF RIGHTS AND REMEDIES.................................60
18.11 TIME............................................................60
18.12 REFORMATION AND SEVERABILITY....................................60
18.13 REMEDIES CUMULATIVE.............................................60
18.14 CAPTIONS........................................................61
-v-
<PAGE>
ANNEXES
Annex I - Consideration to Be Paid to Stockholders and Other
Stockholders
Annex II - Stockholders and Stock Ownership of the Company
Annex III - Certificate of Incorporation and By-Laws of Pentacon and
Newco
Annex IV - Form of Opinion of Counsel to Pentacon and Newco
Annex V - Form of Opinion of Counsel to Company and Stockholders
Annex VI - Form of Founder Employment Agreement
-vi-
<PAGE>
SCHEDULES
5.1 Due Organization
5.2 Authorization
5.3 Capital Stock of the Company
5.4 Transactions in Capital Stock, Organization Accounting
5.5 No Bonus Shares
5.6 Subsidiaries
5.7 Predecessor Status; etc.
5.8 Spin-off by the Company
5.9 Financial Statements
5.10 Liabilities and Obligations
5.11 Accounts and Notes Receivable
5.12 Permits and Intangibles
5.13 Environmental Matters
5.14 Personal Property
5.15 Significant Customers; Material Contracts and Commitments
5.16 Real Property
5.17 Insurance
5.18 Compensation; Employment Agreements; Labor Matters
5.19 Employee Plans
5.20 Compliance with ERISA
5.21 Conformity with Law; Litigation
5.22 Taxes
5.23 No Violations, Consents, etc.
5.24 Government Contracts
5.25 Absence of Changes
5.26 Deposit Accounts; Powers of Attorney
5.30 Prohibited Activities
5.31 No Warranties or Insurance
5.32 Related Party Transactions
5.33 Exceptions Regarding Company Stock
5.35 No Intention to Dispose of Pentacon Stock
6.3 Capital Stock of Pentacon and Newco
6.4 Options, Warrants and Rights
6.8 Litigation
6.9 No Violations
6.12 Side Agreements
7.2 Conduct of Business Pending Closing
7.3 Prohibited Activities
7.5 Notice to Bargaining Agents
7.6 Termination Agreements
7.15 Obligations to be Paid at Closing
9.7 Continuing Related Party Agreements
9.12 Employment Agreements
13.1 Prohibited Activities
18.5 Brokers and Agents
-vii-
<PAGE>
AGREEMENT AND PLAN OF ORGANIZATION
THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of
the 1st day of December, 1997, by and among PENTACON, INC., a Delaware
corporation ("Pentacon"), SALES SYSTEMS LIMITED ACQUISITION COMPANY, a Delaware
corporation ("Newco"), SALES SYSTEMS, LIMITED, a Pennsylvania corporation (the
"Company"), and BENJAMIN E. SPENCE, JR. and RICHARD D. KNORR (the "Stockholders
"), who, together with the other stockholders of the Company, James D. Mitchell
and William C. Creecy, who are not party to this Agreement (the "Other
Stockholders "), are all the stockholders of the Company, who herein agree as
follows:
RECITALS
WHEREAS, Newco is a corporation duly organized and existing under the laws
of the State of Delaware, having been incorporated on November 26, 1997, solely
for the purpose of completing the transactions set forth herein, and is a wholly
owned subsidiary of Pentacon, a corporation organized and existing under the
laws of the State of Delaware;
WHEREAS, the respective boards of directors of Newco and the Company
(which together are hereinafter collectively referred to as "Constituent
Corporations") deem it advisable and in the best interests of the Constituent
Corporations and their respective stockholders that Newco merge with and into
the Company pursuant to this Agreement and the applicable provisions of the laws
of the States of Delaware and the State of Incorporation (as hereinafter
defined);
WHEREAS, Pentacon is entering into other separate agreements substantially
similar to this Agreement (the "Other Agreements"), each of which is entitled
"Agreement and Plan of Organization,"with each of the Other Founding Companies
(as defined herein) and their respective stockholders in order to acquire
additional fasteners companies;
WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon
Plan of Organization";
WHEREAS, the Stockholders and Other Stockholders and the boards of
directors and the stockholders of Pentacon, each of the Other Founding Companies
and each of the subsidiaries of Pentacon that are parties to the Other
Agreements have approved and adopted the Pentacon Plan of Organization as an
integrated plan pursuant to which the Stockholders, the Other Stockholders and
the stockholders of each of the other Founding Companies will transfer the
capital stock of each of the Founding Companies to Pentacon and the stockholders
of each of the other Founding Companies will acquire the stock of Pentacon (but
not cash or other property) as a tax-free transfer of property under Section 351
of the Code;
-1-
<PAGE>
WHEREAS, the Board of Directors of the Company has approved this Agreement
as part of the Pentacon Plan of Organization in order to transfer the capital
stock of the Company to Pentacon;
WHEREAS, unless the context otherwise requires, capitalized terms used in
this Agreement or in any schedule attached hereto and not otherwise defined
shall have the following meanings for all purposes of this Agreement:
"1933 ACT" means the Securities Act of 1933, as amended.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"ACQUIRED PARTY" means the Company, any subsidiary and any member of a
Relevant Group.
"ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware
companies wholly-owned by Pentacon prior to the Consummation Date.
"AFFILIATES" shall mean with respect to any person or entity, any other
person or entity that directly or indirectly, controls, is controlled, or is
under common control with such person or entity. For purposes hereof, control
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger
with respect to the Merger in such forms as may be required by the laws of the
State of Delaware and the State of Incorporation.
"BALANCE SHEET DATE" means September 30, 1997.
"CHARTER DOCUMENTS" has the meaning set forth in Section 5.1.
"CLOSING" has the meaning set forth in Section 4.
"CLOSING DATE" has the meaning set forth in Section 4.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning set forth in the first paragraph of this
Agreement.
"COMPANY STOCK" has the meaning set forth in Section 2.1.
"CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital
of this Agreement.
-2-
<PAGE>
"CONSUMMATION DATE" has the meaning set forth in Section 4.
"DELAWARE GCL" has the meaning set forth in Section 1.4.
"DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of
the Registration Statement, and any corrections thereto and supplemental
information delivered by Pentacon to the Company for delivery to the
Stockholders prior to the time this Agreement is delivered by the Company and
the Stockholders to Pentacon.
"EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger
becomes effective, which shall occur on the Consummation Date.
"ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13.
"ERISA" has the meaning set forth in Section 5.19.
"EXPIRATION DATE" has the meaning set forth in Section 5(A).
"FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii).
"FOUNDING COMPANIES" means:
Alatec Products, Inc., a California corporation;
AXS Solutions, Inc., a Delaware corporation;
Capitol Bolt & Supply, Inc., a Texas corporation;
Maumee Industries, Inc., an Indiana corporation; and
Sales Systems, Limited, a Pennsylvania corporation.
"HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13.
"HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c).
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(ii).
"IPO" means the initial public offering of Pentacon Stock pursuant to the
Registration Statement described herein.
"LICENSES" has the meaning set forth in Section 5.12.
-3-
<PAGE>
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the business,
operations, properties, assets or condition (financial or otherwise), of the
subject entity and its subsidiaries taken as a whole.
"MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a).
"MERGER" means the merger of Newco with and into the Company pursuant to
this Agreement and the applicable provisions of the laws of the State of
Delaware and the laws of the State of Incorporation.
"NEWCO" has the meaning set forth in the first paragraph of this
Agreement.
"NEWCO STOCK" means the common stock, par value $.0l per share, of Newco.
"OTHER AGREEMENTS" has the meaning set forth in the third recital hereof.
"OTHER FOUNDING COMPANIES" means all of the Founding Companies other than
the Company.
"OTHER STOCKHOLDERS" means those persons or entities owning stock in the
Company other than the Stockholders .
"PBGC" has the meaning set forth in Section 5.19.
"PENTACON" has the meaning set forth in the first paragraph of this
Agreement.
"PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1
"PENTACON STOCK" means the common stock, par value $.01 per share, of
Pentacon.
"PERSON" means an individual, partnership, joint venture, corporation,
bank, trust, unincorporated organization or other entity.
"PRICING" means the date of determination by Pentacon and the Underwriters
of the public offering price of the shares of Pentacon Stock in the IPO; the
parties hereto contemplate that the Pricing shall take place on the Closing
Date.
"PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30.
"QUALIFIED PLANS" has the meaning set forth in Section 5.20.
"REDEMPTION AGREEMENTS" has the meaning set forth in Paragraph 3 of Annex
II.
-4-
<PAGE>
"REGISTRATION STATEMENT" means that certain registration statement on Form
S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued
in the IPO and all amendments thereto.
"RELEVANT GROUP" means the Company and any affiliated, combined,
consolidated, unitary or similar group of which the Company is or was a member.
"RETURNS" means any returns, reports or statements (including any
information returns) required to be filed for purposes of reporting, computing
or otherwise required in connection with a particular Tax.
"SCHEDULE" means each Schedule attached hereto, which shall reference the
relevant sections of this Agreement, on which parties hereto disclose
information as part of their respective representations, warranties and
covenants.
"SEC" means the United States Securities and Exchange Commission.
"STATE OF INCORPORATION" means the Commonwealth of Pennsylvania.
"STOCKHOLDERS" has the meaning set forth in the first paragraph of this
Agreement.
"SUBSIDIARIES" means with respect to a person or entity, any corporation
or other entity in which such person or entity owns a 5% or greater ownership
interest.
"SURVIVING CORPORATION" has the meaning set forth in Section 1.2.
"TAX" OR "TAXES" means all federal, state, local or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, withholding, employment, excise, property, deed, stamp, alternative
or add on minimum, or other taxes, assessments, duties, fees, levies or other
governmental charges, whether disputed or not, together with any interest,
penalties, additions to tax or additional amounts with respect thereto.
"UNDERWRITERS" means the prospective underwriters identified in the Draft
Registration Statement.
"YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section
5.9(i).
-5-
<PAGE>
1. THE MERGER
1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent
Corporations will cause the Articles of Merger to be signed, verified and
delivered to Pentacon to be held for filing with the Secretary of State of the
State of Delaware and the Secretary of State (or other appropriate authority) of
the State of Incorporation on or effective as of the Consummation Date.
1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger,
Newco shall be merged with and into the Company in accordance with the Articles
of Merger and the separate existence of Newco shall cease. The Company shall be
the surviving party in the Merger and the Company is sometimes hereinafter
referred to as the "Surviving Corporation". As a result of the Merger, the
outstanding shares of capital stock of Newco and the Company shall be converted
or canceled in the manner provided in Section 2.
1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF
SURVIVING CORPORATION. At the Effective Time of the Merger:
(i) the Certificate of Incorporation of the Company then in effect
shall be the Certificate of Incorporation of the Surviving Corporation
until changed as provided by law;
(ii) the By-laws of Newco then in effect shall become the By-laws of
the Surviving Corporation; and subsequent to the Effective Time of the
Merger, such By-laws shall be the By-laws of the Surviving Corporation
until they shall thereafter be duly amended (and such By-laws shall be
amended, if necessary, to comply with applicable state law);
(iii) the Board of Directors of the Surviving Corporation shall
consist of the persons who are on the Board of Directors of the Company
immediately prior to the Effective Time of the Merger, provided that Bruce
Taten shall become an additional director of the Surviving Corporation
effective as of the Effective Time of the Merger, and the number of
directors constituting the entire Board of Directors of the Company shall
be increased, if necessary, to accommodate the addition of such additional
director; the Board of Directors of the Surviving Corporation shall hold
office subject to the provisions of the laws of the State of Incorporation
and of the Certificate of Incorporation and By-laws of the Surviving
Corporation; and
(iv) the officers of the Company immediately prior to the Effective
Time of the Merger shall continue as the officers of the Surviving
Corporation in the same capacity or capacities, and effective upon the
Effective Time of the Merger Brian Fontana shall become an additional Vice
President and Bruce Taten will become the Secretary of the Surviving
Corporation, such officers to serve, subject to the provisions of the
Certificate of Incorporation and By-laws of the Surviving Corporation,
until their respective successors are duly elected and qualified.
-6-
<PAGE>
1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of
the Merger shall be as provided in the applicable provisions of the General
Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of
the State of Incorporation. Except as herein specifically set forth, the
identity, existence, purposes, powers, objects, franchises, privileges, rights
and immunities of the Company shall continue unaffected and unimpaired by the
Merger and the corporate franchises, existence and rights of Newco shall be
merged with and into the Company, and the Company, as the Surviving Corporation,
shall be fully vested therewith. At the Effective Time of the Merger, the
separate existence of Newco shall cease and, in accordance with the terms of
this Agreement, the Surviving Corporation shall possess all the rights,
privileges, immunities and franchises, of a public, as well as of a private,
nature, and all property, real, personal and mixed, and all debts due on
whatever account, including subscriptions to shares, and all taxes, including
those due and owing and those accrued, and all other choses in action, and all
and every other interest of or belonging to or due to the Company or Newco shall
be transferred to, and vested in, the Surviving Corporation without further act
or deed; and all property, rights and privileges, powers and franchises and all
and every other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of the Company and Newco; and the title to
any real estate, or interest therein, whether by deed or otherwise, under the
laws of the State of Incorporation vested in the Company or Newco, shall not
revert or be in any way impaired by reason of the Merger. Except as otherwise
provided herein, the Surviving Corporation shall thenceforth be responsible and
liable for all the liabilities and obligations of the Company and Newco and any
claim existing, or action or proceeding pending, by or against the Company or
Newco may be prosecuted as if the Merger had not taken place, or the Surviving
Corporation may be substituted in their place. Neither the rights of creditors
nor any liens upon the property of the Company or Newco shall be impaired by the
Merger, and all debts, liabilities and duties of the Company and Newco shall
attach to the Surviving Corporation, and may be enforced against such Surviving
Corporation to the same extent as if said debts, liabilities and duties had been
incurred or contracted by such Surviving Corporation.
2. CONVERSION OF STOCK
2.1 MANNER OF CONVERSION. The manner of converting the shares of (i)
outstanding capital stock of the Company ("Company Stock") into shares of
Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of
the Surviving Corporation, respectively, shall be as follows:
As of the Effective Time of the Merger:
(i) all of the shares of Company Stock issued and outstanding
immediately prior to the Effective Time of the Merger (other than shares
of Company Stock subject to the Redemption Agreements), by virtue of the
Merger and without any action on the part of the holder thereof,
automatically shall be deemed to represent (1) the right to receive the
number of shares of Pentacon Stock set forth on Annex I hereto with
respect to such holder and (2) the right to receive the amount of cash set
forth on Annex I hereto with respect to such holder;
-7-
<PAGE>
(ii) all shares of Company Stock that are held by the Company as
treasury stock or which are otherwise issued but not outstanding
(including the shares of Company Stock subject to the Redemption
Agreements) shall be canceled and retired and shall cease to exist and no
shares of Pentacon Stock or other consideration shall be delivered or paid
in exchange therefor; and
(iii) each share of Newco Stock issued and outstanding immediately
prior to the Effective Time of the Merger, shall, by virtue of the Merger
and without any action on the part of Pentacon, automatically be converted
into one fully paid and non-assessable share of common stock of the
Surviving Corporation which shall constitute all of the issued and
outstanding shares of common stock of the Surviving Corporation
immediately after the Effective Time of the Merger.
All Pentacon Stock received by the Stockholders and Other Stockholders
pursuant to this Agreement shall, except for restrictions on resale or transfer
described in Sections 15 and 16 hereof, have the same rights as all the other
shares of outstanding Pentacon Stock by reason of the provisions of the
Certificate of Incorporation of Pentacon or as otherwise provided by the
Delaware GCL. All Pentacon Stock received by the Stockholders and Other
Stockholders shall be issued and delivered to the Stockholders and Other
Stockholders free and clear of any liens, claims or encumbrances of any kind or
nature. All voting rights of such Pentacon Stock received by the Stockholders
and Other Stockholders shall be fully exercisable by the Stockholders and Other
Stockholders and the Stockholders and Other Stockholders shall not be deprived
nor restricted in exercising those rights. At the Effective Time of the Merger,
Pentacon shall have no class of capital stock issued and outstanding other than
the Pentacon Stock.
3. DELIVERY OF MERGER CONSIDERATION
3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date
the Stockholders and Other Stockholders , who are the holders of all of the
issued and outstanding Company Stock, shall, upon surrender of their share
certificates, receive the respective number of shares of Pentacon Stock, the
amount of cash or the combination of Pentacon Stock or cash (as appropriate) set
forth on Annex I hereto, said cash to be payable by certified check, or if
hereafter agreed by the Stockholders and Pentacon, by wire transfer.
3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders and Other
Stockholders shall deliver to Pentacon at the Closing the certificates
representing Company Stock, duly endorsed in blank by the Stockholders and Other
Stockholders, or accompanied by blank stock powers, and with all necessary
transfer tax and other revenue stamps, acquired at the Stockholders' and Other
Stockholders' expense, affixed and canceled. The Stockholders and Other
Stockholders agree promptly to cure any deficiencies with respect to the
endorsement of the stock certificates or other documents of conveyance with
respect to such Company Stock or with respect to the stock powers accompanying
any Company Stock.
-8-
<PAGE>
4. CLOSING
At or prior to the Pricing, the parties shall take all actions reasonably
necessary to prepare to (i) effect the Merger (including the execution of the
Articles of Merger which shall be placed in escrow with Pentacon for filing with
the appropriate authorities effective on the Consummation Date, subject,
however, to satisfaction or waiver of all conditions precedent) and (ii) effect
the conversion and delivery of shares referred to in Section 3 hereof; provided,
that such actions shall not include the actual completion of the Merger or the
conversion and delivery of the shares and certified check(s) (or wire transfers)
referred to in Section 3 hereof, each of which actions shall only be taken upon
the Consummation Date as herein provided. In the event that there is no
Consummation Date and this Agreement automatically terminates as provided in
this Section 4 the Articles of Merger shall not be filed and shall be promptly
returned to the Stockholders. The taking of the actions described in clauses (i)
and (ii) above (the "Closing") shall take place on the closing date (the
"Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce
Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between
the Stockholders and Pentacon. On the Consummation Date (x) the Articles of
Merger shall be filed with the appropriate state authorities so that they shall
be, as early as practicable on the Consummation Date, effective and the Merger
shall thereby be effected, (y) all transactions contemplated by this Agreement,
including the conversion and delivery of shares, the delivery of a certified
check or checks (or wire transfers) in an amount equal to the cash portion of
the consideration which the Stockholders shall be entitled to receive pursuant
to Section 3 hereof shall occur and be completed and (z) the closing with
respect to the IPO shall occur and be completed. The date on which the actions
described in the preceding clauses (x), (y) and (z) occurs shall be referred to
as the "Consummation Date". During the period from the Closing Date to the
Consummation Date, this Agreement may only be terminated by the parties if the
underwriting agreement in respect of the IPO is terminated pursuant to the terms
of such underwriting agreement. This Agreement shall also in any event
automatically terminate if the Consummation Date has not occurred within 15
business days following the Closing Date. Time is of the essence.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
(A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.
Each of the Stockholders, jointly and severally, and the Company represent
and warrant that all of the following representations and warranties in this
Section 5(A) are true at the date of this Agreement, and that such
representations and warranties shall survive the Consummation Date for a period
of twenty-four months (the last day of such period being the "Expiration Date"),
except that the warranties and representations set forth in Sections 5.13 and
5.22 hereof shall survive until such time as the applicable statute of
limitations period has run or for five (5) years if there is no applicable
statute of limitations, which shall be deemed to be the Expiration Date for
Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall
mean and refer to the Company and all of its Subsidiaries, if any.
-9-
<PAGE>
5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and
organized, validly existing and in good standing under the laws of the State of
Incorporation, and has the requisite power and authority to carry on its
business as it is now being conducted. The Company is duly qualified to do
business and is in good standing in each jurisdiction in which failure to so
qualify would reasonably be expected to have a Material Adverse Effect on the
Company. Schedule 5.1 sets forth a list of all jurisdictions in which the
Company is authorized or qualified to do business. True, complete and correct
copies of (i) the Certificate of Incorporation and By-laws, each as amended, of
the Company (the "Charter Documents"), and (ii) the stock records of the Company
(including, without limitation, a copy of the Company's stock ledger), are all
attached to Schedule 5.1. The Company has delivered complete and correct copies
of all minutes of meetings, written consents and other written evidence, if any,
of deliberations of or actions taken by the Company's Board of Directors, any
Committees of the Board of Directors and stockholders during the last five
years.
5.2 AUTHORIZATION. (i) The officers or other representatives of the
Company executing this Agreement have the authority to enter into and bind the
Company to the terms of this Agreement and (ii) the Company has the full legal
right, power and authority to enter into this Agreement and the Merger. The
directors and Stockholders and Other Stockholders have approved this Agreement
and the transactions contemplated hereby in all respects, and copies of all such
resolutions, certified by the Secretary or an Assistant Secretary of the Company
as being in full force and effect on the date hereof, are attached hereto as
Schedule 5.2.
5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the
Company is as set forth on Schedule 5.3. All of the issued and outstanding
shares of the capital stock of the Company are owned by the Stockholders and
Other Stockholders in the amounts set forth in Annex II. Each Stockholder and
each of the Other Stockholders by their execution of the Limited Joinder hereto,
severally represents and warrants that except as set forth on Schedule 5.3, the
shares of capital stock of the Company owned by each Stockholder and Other
Stockholder are owned free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable, are
owned of record and beneficially by the Stockholders and Other Stockholders and
further, such shares were offered, issued, sold and delivered by the Company in
compliance with all applicable state and Federal laws concerning the issuance of
securities. Further, none of such shares were issued in violation of any
preemptive rights of any past or present stockholder.
5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set
forth on Schedule 5.4, the Company has not acquired or redeemed any Company
Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option,
warrant, call, conversion right or commitment of any kind exists which obligates
the Company to issue any of its authorized but unissued capital stock; (ii) the
Company has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any of its equity securities or any interests therein or to
pay any dividend or make any distribution in respect thereof; and (iii) neither
the voting stock structure of the Company nor the
-10-
<PAGE>
relative ownership of shares among any of its respective stockholders has been
altered or changed in contemplation of the Merger and/or the Pentacon Plan of
Organization. Except as set forth in Schedule 5.4, there are no voting trusts,
proxies or other agreements or understandings to which the Company or any of its
stockholders is a party or is bound with respect to the voting of any shares of
capital stock of the Company.
5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the
shares of Company Stock was issued pursuant to awards, grants or bonuses in
contemplation of the Merger or the Pentacon Plan of Organization.
5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on
Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule
5.6, the Company does not presently own, of record or beneficially, or control,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity nor is the Company, directly or indirectly, a participant in any joint
venture, partnership or other non-corporate entity.
5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all
predecessor companies of the Company, including the names of any entities
acquired by the Company (by stock purchase, merger or otherwise) or owned by the
Company or from whom the Company previously acquired material assets, in any
case, from the earliest date upon which any Stockholder acquired his or her
stock in any Company. Except as disclosed on Schedule 5.7, the Company has not
been, within such period of time, a subsidiary or division of another
corporation or a part of an acquisition which was later rescinded.
5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there
has not been any sale, spin-off or split-up of material assets of either the
Company or any other person or entity that is an Affiliate of the Company since
January 1, 1995.
5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following
financial statements are attached hereto as Schedule 5.9:
(i) the balance sheets of the Company as of December 31, 1995 and
1996 and the related statements of operations, stockholder's equity and
cash flows for the two-year period ended December 31, 1996, together with
the related notes and schedules (such balance sheets, the related
statements of operations, stockholder's equity and cash flows and the
related notes and schedules are referred to herein as the "Year-end
Financial Statements"); and
(ii) the balance sheet of the Company as of September 30, 1997, (the
"Interim Balance Sheet") and the related statements of operations,
stockholder's equity and cash flows for the nine-month periods ended
September 30, 1997, together with the related notes and schedules (such
balance sheets, the related statements of operations, stockholder's equity
and
-11-
<PAGE>
cash flows and the related notes and schedules are referred to herein as
the "Interim Financial Statements"). The Year-end Financial Statements and
the Interim Financial Statements are collectively called the "Financial
Statements".
5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate
list as of the Balance Sheet Date of (i) all liabilities of the Company which
are not reflected on the Interim Balance Sheet of the Company at the Balance
Sheet Date or otherwise reflected in the Interim Financial Statements at the
Balance Sheet Date except for those liabilities not required to be reflected or
disclosed under generally accepted accounting principles or F.A.S.B. 5 and which
were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan
agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other
security agreements to which the Company is a party or by which its properties
may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet
Date, the Company has not incurred any liabilities or obligations of any kind,
character or description, whether accrued, absolute, secured or unsecured,
contingent or otherwise, other than liabilities incurred in the ordinary course
of business and consistent with past practices. The Company has also delivered
to Pentacon on Schedule 5.10, in the case of those contingent liabilities
related to pending or threatened litigation, a good faith and reasonable
estimate (to the extent the Company can reasonably make an estimate) of the
maximum amount which the Company reasonably expects may be payable and the
amount, if any, accrued or reserved for each such potential liability on the
Company's Financial Statements. If no estimate is provided, the estimate shall
for purposes of this Agreement be deemed to be zero. For each such contingent
liability or liability for which the amount is not fixed or is contested, the
Company has provided to Pentacon the following information:
(i) a summary description of the liability together with the
following:
(a) copies of all relevant documentation relating thereto;
(b) amounts claimed and any other action or relief sought;
and
(c) name of claimant and all other parties to the claim,
suit or proceeding;
(ii) the name of each court or agency before which such claim, suit
or proceeding is pending; and
(iii) the date (if any) on which such claim, suit or proceeding was
instituted or the date (period) to which such claim relates.
5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate
list of the accounts and notes receivable of the Company, as of the Balance
Sheet Date, including any such amounts which are not reflected in the Interim
Balance Sheet as of the Balance Sheet Date, and including receivables from and
advances to employees and the Stockholders or Other Stockholders, which are
identified as such. Except to the extent reflected on Schedule 5.11, such
accounts, notes
-12-
<PAGE>
and other receivables are collectible in the amounts shown on Schedule 5.11, net
of reserves reflected in the Interim Balance Sheet of the Balance Sheet Date.
5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses,
franchises, permits and other governmental authorizations ("Licenses") necessary
to conduct the business of the Company and the Company has delivered to Pentacon
an accurate list and summary description (which is set forth on Schedule 5.12)
of all such material Licenses, including any material trademarks, trade names,
patents, patent applications and copyrights owned or held by the Company or any
of its employees (including interests in software or other technology systems,
programs and intellectual property). At or prior to the Closing, all rights to
such trademarks, trade names, patents, patent applications, copyrights and other
intellectual property held by the Stockholders, or their Affiliates will be
assigned or licensed to the Company for no additional consideration. The
Licenses and other rights listed on Schedule 5.12 are valid, and the Company has
not received any notice that any person intends to cancel, terminate or not
renew any such License or other right. The Company has conducted and is
conducting its business in compliance with the requirements, standards, criteria
and conditions set forth in the Licenses and other rights listed on Schedule
5.12 and is not in violation of any of the foregoing. Except as specifically
provided in Schedule 5.12, the transactions contemplated by this Agreement will
not result in a default under or a breach or violation of, or adversely affect
the rights and benefits afforded to the Company by, any such Licenses or other
rights.
5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached
hereto, (i) the Company has conducted its businesses in compliance with all
applicable Environmental Laws, including, without limitation, having all
environmental permits, licenses and other approvals and authorizations necessary
for the operation of its business as presently conducted, (ii) none of the
properties owned by the Company contain any Hazardous Substance as a result of
any activity of the Company in amounts exceeding the levels permitted by
applicable Environmental Laws, (iii) the Company has not received any notices,
demand letters or requests for information from any Federal, state, local or
foreign governmental entity or third party indicating that the Company may be in
violation of, or liable under, any Environmental Law in connection with the
ownership or operation of its business, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or to the knowledge of the Stockholders threatened, against
the Company relating to any violation, or alleged violation, of any
Environmental Law, (v) no reports have been filed, or are required to be filed,
by the Company concerning the release of any Hazardous Substance or the
threatened or actual violation of any Environmental Law, (vi) no Hazardous
Substance has been disposed of, released or transported in violation of any
applicable Environmental Law from any properties owned by the Company as a
result of any activity of the Company during the time such properties were
owned, leased or operated by the Company, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analysis regarding
compliance or non-compliance with any applicable Environmental Law conducted by
or which are in the possession of or readily available to the Company relating
to the activities of the Company which are not listed on Schedule 5.13 attached
hereto prior to the date hereof, (viii) there are no underground storage tanks
on, in or under any properties owned by the Company and no
-13-
<PAGE>
underground storage tanks have been closed or removed from any of such
properties during the time such properties were owned, leased or operated by the
Company, (ix) there is no asbestos or asbestos containing material present in
any of the properties owned by the Company, and no asbestos has been removed
from any of such properties during the time such properties were owned, leased
or operated by the Company, and (x) neither the Company nor any of its
respective properties are subject to any material liabilities or expenditures
(fixed or contingent) relating to any suit, settlement, court order,
administrative order, regulatory requirement, judgment or claim asserted or
arising under any Environmental Law.
(b) As used herein, "ENVIRONMENTAL LAW" means any federal, state, local or
foreign law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, legal doctrine, order, judgment, decree,
injunction, requirement or agreement with any governmental entity which is
applicable where the Company conducts or conducted business or owns or owned
property or is applicable to any disposal, transportation or release of
Hazardous Substances by or for the Company and, in each case, relates to (x) the
protection, preservation or restoration of the environment (including, without
limitation, air, water vapor, surface water, groundwater, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource) or to human health or safety or (y) the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances, in each case
as amended and as in effect on the Closing Date. The term Environmental Law
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Federal Occupational Safety and Health Act of 1970, each as amended and as
in effect on the Closing Date, and (ii) any common law or equitable doctrine
(including, without limitation, injunctive relief and tort doctrines such as
negligence, nuisance, trespass and strict liability) that may impose liability
or obligations for injuries or damages due to, or threatened as a result of, the
presence of, effects of or exposure to any Hazardous Substance.
(c) As used herein, "Hazardous Substance" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive, or
dangerous, or otherwise regulated, under any Environmental Law. Hazardous
Substance includes any substance to which exposure is regulated by any
government authority or any Environmental Law including, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos or
asbestos containing material, urea formaldehyde foam insulation, lead or
polychlorinated biphenyls.
-14-
<PAGE>
5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate
list (which is set forth on Schedule 5.14) of (x) all personal property material
to the operations of the Company included in "plant, property and equipment" on
the Interim Balance Sheet of the Company, (y) all other personal property owned
by the Company with an individual fair market value in excess of $5,000 (i) as
of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z)
all material leases and agreements in respect of personal property, including,
in the case of each of (x), (y) and (z), (1) true, complete and correct copies
of all such leases and (2) an indication as to which assets are currently owned,
or were formerly owned, by Stockholders or Other Stockholders, relatives of
Stockholders or Other Stockholders, or Affiliates of the Company. Except as set
forth on Schedule 5.14, (i) all material personal property used by the Company
in its business is either owned by the Company or leased by the Company pursuant
to a lease included on Schedule 5.14, (ii) all of the personal property listed
on Schedule 5.14 is in working order and condition sufficient for the operation
of the Company's business, ordinary wear and tear excepted and (iii) all leases
and agreements included on Schedule 5.14 are in full force and effect and
constitute valid and binding agreements of the Company and of the other parties
(and their successors) thereto in accordance with their respective terms.
5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.15) of all customers (persons or entities) representing 5%
or more of the Company's annual revenues for the period covered by any of the
most current Year-End Financial Statements. Except to the extent set forth on
Schedule 5.15, none of such customers have canceled or substantially reduced or,
to the knowledge of the Company and the Stockholders, are currently attempting
or threatening to cancel a contract or substantially reduce utilization of the
services provided by the Company.
(b) The Company has listed on Schedule 5.15 all material contracts,
commitments and similar agreements to which the Company is a party or by which
it or any of its properties are bound (including, but not limited to, contracts
with significant customers, joint venture or partnership agreements, contracts
with any labor organizations, strategic alliances and options to purchase land),
other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence
as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date,
and in each case has delivered (or, in the case of supplier and distributor
contracts and customer contracts on standard purchase forms, has made available)
true, complete and correct copies of such agreements to Pentacon. The Company
has also indicated on Schedule 5.15 a summary description of all plans or
projects commenced or approved in the last six (6) months and involving the
opening of new operations, expansion of existing operations, the acquisition of
any personal property, business or assets requiring, in any event, the payment
of more than $20,000 by the Company during any 12-month period.
(c) Except as set forth on Schedule 5.15, since January 1, 1995, the
Company has not experienced any difficulties in obtaining any inventory items
necessary to the operation of its business, and, to the knowledge of the Company
and the Stockholders, no such shortage of supply
-15-
<PAGE>
of inventory items is threatened or pending. To the knowledge of the Company and
the Stockholders, no customer or supplier of the Company will cease to do
business with, or substantially reduce its purchases from, the Company after the
consummation of the transactions contemplated hereby.
(d) The Company is not required to provide any bonding or other financial
security arrangements in any material amount in connection with any transactions
with any of its customers or suppliers.
5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property
owned or leased by the Company at the date hereof and all other real property,
if any, used by the Company in the conduct of its business. Except as set forth
on Schedule 5.16, any such real property owned by the Company will be sold or
distributed by the Company on terms acceptable to Pentacon and leased back by
the Company on terms no less favorable to the Company than those available from
an unaffiliated party and otherwise reasonably acceptable to Pentacon at or
prior to the Closing Date. The Company has good and insurable title to any real
property owned by it that is shown on Schedule 5.16, other than property
intended to be sold or distributed prior to the Closing Date, subject to no
mortgage, pledge, lien, conditional sales agreement, encumbrance or charge,
except for:
(i) liens reflected on Schedules 5.10 or 5.16 as securing specified
liabilities (with respect to which no material default exists);
(ii) liens for current taxes not yet payable and assessments not in
default;
(iii) easements for utilities serving the property only; and
(iv) easements, covenants and restrictions and other exceptions to
title which do not adversely affect the current use of the property.
True, complete and correct copies of all leases and agreements in respect
of such real property leased by the Company are attached to Schedule 5.16, and
an indication as to which such properties, if any, are currently owned, or were
formerly owned, by Stockholders or Other Stockholders or Affiliates of the
Company or Stockholders or Other Stockholders is included in Schedule 5.16.
Except as set forth on Schedule 5.16, all of such leases included on Schedule
5.16 are in full force and effect and constitute valid and binding agreements of
the Company and of the other parties (and their successors) thereto in
accordance with their respective terms.
5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the
Balance Sheet Date of all insurance policies carried by the Company, (ii) an
accurate list of all insurance loss runs (to the extent available) or workers
compensation claims received for the past three policy years. True, complete and
correct copies of all insurance policies currently in effect have been delivered
or made available to Pentacon. Such insurance policies evidence all of the
insurance that the
-16-
<PAGE>
Company is required to carry pursuant to all of its contracts and other
agreements and pursuant to all applicable laws, and, in the reasonable judgment
of the Company's management, provide adequate coverage against the risks
involved in the Company's business. All of such insurance policies are currently
in full force and effect and are scheduled to remain in full force and effect
through the Consummation Date. Since January 1, 1995, no insurance carried by
the Company has been canceled by the insurer and the Company has not been denied
coverage.
5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS.
(a) The Company has delivered to Pentacon an accurate list (which is set
forth on Schedule 5.18) showing all officers, directors and key employees of the
Company, listing all employment agreements with such officers, directors and key
employees and the rate of compensation (and the portions thereof attributable to
salary, bonus and other compensation, respectively) of each of such persons as
of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided
to Pentacon true, complete and correct copies of any existing employment
agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and
except as described in Schedule 5.18, there have been no increases in the
compensation payable or any special bonuses to any officer, director, key
employee or other employee, except ordinary salary increases implemented on a
basis consistent with past practices and bonuses, as described in Schedule 5.18.
(b) Except as set forth on Schedule 5.18, (i) the Company is not bound by
or subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union, (ii) no employees of the
Company are represented by any labor union or covered by any collective
bargaining agreement, (iii) to the best knowledge of the Company, no campaign to
establish such representation is in progress and (iv) there is no pending or, to
the knowledge of the Company and the Stockholders, threatened labor dispute
involving the Company and any group of its employees nor has the Company
experienced any labor interruptions over the past three years.
(c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no
significant controversies pending or, to the knowledge of the Company and the
Stockholders, threatened between the Company and any of its employees, (ii) the
Company has complied in all material respects with all laws relating to the
employment of labor, including, without limitation, any provisions thereof
relating to wages, hours, collective bargaining, and the payment of social
security and similar taxes, and (iii) to the knowledge of the Company and the
Stockholders, no person has asserted that the Company is liable in any material
amount for any arrears of wages or any taxes or penalties for failure to comply
with any of the foregoing.
5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee
benefit plans of the Company, including all employment agreements and other
agreements or arrangements containing "golden parachute" or other similar
provisions, and deferred compensation agreements, together with true, complete
and correct copies of such plans, agreements and any trusts related thereto, and
classifications of employees covered thereby as of the Balance Sheet Date.
Except for the employee benefit plans, if any, described on Schedule 5.19, the
Company does not sponsor,
-17-
<PAGE>
maintain or contribute to any plan program, fund or arrangement that constitutes
an "employee pension benefit plan", and neither the Company nor any subsidiary
has any obligation to contribute to or accrue or pay any benefits under any
deferred compensation or retirement funding arrangement on behalf of any
employee or employees (such as, for example, and without limitation, any
individual retirement account or annuity, any "excess benefit plan" (within the
meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) or any non-qualified deferred compensation arrangement).
For the purposes of this Agreement, the term "employee pension benefit plan"
shall have the same meaning as is given that term in Section 3(2) of ERISA. The
Company has not sponsored, maintained or contributed to any employee pension
benefit plan other than the plans set forth on Schedule 5.19, and the Company is
not or could not be required to contribute to any retirement plan pursuant to
the provisions of any collective bargaining agreement establishing the terms and
conditions or employment of any of the Company's employees.
Except as set forth on Schedule 5.19, the Company is not now, or will not
as a result of its past activities become, liable to the Pension Benefit
Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit
plan under the provisions of Title IV of ERISA.
All employee benefit plans listed on Schedule 5.19 and the administration
thereof are in compliance with their terms and all applicable provisions of
ERISA and the regulations issued thereunder, as well as with all other
applicable federal, state and local statutes, ordinances and regulations.
All accrued contribution obligations of the Company with respect to any
plan listed on Schedule 5.19 as of the Balance Sheet Date have either been
fulfilled in their entirety or are fully reflected on the Interim Balance Sheet
as of the Balance Sheet Date.
5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, All such
plans listed on Schedule 5.19 that are intended to qualify (the "Qualified
Plans") under Section 401 (a) of the Code are, and have been so qualified and
have been determined by the Internal Revenue Service to be so qualified, and
copies of the most recent determination letters with respect thereto are
attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and
other documents required to be filed with any governmental agency or distributed
to plan participants or beneficiaries (including, but not limited to, actuarial
reports, audits or tax returns) have been timely filed or distributed, and
copies of the most recent reports and filing relating thereto are included as
part of Schedule 5.19 hereof. Neither Stockholders, the Other Stockholders, any
such plan listed in Schedule 5.19, nor the Company has engaged in any
transaction prohibited under the provisions of Section 4975 of the Code or
Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an
accumulated funding deficiency, as defined in Section 412(a) of the Code and
Section 302(l) of ERISA; and the Company has not incurred any liability for
excise tax or penalty due to the Internal Revenue Service nor any liability to
the PBGC. The Stockholders further represent that except as set forth on
Schedule 5.19 hereto:
-18-
<PAGE>
(i) there have been no terminations, partial terminations or
discontinuations of contributions to any Qualified Plan intended to
qualify under Section 401(a) of the Code without notice to and approval by
the Internal Revenue Service;
(ii) no plan listed in Schedule 5.19 subject to the provisions of
Title IV of ERISA has been terminated;
(iii) there have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such plan listed in
Schedule 5.19;
(iv) the Company (including any subsidiaries) has not incurred
liability under Section 4062 of ERISA; and
(v) to the knowledge of the Company and the Stockholders, no
circumstances exist pursuant to which the Company would be reasonably
likely to have any direct or indirect liability whatsoever (including, but
not limited to, any liability to any multiemployer plan or the PBGC under
Title IV of ERISA or to the Internal Revenue Service for any excise tax or
penalty, or being subject to any statutory lien to secure payment of any
such liability) with respect to any plan now or heretofore maintained or
contributed to by any entity other than the Company that is, or at any
time was, a member of a "controlled group" (as defined in Section
412(n)(6)(B) of the Code) that includes the Company.
5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on
Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is
not in violation of any law or regulation or any order of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality having jurisdiction over it; and except to the extent
set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or
proceedings, pending or, to the knowledge of the Company and the Stockholders,
threatened against or affecting, the Company, at law or in equity, or before or
by any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over any of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received by the Company, and, to the knowledge of the
Company and the Stockholders, there is no basis for any such claim, action, suit
or proceeding. The Company has conducted and is now conducting its business in
substantial compliance with the requirements, standards, criteria and conditions
set forth in applicable Federal, state and local statutes, ordinances, orders,
approvals, variances, rules and regulations.
5.22 TAXES.
(a) Except as set forth in Schedule 5.22, the Company has timely filed all
requisite Federal, state and other Tax Returns or extension requests for all
fiscal periods ended on or before the Balance Sheet Date; and except as set
forth on Schedule 5.22, the Company has no notice that any examinations are in
progress or that any claims are pending against it for federal, state and other
-19-
<PAGE>
Taxes (including penalties and interest) for any period or periods prior to and
including the Balance Sheet Date and no notice of any claim for Taxes, whether
pending or threatened, has been received. Except as set forth in Schedule 5.22,
all Tax, including interest and penalties (whether or not shown on any Tax
Return) owed by the Company has been paid or accrued in its financial accounts.
The amounts shown as accruals for Taxes on the Company Financial Statements are
sufficient for the payment of all Taxes of the kinds indicated (including
penalties and interest) for all fiscal periods ended on or before that date.
Copies of (i) any tax examinations, (ii) extensions of statutory limitations and
(iii) the federal and local income Tax Returns and franchise Tax Returns of
Company for their last three (3) fiscal years, or such shorter period of time as
any of them shall have existed, are attached hereto as Schedule 5.22 or have
otherwise been delivered to Pentacon. The Company has a taxable year ended
December 31. Except as set forth on Schedule 5.22, Company uses the accrual
method of accounting for income tax purposes, and the Company's methods of
accounting have not changed in the past five years. The Company is not an
investment Company as defined in Section 351(e)(1) of the Code. Except as set
forth in Schedule 5.22, the Company is not and has not during the last five
years been a party to any tax sharing agreement or agreement of similar effect.
The Company is not and has not during the last five years been a member of any
consolidated group. Except as set forth on Schedule 5.22, the Company has not
received, been denied, or applied for any private letter ruling during the last
ten years.
(b) The stockholders of the Company made a valid election under the
provisions of Subchapter S of the Code and the Company has not, within the past
twelve (12) months, been taxed under the provisions of Subchapter C of the Code.
The Stockholders shall pay all income taxes with respect to the Company payable
for all periods through and including the Closing Date, except for income taxes
of the Company which are accrued on the Interim Balance Sheet and payable by the
Company.
5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.
(a) The Company is not in violation of any Charter Document. Except as set
forth in Schedule 5.23, neither the Company nor, to the best knowledge of the
Company and the Stockholders, any other party thereto, is in default under any
lease, instrument, agreement, license, or permit set forth on Schedule 5.12,
5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party
or by which its properties are bound (the "Material Documents").
(b) Except as set forth in Schedule 5.23, the execution and delivery of
this Agreement by each of the Company and the Stockholders do not violate,
conflict with or result in a breach of any provision of, or constitute a default
(or an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the performance
required by, or result in a right of termination or acceleration under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company under any of the terms,
conditions or provisions of (i) the Charter Documents (ii) any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court or governmental authority applicable to the Company or
any of its properties or assets, or (iii) any
-20-
<PAGE>
Material Document or other material instrument, obligation or agreement of any
kind to which the Company or any of the Stockholders is now a party or by which
any of the Stockholders or the Company or any of its properties or assets may be
bound or affected. The consummation by the Company and the Stockholders of the
transactions contemplated hereby will not result in any violation, conflict,
breach, right of termination or acceleration or creation of liens under any of
the terms, conditions or provisions of the items described in clauses (i)
through (iii) of the preceding sentence, subject, in the case of the terms,
conditions or provisions of the items described in clause (iii) above, to
obtaining (prior to the Effective Time of the Merger) such consents as may be
required from commercial lenders, lessors or other third parties.
(c) Except as set forth on Schedule 5.23, none of the Material Documents
requires notice to, or the consent or approval of, any governmental agency or
other third party with respect to any of the transactions contemplated hereby in
order to remain in full force and effect, and consummation of the transactions
contemplated hereby will not give rise to any right to termination, cancellation
or acceleration or loss of any material right or benefit.
(d) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
for the making of the merger filings with the Secretary of State of the State of
Delaware and the State of Incorporation in connection with the Merger, (iv) for
filings in connection with listing on the NASDAQ National Market System or New
York Stock Exchange or other nationally recognized securities exchange; (v) for
possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13
and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholders
are required to make any declaration, filing or registration with, or notice to,
or obtain any authorization, consent or approval of, any governmental or
regulatory body or authority is necessary for the execution and delivery of this
Agreement by the Company and the Stockholders or the consummation by the Company
and the Stockholders of the transactions contemplated hereby.
(e) Except as set forth on Schedule 5.23, none of the Material Documents
prohibits the use or publication by the Company, Pentacon or Newco of the name
of any other party to such Material Document, and none of the Material Documents
prohibits or restricts the Company from freely providing services or selling
products to any other customer or potential customer of the Company, Pentacon,
Newco or any Other Founding Company.
5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth
on Schedule 5.24, the Company is not now a party to any governmental contract
that, by its express terms, is subject to price redetermination or renegotiation
or that is customarily subject to price redetermination or renegotiations in the
ordinary course of business. Except as set forth on Schedule 5.24, the Company
is not now a party to any material contract based on minority ownership which
would be canceled or otherwise materially adversely impacted by completion of
the Pentacon Plan of Organization.
-21-
<PAGE>
5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth
on Schedule 5.25 or as otherwise contemplated hereby, there has not been:
(i) any Material Adverse Effect with respect to the Company;
(ii) any damage, destruction or loss (whether or not covered by
insurance), alone or in the aggregate, materially adversely affecting the
properties or business of the Company;
(iii) any change in the authorized capital of the Company or its
outstanding securities or any change in its ownership interests or any
grant of any options, warrants, calls, conversion rights or commitments;
(iv) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the Company
except for distributions that would have been permitted after the date
hereof under Section 7.3(iii) hereof,
(v) any increase in the compensation, bonus, sales commissions or
fee arrangement payable or to become payable by the Company to any of its
officers, directors, Stockholders, employees, consultants or agents,
except for ordinary and customary bonuses and salary increases for
employees in accordance with past practice;
(vi) any work interruptions, labor grievances or claims filed, or
any event or condition of any character, materially adversely affecting
the business or future prospects of the Company;
(vii) any sale or transfer, or any agreement to sell or transfer,
any material assets, property or rights of Company outside of the ordinary
course of business to any person, including, without limitation, the
Stockholders, Other Stockholders and their respective affiliates;
(viii) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company, including without limitation any
indebtedness or obligation of any Stockholders, Other Stockholders or any
respective affiliate thereof;
(ix) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights;
(x) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets outside
of the ordinary course of the Company's business;
-22-
<PAGE>
(xi) any waiver of any material rights or claims of the Company;
(xii) any amendment or termination of any Material Document;
(xiii) any transaction by the Company outside the ordinary course of
its business;
(xiv) any cancellation or termination of a Material Document or
material customer contract with a customer or client prior to the
scheduled termination date; or
(xv) any other distribution of property or assets by the Company
other than in the ordinary course of business and other than distributions
of real estate and other assets as permitted by this Agreement.
5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an
accurate schedule as of the date of the Agreement of:
(i) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(ii) the names in which the accounts or boxes are held;
(iii) the type of account and account number; and
(iv) the name of each person authorized to draw thereon or have
access thereto.
Schedule 5.26 also sets forth the name of each person, corporation, firm or
other entity holding a general or special power of attorney from the Company and
a description of the terms of such power.
5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
by the Company and the performance of the transactions contemplated herein have
been duly and validly authorized by the Board of Directors of the Company and
this Agreement has been duly and validly authorized by all necessary corporate
action and is a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the
Stockholders, or any Affiliate of any of them has given or offered anything of
value to any governmental official, political party or candidate for government
office in violation of any applicable laws, rules or regulations, nor has it or
any of them otherwise taken any action which would cause the Company to be in
violation of the Foreign Corrupt Practices Act of 1977, as amended or any
applicable law of similar effect.
-23-
<PAGE>
5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules
hereto, furnished to Pentacon by the Company and the Stockholders in connection
herewith, do not contain an untrue statement of a material fact or omit to state
a material fact necessary to make the statements herein and therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that the foregoing does not apply to statements contained in or omitted from any
of such documents made or omitted in reliance upon information furnished in
writing by Pentacon or Newco.
(b) The Company and the Stockholders acknowledge and agree (i) that there
exists no firm commitment, binding agreement, or promise or other assurance of
any kind, whether express or implied, oral or written, that a Registration
Statement will become effective or that the IPO pursuant thereto will occur at a
particular price or within a particular range of prices or occur at all; (ii)
that neither Pentacon or any of its officers, directors, agents or
representatives nor any Underwriter shall have any liability to the Company, the
Stockholders or any other person affiliated or associated with the Company for
any failure of the Registration Statement to become effective, the IPO to occur
at a particular price or within a particular range of prices or to occur at all;
and (iii) that the decision of Stockholders to enter into this Agreement, or to
vote in favor of or consent to the proposed Merger, has been or will be made
independent of, and without reliance upon, any statements, opinions or other
communications, or due diligence investigations which have been or will be made
or performed by any prospective Underwriter, relative to Pentacon or the
prospective IPO.
5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the
Company has not, between the Balance Sheet Date and the date hereof, taken any
of the actions which are prohibited ("Prohibited Activities") in Section 7.3.
5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to
the knowledge of the Company or the Stockholders, the Company has no liability
or potential liability to any person under any product or service warranty and
the Company does not offer or sell insurance or consumer protection plans or
other similar arrangements that could result in the Company being required to
make any material payment to or perform any material service for any person
thereunder.
5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS.
Except as described on Schedule 5.32, no Stockholder, officer, director or
Affiliate of the Company (i) possesses, directly or indirectly, any financial
interest in, or is a director, officer, employee or affiliate of, any
corporation, firm, association or business organization that is a client,
supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a
party to an agreement or relationship, that involves the receipt by such person
of compensation or property from the Company other than through a customary
employment relationship.
-24-
<PAGE>
(B) REPRESENTATIONS AND WARRANTIES ON BEHALF OF STOCKHOLDERS AND
OTHER STOCKHOLDERS.
Each Stockholder and each of the Other Stockholders by their
execution of the Limited Joinder hereto, severally, but not jointly, represents
and warrants to Pentacon that the representations and warranties set forth below
are true as of the date of this Agreement as they relate to each Stockholder or
Other Stockholder and that the representations and warranties set forth in this
Section 5(B) shall survive the Consummation Date.
5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Each Stockholder has
the full legal right, power and authority to enter into this Agreement. Each
Stockholder and Other Stockholder owns beneficially and of record all of the
shares of the Company stock identified on Annex II as being owned by such
Stockholder and Other Stockholder, and, except as set forth on Schedule 5.33,
such Company Stock is owned free and clear of all liens, encumbrances and claims
of every kind. This Agreement is a legal, valid, and binding obligation of the
Stockholder. Each Other Stockholder has the full legal right, power and
authority to enter into the Limited Joinder Agreement and such agreement is a
legal, valid and binding obligation of such Other Stockholder.
5.34 PREEMPTIVE RIGHTS. Except as contemplated herein, no Stockholder or
Other Stockholder has any preemptive or other right to acquire shares of Company
Stock or Pentacon Stock. Nothing herein, however, shall limit or restrict the
rights of any Stockholder to acquire Pentacon Stock pursuant to (i) this
Agreement or (ii) any option granted by Pentacon.
5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. Except as set forth in
Schedule 5.35, no Stockholder or Other Stockholder is under any binding
commitment or contract to sell, exchange or otherwise dispose of shares of
Pentacon Stock received as described in Section 3.1.
6. REPRESENTATIONS OF PENTACON AND NEWCO
Pentacon and Newco, jointly and severally, represent and warrant to the
Stockholders that all of the following representations and warranties in this
Section 6 are true at the date of this Agreement and, subject to Section 7.8
hereof, shall be true at the time of Closing and the Consummation Date, and that
such representations and warranties shall survive the Consummation Date for a
period of twenty-four months (the last day of such period being the "Expiration
Date"), except that (i) the warranties and representations set forth in Section
6.14 hereof shall survive until such time as the limitations period has run for
all tax periods ended on or prior to the Consummation Date, which shall be
deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes
of determining whether a claim for indemnification under Section 11.2(iv) hereof
has been made on a timely basis, and solely to the extent that in connection
with the IPO, any of the Stockholders actually incurs liability under the 1933
Act, the 1934 Act, or any other Federal or state securities laws, the
representations and warranties of Pentacon and Newco set forth herein shall
survive until the expiration of any applicable limitations period, which shall
be deemed to be the Expiration Date for such purposes.
-25-
<PAGE>
6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly
incorporated and organized, validly existing and in good standing under the laws
of the State of Delaware, and each has the requisite power and authority to
carry on its business as it is now being conducted. Pentacon and Newco are each
qualified to do business and are each in good standing in each jurisdiction in
which the nature of its business makes such qualification necessary. True,
complete and correct copies of the Certificate of Incorporation and By-laws,
each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter
Documents") are all attached hereto as Annex III.
6.2 AUTHORIZATION. (i) The respective officers or other representatives of
Pentacon and Newco executing this Agreement have the authority to enter into and
bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and
Newco have the full legal right, power and authority to enter into this
Agreement and the Other Agreements and consummate the Merger. All corporate acts
and other proceedings required to have been taken by Pentacon and Newco to
authorize the execution, delivery and performance of this Agreement and the
consummation of the Merger have been duly and properly taken.
6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of
Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration
Statement. All of the issued and outstanding shares of the capital stock of
Newco are owned by Pentacon and all of the issued and outstanding shares of the
capital stock of Pentacon are owned by the persons set forth on Schedule 6.3
hereof, in each case, free and clear of all liens, security interests, pledges,
charges, voting trusts, restrictions, encumbrances and claims of every kind. All
of the issued and outstanding shares of the capital stock of Pentacon and Newco
have been duly authorized and validly issued, are fully paid and nonassessable,
and further, such shares were offered, issued, sold and delivered by Pentacon
and Newco in compliance with all applicable state and Federal laws concerning
the issuance of securities. Further, none of such shares were issued in
violation of the preemptive rights of any past or present stockholder of
Pentacon or Newco.
6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the
Other Agreements and except as set forth in the Draft Registration Statement or
in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or
commitment of any kind exists which obligates Pentacon or Newco to issue any of
their respective authorized but unissued capital stock; (ii) no voting trust,
voting agreement, proxy or other agreements or understandings exist with respect
to the voting of any shares of capital stock of Pentacon; and (iii) neither
Pentacon nor Newco has any obligation (contingent or otherwise) to purchase,
redeem or otherwise acquire any of its equity securities or any interests
therein or to pay any dividend or make any distribution in respect thereof.
Schedule 6.4 also includes a list of all outstanding options, warrants or other
rights to acquire shares of the stock of Pentacon.
-26-
<PAGE>
6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries
except for Newco and each of the companies identified as "Newco" in each of the
Other Agreements. Except as set forth in the preceding sentence, neither
Pentacon nor Newco presently owns, of record or beneficially, or controls,
directly or indirectly, any capital stock, securities convertible into capital
stock or any other equity interest in any corporation, association or business
entity, and neither Pentacon nor Newco, directly or indirectly, is a participant
in any joint venture, partnership or other non-corporate entity.
6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in
the Draft Registration Statement (the "Pentacon Financial Statements") have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated (except as noted thereon),
and the balance sheet included therein presents fairly the financial position of
Pentacon as of its date.
6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft
Registration Statement, Pentacon and Newco have no material liabilities,
contingent or otherwise, except as set forth in or contemplated by this
Agreement and the Other Agreements and except for fees generally described in
Part II of the Draft Registration Statement and incurred in connection with the
transactions contemplated hereby and thereby.
6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the
Draft Registration Statement, neither Pentacon nor Newco is in violation of any
law or regulation or any order of any court or Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality having jurisdiction over either of them and except to the extent
set forth in Schedule 6.8, there are no material claims, actions, suits or
proceedings, pending or, to the knowledge of Pentacon or Newco, threatened
against or affecting, Pentacon or Newco, at law or in equity, or before or by
any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality having jurisdiction over either of them
and no notice of any claim, action, suit or proceeding, whether pending or
threatened, has been received. Pentacon and Newco have conducted and are
conducting their respective businesses in substantial compliance with the
requirements, standards, criteria and conditions set forth in applicable
Federal, state and local statutes, ordinances, permits, licenses, orders,
approvals, variances, rules and regulations and are not in violation, in any
material respect, of any of the foregoing.
6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any
Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of
Pentacon and Newco, any other party thereto, is in default under any lease,
instrument, agreement, license, or permit to which Pentacon or Newco is a party,
or by which Pentacon or Newco, or any of their respective properties, are bound
(collectively, the "Pentacon Documents"); and (a) the rights and benefits of
Pentacon and Newco under the Pentacon Documents will not be adversely affected
by the transactions contemplated hereby and (b) the execution and delivery of
this Agreement and the Other Agreements by Pentacon and Newco and the
performance of their obligations hereunder and thereunder do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the
-27-
<PAGE>
terms hereof and thereof will not, conflict with, or result in any violation or
default (with or without notice or lapse of time, or both), under or give rise
to a right of termination, cancellation, or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any lien upon any
of the assets of Pentacon or Newco under, any provision of (i) the Certificate
of Incorporation or Bylaws of Pentacon Charter Documents or the comparable
governing instruments of Newco, (ii) any note, bond, mortgage, indenture or deed
of trust or any license, lease, contract, commitment, agreement or arrangement
to which Pentacon or Newco is a party or by which any of their respective
properties or assets are bound or (iii) any judgment, order, decree or law,
ordinance, rule or regulation, applicable to Pentacon or Newco or their
respective properties or assets.
(b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the
Pentacon Documents requires notice to, or the consent or approval of, any
governmental agency or other third party with respect to any of the transactions
contemplated hereby in order to remain in full force and effect and consummation
of the transactions contemplated hereby will not give rise to any right to
termination, cancellation or acceleration or loss of any right or benefit.
(c) Except (i) for the filings by Pentacon in connection with the IPO of
the Registration Statement, (ii) for the declaration of the effectiveness
thereof by the SEC and filings with various state blue sky authorities, (iii)
filings with blue sky authorities in connection with the transactions
contemplated by this Agreement, (iv) for the making of the merger filings with
the Secretary of State of the State of Delaware and the State of Incorporation
in connection with the Merger, (v) for filings in consideration for listing on
the NASDAQ National Market System or the New York Stock Exchange or other
nationally recognized securities exchange; and (vi) for possible filings under
the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not
required make any declaration, filing or registration with, or notice to, or
obtain any authorization, consent or approval of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the
transactions contemplated hereby.
6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement
and the Other Agreements by Pentacon and Newco and the performance of the
transactions contemplated herein and therein have been duly and validly
authorized by the respective Boards of Directors and stockholders of Pentacon
and Newco and this Agreement and the Other Agreements have been duly and validly
authorized by all necessary corporate action and are legal, valid and binding
obligations of Pentacon and Newco, enforceable against them in accordance with
their respective terms.
6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the
Stockholders, the Pentacon Stock to be delivered to the Stockholders pursuant to
this Agreement will constitute valid and legally issued shares of Pentacon,
fully paid and nonassessable, and with the exception of restrictions upon resale
set forth in Sections 15 and 16 hereof, will be identical in all substantive
respects (which do not include the form of certificate upon which it is printed
or the presence or absence of a CUSIP number on any such certificate) to the
Pentacon Stock issued and outstanding
-28-
<PAGE>
as of the date hereof by reason of the provisions of the Delaware GCL. The
Pentacon Stock issued and delivered to the Stockholders shall at the time of
such issuance and delivery be free and clear of any liens, claims or
encumbrances of any kind or character. The shares of Pentacon Stock to be issued
to the Stockholders pursuant to this Agreement will not be registered under the
1933 Act, except as provided in Section 17 hereof.
6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither
Pentacon nor Newco has entered or will enter into any agreement with any of the
Founding Companies or any of the Stockholders of the Founding Companies or
Pentacon other than the Other Agreements and the agreements contemplated by each
of the Other Agreements, including the employment agreements and real property
leases referred to herein or entered into in connection with the transactions
contemplated hereby and thereby.
6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on
March 20, 1997 and has conducted only limited operations since that time.
Neither Pentacon nor Newco has conducted any material business since the date of
its inception, except in connection with this Agreement, the Other Agreements
and the IPO. Except as described in the Draft Registration Statement, neither
Pentacon nor Newco owns or has at any time owned any real property or any
material personal property or is a party to any other material agreement other
than the Other Agreements, the agreements contemplated thereby and such
agreements as will be filed as Exhibits to the Registration Statement.
6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company
and the Stockholders, together with this Agreement and the information furnished
to the Company and the Stockholders in connection herewith, does not contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the foregoing does not apply
to statements contained in or omitted from any of such documents made or omitted
in reliance upon information furnished in writing by the Company or the
Stockholders or information pertaining to the Company or a Stockholder which is
confirmed in writing by the Company or such Stockholder.
7. COVENANTS PRIOR TO CLOSING
7.1 ACCESS AND COOPERATION; DUE DILIGENCE.
(a) Between the date of this Agreement and the Consummation Date, the
Company will afford to the officers and authorized representatives of Pentacon
and the Other Founding Companies access to all of the Company's sites,
properties, books and records and will furnish Pentacon with such additional
financial and operating data and other information as to the business and
properties of the Company as Pentacon or the Other Founding Companies may from
time to time reasonably request; provided, however, that the Company shall not
prior to the Closing Date be required to disclose to the Other Founding
Companies, and Pentacon shall not without first obtaining the written approval
of the Company disclose to the Other Founding Companies, information relating to
pricing
-29-
<PAGE>
or profitability on an account-by-account basis or any pricing information
relating to the Company's suppliers on a supplier-by-supplier basis. The Company
will cooperate with Pentacon, its representatives, auditors and counsel and the
Other Founding Companies in the preparation of any documents or other material
which may be required in connection with any documents or materials required by
this Agreement. Pentacon, Newco, the Stockholders and the Company will treat all
information obtained in connection with the negotiation and performance of this
Agreement or the due diligence investigations conducted with respect to the
Other Founding Companies as confidential in accordance with the provisions of
Section 14 hereof. In addition, Pentacon will cause each of the Other Founding
Companies to enter into a provision similar to this Section 7.1(a) requiring
each such Other Founding Company, its stockholders, directors, officers,
representatives, employees and agents to keep confidential any information
obtained by such Other Founding Company.
(b) Between the date of this Agreement and the Consummation Date, Pentacon
will afford to the officers and authorized representatives of the Company and
the Stockholders access to all of Pentacon's and Newco's sites, properties,
books and records and will furnish the Company with such additional financial
and operating data and other information as to the business and properties of
Pentacon and Newco as the Company may from time to time reasonably request.
Pentacon and Newco will cooperate with the Company, its representatives,
auditors and counsel in the preparation of any documents or other material which
may be required in connection with any documents or materials required by this
Agreement. The Company will cause all information obtained in connection with
the negotiation and performance of this Agreement to be treated as confidential
in accordance with the provisions of Section 14 hereof.
7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this
Agreement and the Consummation Date, the Company will, except as set forth on
Schedule 7.2 or as otherwise expressly contemplated by this Agreement:
(i) carry on its respective businesses in substantially the same
manner as it has heretofore and not introduce any material new method of
management, operation or accounting;
(ii) use commercially reasonable efforts to maintain its respective
properties and facilities, including those held under leases, in as good
working order and condition as at present, ordinary wear and tear
excepted;
(iii) perform in all material respects all of its respective
obligations under agreements relating to or affecting its respective
assets, properties or rights;
(iv) use commercially reasonable efforts to keep in full force and
effect present insurance policies or other comparable insurance coverage;
-30-
<PAGE>
(v) use commercially reasonable efforts to maintain and preserve its
business organization intact, retain its respective present key employees
and maintain its respective relationships with material suppliers,
customers and others having business relations with the Company;
(vi) use commercially reasonable efforts to maintain compliance with
all material permits, laws, rules and regulations, consent orders, and all
other orders of applicable courts, regulatory agencies and similar
governmental authorities;
(vii) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments without the knowledge and consent
of Pentacon (which consent shall not be unreasonably withheld, delayed or
conditioned), provided that debt and/or lease instruments may be replaced
without the consent of Pentacon if such replacement instruments are on
terms at least as favorable to the Company as the instruments being
replaced; and
(viii)maintain or reduce present salaries and commission levels for
all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with the
Company's past practices.
7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3 or as
otherwise expressly contemplated by this Agreement, between the date hereof and
the Consummation Date, the Company will not, without prior written consent of
Pentacon:
(i) make any change in its Articles of Incorporation or By-laws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind other than in
connection with the exercise of options or warrants listed in Schedule
5.4;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem or otherwise acquire or retire for value any shares of its stock
except for (1) dividends paid in respect of the Company's Accumulated
Adjustment Accounts provided that any such dividends shall reduce,
dollar-for-dollar, the amount of cash consideration to be received by the
Stockholder on the Consummation Date whether or not such dividend is
listed or described on a schedule attached hereto and (2) dividends paid
to cover estimated quarterly tax payments required to be made by the
Stockholders and Other Stockholders;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures, except if it is in
the normal course of business (consistent with past practice) or involves
an amount not in excess of $25,000;
-31-
<PAGE>
(v) create, assume or permit to exist any mortgage, pledge or other
lien or encumbrance upon any assets or properties whether now owned or
hereafter acquired, except (1) with respect to purchase money liens
incurred in connection with the acquisition of equipment with an aggregate
cost not in excess of $25,000 necessary or desirable for the conduct of
the businesses of the Company, (2) (A) liens for Taxes either not yet due
or being contested in good faith and by appropriate proceedings (and for
which contested Taxes adequate reserves have been established and are
being maintained) or (B) materialmen's, mechanics', workers', repairmen's,
employees' or other like liens arising in the ordinary course of business
(the liens set forth in clause (2) being referred to herein as "Statutory
Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16
hereto;
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the normal course of business and other
than distributions of real estate and other assets as permitted in this
Agreement (including the Schedules hereto);
(vii) negotiate for the acquisition of any business or the start-up
of any new business;
(viii)merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(ix) waive any material rights or claims of the Company, provided
that the Company may negotiate and adjust bills and accounts in the course
of good faith disputes with customers in a manner consistent with past
practice, provided, further, that such adjustments shall not be deemed to
be included in Schedule 5.11 to the extent they exceed the reserves, if
any, established therefor, or unless specifically listed thereon;
(x) amend or terminate any material agreement, permit, license or
other right of the Company provided that the Company may continue to
administer vendor and supplier contracts in the ordinary course of
business provided written notice of any such material amendments or
terminations is provided to Pentacon as soon as possible following such
action and in any event prior to the Closing; or
(xi) enter into any other transaction outside the ordinary course of
its business or prohibited hereunder.
7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the
Company, nor any agent, officer, director, trustee or any representative of any
of the foregoing will, during the period commencing on the date of this
Agreement and ending with the earlier to occur of the Consummation Date or the
termination of this Agreement in accordance with its terms, directly or
indirectly:
(i) solicit or initiate the submission of proposals or offers from
any person for,
-32-
<PAGE>
(ii) participate in any discussions pertaining to, or
(iii) furnish any information to any person other than Pentacon,
Newco or their authorized agents relating to, any acquisition or purchase
of all or a material amount of the assets of, or any equity interest in,
the Company or a merger, consolidation or business combination of the
Company.
7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company
shall satisfy any requirement for notice of the transactions contemplated by
this Agreement under applicable collective bargaining agreements, and shall
provide Pentacon on Schedule 7.5 with proof that any required notice has been
sent.
7.6 AGREEMENTS. The Stockholders, Other Stockholders and the Company shall
terminate (i) any stockholders agreements, voting agreements, voting trusts,
options, warrants and employment agreements between the Company and any employee
listed on Schedule 9.12 hereto and (ii) any existing agreement between the
Company and any Stockholder or Other Stockholder, on or prior to the
Consummation Date provided that nothing herein shall prohibit or prevent the
Company from paying (either prior to or on the Closing Date) notes or other
obligations from the Company to the Stockholders or Other Stockholders in
accordance with the terms thereof, which terms have been disclosed to Pentacon.
Such termination agreements are listed on Schedule 7.6 and copies thereof shall
be attached thereto.
7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.
The Stockholders and the Company shall give prompt notice to Pentacon of (i) the
occurrence or non-occurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty of the Company or
the Stockholders contained herein to be untrue or inaccurate in any material
respect at or prior to the Closing and (ii) any material failure of any
Stockholder or the Company to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such person hereunder. Pentacon
and Newco shall give prompt notice to the Company of (i) the occurrence or
non-occurrence of any event the occurrence or non-occurrence of which would be
likely to cause any representation or warranty of Pentacon or Newco contained
herein to be untrue or inaccurate in any material respect at or prior to the
Closing and (ii) any material failure of Pentacon or Newco to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder. The delivery or deemed delivery of any notice pursuant to this
Section 7.7 shall not be deemed to (i) modify the representations or warranties
hereunder of the party delivering such notice, which modification may only be
made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8
and 9, or (iii) limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
If, prior to the Closing Date, the Chief Executive Officer, the Chief
Financial Officer or the General Counsel of Pentacon shall determine that any of
Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder
for indemnification against any STOCKHOLDER(S)
-33-
<PAGE>
(whether or not such claim might exceed the Indemnification Threshold), then
Pentacon shall promptly advise the affected Stockholder(s), in writing, of such
potential claim and provide information supporting the basis and potential
amount of such claim (a "Potential Claim Notice"). This procedure with respect
to Potential Claim Notices is intended to afford the affected Stockholder(s)
notice so that it may attempt to cure or otherwise address the claim prior to
Closing; provided, however, that (i) this procedure shall not affect or delay
Closing and (ii) neither the failure or delay by Pentacon to give a Potential
Claim Notice nor the information included or omitted from a Potential Claim
Notice shall constitute a waiver of, or shall otherwise adversely affect the
right to receive indemnification for, any such claim paid by Pentacon, Newco,
the Surviving Corporation or the Company hereunder after the Closing Date.
7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to
the representations and warranties of such party contained in this Agreement,
such party shall have the continuing obligation until 24 hours prior to the
anticipated effectiveness of the Registration Statement to supplement or amend
promptly the Schedules hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules, provided however,
that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall
only have to be delivered at the Closing Date, unless such Schedule is to be
amended to reflect an event occurring other than in the ordinary course of
business. Notwithstanding the foregoing sentence, no amendment or supplement to
a Schedule prepared by the Company that constitutes or reflects an event or
occurrence that would have a Material Adverse Effect with respect to the Company
may be made unless Pentacon and a majority of the Founding Companies other than
the Company consent to such amendment or supplement; and provided further, that
no amendment or supplement to a Schedule prepared by Pentacon or Newco that
constitutes or reflects an event or occurrence that would have a Material
Adverse Effect with respect to Pentacon or Newco may be made unless a majority
of the Founding Companies consent to such amendment or supplement. For all
purposes of this Agreement, including without limitation for purposes of
determining whether the conditions set forth in Sections 8.1 and 9.1 have been
fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended
or supplemented pursuant to this Section 7.8. In the event that one of the Other
Founding Companies seeks to amend or supplement a Schedule pursuant to Section
7.8 of one of the Other Agreements, and such amendment or supplement constitutes
or reflects an event or occurrence that would have a Material Adverse Effect on
such Other Founding Company, Pentacon shall give the Company written notice
promptly after it has knowledge thereof. If Pentacon and a majority of the
Founding Companies consent to such amendment or supplement, which consent shall
have been deemed given by Pentacon or any Founding Company if no response is
received within 24 hours following receipt of written notice of such amendment
or supplement (or sooner if reasonable and if required by the circumstances
under which such consent is requested), but the Company does not give its
consent, the Company may terminate this Agreement pursuant to Section 12.1(iv)
hereof. In the event that the Company seeks to amend or supplement a Schedule
pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding
Companies do not consent to such amendment or supplement, this Agreement shall
be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof.
In the event that Pentacon or Newco seeks to amend or supplement a
-34-
<PAGE>
Schedule pursuant to this Section 7.8 and a majority of the Founding Companies
do not consent to such amendment or supplement, this Agreement shall be deemed
terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to
this Agreement shall be liable to any other party if this Agreement shall be
terminated pursuant to the provisions of this Section 7.8. No amendment of or
supplement to a Schedule shall be made later than 24 hours prior to the
anticipated effectiveness of the Registration Statement.
7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and
Stockholders shall furnish or cause to be furnished to Pentacon and the
Underwriters all of the information concerning the Company and the Stockholders
reasonably required for inclusion in, and will cooperate with Pentacon and the
Underwriters in the preparation of, the Registration Statement and the
prospectus included therein (including audited and unaudited financial
statements, prepared in accordance with generally accepted accounting
principles, in form suitable for inclusion in the Registration Statement, except
that the cost of the preparation of any such audited and unaudited Financial
Statements shall be borne by Pentacon). The Company and the Stockholders agree
promptly to advise Pentacon if at any time during the period in which a
prospectus relating to the IPO is required to be delivered under the Securities
Act, any information contained in the prospectus concerning the Company or the
Stockholders becomes incorrect or incomplete in any material respect, and to
provide the information needed to correct such inaccuracy. Insofar as the
information relates solely to the Company or the Stockholders, the Company
represents and warrants as to such information with respect to itself, and each
Stockholder represents and warrants, as to such information with respect to the
Company and himself or herself, severally, but not jointly, that the information
expressly provided for inclusion in the Registration Statement or otherwise
confirmed in writing by such Stockholder will not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the
Consummation Date, and Pentacon shall have had sufficient time to review the
unaudited consolidated balance sheets of the Company as of the end of all fiscal
quarters following the Balance Sheet Date, and the unaudited consolidated
statement of income, cash flows and retained earnings of the Company for all
fiscal quarters ended after the Balance Sheet Date. Such financial statements
shall have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated
(except as noted therein). Except as noted in such financial statements, all of
such financial statements will present fairly the results of operations of the
Company for the periods indicated therein.
7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver,
or cause to be executed and delivered, such further instruments or documents or
take such other action as may be reasonably necessary or convenient to carry out
the transactions contemplated hereby.
-35-
<PAGE>
7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall
maintain its authorized capital stock as set forth in the Registration Statement
filed with the SEC except for such changes in authorized capital stock as are
made to respond to comments made by the SEC or requirements of any exchange or
automated trading system for which application is made to register the Pentacon
Stock and any changes necessary or advisable in order to permit the delivery of
the opinion contemplated by Section 8.12 hereof.
7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS
ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby
recognize that one or more filings under the Hart-Scott-Rodino Act may be
required in connection with the transactions contemplated herein. If it is
determined by the parties to this Agreement that filings under the
Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees
to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act,
(ii) such compliance by the Stockholders and the Company shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a
condition precedent in addition to the conditions precedent set forth in Section
9 of this Agreement, and (iii) the parties agree to cooperate and use their best
efforts to cause all filings required under the Hart-Scott-Rodino Act to be
made. If filings under the Hart-Scott-Rodino Act are required, the costs and
expenses thereof (including filing fees) shall be borne by Pentacon. The
obligation of each party to consummate the transactions contemplated by this
Agreement is subject to the expiration or termination of the waiting period
under the Hart-Scott-Rodino Act, if applicable.
7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date
of the final prospectus of Pentacon utilized in connection with the IPO, the
Company or the Stockholders become aware of any fact or circumstance which would
materially affect the accuracy of a representation or warranty of Company or
Stockholders in this Agreement, the Company and the Stockholders shall promptly
give notice of such fact or circumstance to Pentacon. However, subject to the
provisions of Section 7.8, such notification shall not relieve either the
Company or the Stockholders of their respective obligations under this
Agreement, and, subject to the provisions of Section 7.8, at the sole option of
Pentacon, the truth and accuracy of any and all warranties and representations
of the Company, or on behalf of the Company and of Stockholders at the date of
this Agreement and on the Closing Date and on the Consummation Date, shall be a
precondition to the consummation of this transaction.
7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately
following the Effective Time of the Merger, Pentacon will pay, or cause to be
paid, all of the outstanding liabilities, obligations and indebtedness of
Company to the lenders identified on Schedule 7.15 hereto. In connection with
such repayment of such liabilities, obligations and indebtedness, Pentacon will
cause all associated guaranties or suretyships of the Stockholders and the Other
Stockholders to be terminated and cancelled. Furthermore, on the Consummation
Date the Company will cause to be paid to the Other Stockholders, the $5,000,000
aggregate redemption payment amount owed by the Company in connection with the
Redemption Agreements.
-36-
<PAGE>
7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that
one of the conditions to the Stockholders consummating the transactions
contemplated herein is that the IPO shall be closed and the Stockholders and
Other Stockholders (as a group) shall be entitled to receive consideration not
less than the Minimum Value set forth on Annex I attached hereto.
7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon
shall not exceed nine members immediately following the IPO unless the Founding
Stockholder representatives to serve on such board agree in writing to a larger
number of directors.
7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise
required by applicable law, Pentacon will describe or report the transaction in
any required tax reports of Pentacon as a tax-free transaction (insofar as its
relates to the delivery of Pentacon Stock for Company Stock) in a manner
consistent with the tax opinion referenced in Section 8.12.
7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain
all material Licenses necessary for Pentacon to commence the conduct of business
on the Consummation Date.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY
The obligations of Stockholders and the Company with respect to actions to
be taken on the Closing Date are subject to the satisfaction or waiver on or
prior to the Closing Date of all of the following conditions. The obligations of
the Stockholders and the Company with respect to actions to be taken on the
Consummation Date are subject to the satisfaction or waiver on or prior to the
Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and
8.12. As of the Closing Date or, with respect to the conditions set forth in
Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such
conditions have not been satisfied, the Stockholders (acting in unison) shall
have the right to terminate this Agreement, or in the alternative, waive any
condition not so satisfied. The delivery of certificates representing Company
Stock to Pentacon as of the Consummation Date shall constitute a waiver of any
conditions not so satisfied. However, no such waiver shall be deemed to affect
the survival of the representations and warranties of Pentacon and Newco
contained in Section 6 hereof or the rights of the Stockholders pursuant to
Section 11 hereof.
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All
representations and warranties of Pentacon and Newco contained in Section 6
shall be true and correct in all material respects as of the Closing Date and
the Consummation Date as though such representations and warranties had been
made as of that time; all of the terms, covenants and conditions of this
Agreement to be complied with and performed by Pentacon and Newco on or before
the Closing Date and the Consummation Date shall have been duly complied with
and performed in all material respects; and certificates to the foregoing effect
dated the Closing Date and the Consummation Date, respectively, and signed by
the President or any Vice President of Pentacon shall have been delivered to the
Stockholders.
-37-
<PAGE>
8.2 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out this Agreement or incidental hereto and all other related
legal matters shall be reasonably satisfactory to the Company and its counsel.
The Stockholders and the Company shall be satisfied that the Registration
Statement and the prospectus forming a part thereof, including any amendments
thereof or supplements thereto, shall not contain any untrue statement of a
material fact, or omit to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, provided
that, subject to the provisions set forth in the introductory paragraph of this
Section 8, the condition contained in this sentence shall be deemed waived if
the Company or Stockholders shall have failed to inform Pentacon in writing
prior to the effectiveness of the Registration Statement of the existence of an
untrue statement of a material fact or the omission of such a statement of a
material fact.
8.3 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of the Company as a result of which
the management of the Company deems it inadvisable to proceed with the
transactions hereunder.
8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion
from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed
hereto as Annex IV.
8.5 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC and the underwriters named therein shall have
agreed to acquire on a firm commitment basis, subject to the conditions set
forth in the underwriting agreement, on terms such that the aggregate value of
the cash and the number of shares of Pentacon Stock to be received by the
Stockholders and Other Stockholders is not less than the Minimum Value set forth
on Annex I.
8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency or any third party relating to the consummation
of the transactions contemplated herein or set forth in Schedule 5.23 hereto
shall have been obtained and made and no action or proceeding shall have been
instituted or threatened to restrain or prohibit the Merger and no governmental
agency or body shall have taken any other action or made any request of Company
as a result of which Company deems it inadvisable to proceed with the
transactions hereunder.
8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have
delivered to the Company a certificate, dated as of a date no later than ten
days prior to the Closing Date, duly issued by the Delaware Secretary of State
and in each state in which Pentacon or Newco is authorized to do business,
showing that each of Pentacon and Newco is in good standing and authorized to do
business and that all state franchise and/or income tax returns and taxes for
Pentacon and Newco, respectively, for all periods prior to the Closing have been
filed and paid.
-38-
<PAGE>
8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have
occurred with respect to Pentacon or Newco which would constitute a Material
Adverse Effect.
8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a
certificate or certificates, dated the Closing Date and signed by the secretary
of Pentacon and of Newco, certifying the truth and correctness of attached
copies of the Pentacon's and Newco's respective Certificates of Incorporation
(including amendments thereto), By-Laws (including amendments thereto), and
resolutions of the boards of directors and, if required, the Stockholders of
Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement
and the consummation of the transactions contemplated hereby.
8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall have been afforded the opportunity to enter into an employment agreement
substantially in the form of Annex VI hereto.
8.12 TAX MATTERS. The Stockholders shall have received an opinion of Ernst
& Young LLP or other tax advisor of national recognition reasonably acceptable
to the Stockholders that the Pentacon Plan of Organization (including the Plan
of Organization under this Agreement) will qualify as a tax-free transfer of
property under Section 351 of the Code and that the Stockholders and Other
Stockholders will not recognize gain to the extent the Stockholders and Other
Stockholders exchange stock of the Company for Pentacon Stock (but not cash or
other property) pursuant to the Pentacon Plan of Organization.
8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for
listing on the New York Stock Exchange, NASDAQ National Market System or the
American Stock Exchange.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO
The obligations of Pentacon and Newco with respect to actions to be taken
on the Closing Date are subject to the satisfaction or waiver on or prior to the
Closing Date of all of the following conditions. The obligations of Pentacon and
Newco with respect to actions to be taken on the Consummation Date are subject
to the satisfaction or waiver on or prior to the Consummation Date of the
conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or,
with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of
the Consummation Date, if any such conditions have not been satisfied, Pentacon
and Newco shall have the right to terminate this Agreement, or waive any such
condition, but no such waiver shall be deemed to affect the survival of the
representations and warranties contained in Section 5 hereof.
-39-
<PAGE>
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the
representations and warranties of the Stockholders and the Company contained in
this Agreement shall be true and correct in all material respects as of the
Closing Date and the Consummation Date with the same effect as though such
representations and warranties had been made on and as of such date; all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by the Stockholders and the Company on or before the Closing Date or
the Consummation Date, as the case may be, shall have been duly performed or
complied with in all material respects; and the Stockholders shall have
delivered to Pentacon certificates dated the Closing Date and the Consummation
Date, respectively, and signed by them to such effect.
9.2 NO LITIGATION. No action or proceeding before a court or any other
governmental agency or body shall have been instituted or threatened to restrain
or prohibit the Merger or the IPO and no governmental agency or body shall have
taken any other action or made any request of Pentacon as a result of which the
management of Pentacon deems it inadvisable to proceed with the transactions
hereunder.
9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate,
dated the Closing Date and signed by the secretary of the Company, certifying
the truth and correctness of attached copies of the Company's Certificate of
Incorporation (including amendments thereto), By-Laws (including amendments
thereto), and resolutions of the board of directors and the Stockholders and
Other Stockholders approving the Company's entering into this Agreement and the
consummation of the transactions contemplated hereby.
9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have
occurred with respect to the Company which would constitute a Material Adverse
Effect, and the Company shall not have suffered any material loss or damages to
any of its properties or assets, whether or not covered by insurance, which
change, loss or damage materially affects or impairs the ability of the Company
to conduct its business.
9.5 STOCKHOLDERS' RELEASE. The Stockholders and Other Stockholders shall
have delivered to Pentacon an instrument dated the Closing Date, which shall be
effective only upon the occurrence of the Consummation Date and shall relate
only to matters accruing on or prior to the Consummation Date, releasing the
Company and Pentacon from (i) any and all claims of the Stockholders and Other
Stockholders against the Company and Pentacon and (ii) obligations of the
Company and Pentacon to the Stockholders and Other Stockholders, except for (w)
items specifically identified on Schedules 5.10 and 5.15 as being claims of or
obligations to the Stockholders, (x) continuing obligations to Stockholders
relating to their employment by the Company or Pentacon, (y) any obligations or
liabilities arising under this Agreement or the transactions contemplated hereby
(including, but not limited to, any claims for indemnification that the
Stockholders may have against Pentacon pursuant to Section 11 hereof
irrespective of whether such claims accrued, or otherwise relate to matters that
occurred, on or before the Consummation Date) and (z) real estate lease
agreements between the Company and Stockholders and Other Stockholders, as
amended which have been accepted or approved by Pentacon. In the event that the
-40-
<PAGE>
Consummation Date does not occur, then the release instrument referenced herein
shall be void and of no further force or effect.
9.6 SATISFACTION. All actions, proceedings, instruments and documents
required to carry out the transactions contemplated by this Agreement or
incidental hereto and all other related legal matters shall have been approved
by counsel to Pentacon.
9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on
Schedule 9.7, all existing agreements between the Company and the Stockholders
or Other Stockholders (and entities controlled by the Stockholders or Other
Stockholders) shall have been canceled effective prior to or as of the
Consummation Date.
9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from
Counsel to the Company and the Stockholders, dated the Closing Date,
substantially in the form annexed hereto as Annex V.
9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any
governmental authority or agency relating to the consummation of the
transactions contemplated herein shall have been obtained and made; all consents
and approvals of third parties listed on Schedule 5.23 shall have been obtained;
and no action or proceeding shall have been instituted or threatened to restrain
or prohibit the Merger and no governmental agency or body shall have taken any
other action or made any request of Pentacon as a result of which Pentacon deems
it inadvisable to proceed with the transactions hereunder.
9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to
Pentacon a certificate, dated as of a date no earlier than ten days prior to the
Closing Date, duly issued by the appropriate governmental authority in the
Company's state of incorporation and, unless waived by Pentacon, in each state
in which the Company is authorized to do business, showing the Company is in
good standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for the Company for all periods prior to the
Closing have been filed and paid.
9.11 REGISTRATION STATEMENT. The Registration Statement shall have been
declared effective by the SEC.
9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12
shall enter into an employment agreement substantially in the form of Annex VI
hereto.
9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the
Underwriters in the IPO shall have occurred simultaneously with the Consummation
Date hereunder.
-41-
<PAGE>
9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon
a certificate to the effect that he is not a foreign person pursuant to Section
1.1445-2(b) of the Treasury regulations.
10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING
10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated
by this Agreement or the Registration Statement, after the Consummation Date,
Pentacon shall not and shall not permit any of its subsidiaries to undertake any
act that would jeopardize the tax-free status of the organization, including
without limitation:
(a) the retirement or reacquisition, directly or indirectly, of all
or part of the Pentacon Stock issued in connection with the transactions
contemplated hereby; or
(b) the entering into of financial arrangements for the benefit of
the Stockholders.
10.2 PREPARATION AND FILING OF TAX RETURNS.
(i) The Company, if possible, or otherwise the Stockholders shall
file or cause to be filed all Tax Returns (federal, state, local or
otherwise) of any Acquired Party for all taxable periods that end on or
before the Consummation Date, and shall permit Pentacon to review all such
Returns prior to such filings. Unless the Company is a C corporation, the
Stockholders shall pay or cause to be paid all Tax liabilities (in excess
of all amounts already paid with respect thereto or properly accrued or
reserved with respect thereto on the Financial Statements) shown by such
Returns to be due.
(ii) Pentacon shall file or cause to be filed all separate Returns
of, or that include, any Acquired Party for all taxable periods ending
after the Consummation Date.
(iii) Each party hereto shall, and shall cause its Subsidiaries and
Affiliates to, provide to each of the other parties hereto such
cooperation and information as any of them reasonably may request in
filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any
audit or other proceeding in respect of Taxes. Such cooperation and
information shall include providing copies, at the expense of the
requesting party, of all relevant portions of relevant Returns, together
with relevant accompanying schedules and relevant work papers, relevant
documents relating to rulings or other determinations by Taxing
Authorities and relevant records concerning the ownership and Tax basis of
property, which such party may possess. Each party shall make its
employees reasonably available on a mutually convenient basis at its cost
to provide explanation of any documents or information so provided.
Subject to the preceding sentence, each party required to file Returns
pursuant to this Agreement shall bear all costs of filing such Returns.
-42-
<PAGE>
(iv) Each of the Company, Newco, Pentacon and each Stockholder shall
comply with the tax reporting requirements of Section 1.351-3 of the
Treasury Regulations promulgated under the Code, and treat the transaction
as a tax-free contribution under Section 351(a) of the Code subject to
gain, if any, recognized on the receipt of cash or other property under
Section 351(b) of the Code subject to gain, if any, recognized on the
receipt of cash or other property under Section 351(b) of the Code.
10.3 DIRECTORS. The persons named in the Draft Registration Statement
shall be appointed as directors and elected as officers of Pentacon, as and to
the extent set forth in the Draft Registration Statement, promptly following the
Consummation Date.
11. INDEMNIFICATION
The Stockholders, Pentacon and Newco each make the following covenants
that are applicable to them, respectively:
11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders
covenant and agree that they, jointly and severally, will indemnify, defend,
protect and hold harmless Pentacon, Newco, the Company and the Surviving
Corporation at all times, from and after the date of this Agreement until the
Expiration Date (provided that for purposes of Section 11.1(iii) below, the
Expiration Date shall be the date on which the applicable statute of limitations
expires), from and against all claims, damages, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) incurred by Pentacon, Newco, the Company or the Surviving
Corporation as a result of or arising from (i) any breach of the representations
and warranties of the Stockholders or the Company set forth herein or on the
definitive, final schedules or certificates delivered by them in connection
herewith (but excluding any representations or warranties made by the Other
Stockholders with respect to their Common Stock), (ii) any breach of any
agreement on the part of the Stockholders or, prior to Closing, the Company
under this Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or
other Federal or state law or regulation, at common law or otherwise, arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact relating to the Company or the Stockholders, and provided in
writing to Pentacon or its counsel by the Company or the Stockholders for
inclusion in the Registration Statement or any prospectus forming a part
thereof, or any amendment thereof or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
relating to the Company or the Stockholders required to be stated therein or
necessary to make the statements therein not misleading, provided, however, that
such indemnity shall not inure to the benefit of Pentacon, Newco, the Company or
the Surviving Corporation to the extent that such untrue statement (or alleged
untrue statement) was made in, or omission (or alleged omission) occurred in,
any preliminary prospectus and the Stockholders provided, in writing, corrected
information to Pentacon counsel and to Pentacon for inclusion in the final
prospectus, and such information was not so included or properly delivered, and
provided further, that no Stockholder shall be liable for any
-43-
<PAGE>
indemnification obligation pursuant to this Section 11.1(iii) to the extent
attributable to a breach of any representation, warranty or agreement made
herein individually by any Other Stockholder.
Pentacon and Newco acknowledge and agree that other than the
representations and warranties of Company or Stockholders specifically contained
in this Agreement, there are no representations or warranties of Company or
Stockholders, either express or implied, with respect to the transactions
contemplated by this Agreement, the Company or its assets, liabilities and
business.
Pentacon, Newco and the Company further acknowledge and agree that, should
the Closing occur, their sole and exclusive remedy with respect to any and all
claims relating to this Agreement and the transactions contemplated in this
Agreement, shall be pursuant to the indemnification provisions set forth in this
Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the
Closing, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action they or any indemnified person may have
against the Company or any Stockholder relating to this Agreement or the
transactions contemplated hereby arising under or based upon any federal, state,
local or foreign statute, law, rule, regulation or otherwise (and other than
pursuant to the terms of this Agreement).
11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it
will indemnify, defend, protect and hold harmless the Stockholders at all times
from and after the date of this Agreement until the Expiration Date, from and
against all claims, damages, actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including specifically, but without limitation,
reasonable attorneys' fees and expenses of investigation) incurred by the
Stockholders as a result of or arising from (i) any breach by Pentacon or Newco
of their representations and warranties set forth herein or on the definitive,
final schedules or certificates attached delivered by them pursuant hereto, (ii)
any breach of any agreement on the part of Pentacon or Newco under this
Agreement or any other agreement delivered pursuant hereto, (iii) any
liabilities which the Stockholders may incur due to Pentacon's or Newco's or the
Surviving Corporation's failure to pay, perform or discharge when due any of the
liabilities and obligations of the Company for which Pentacon, Newco or the
Surviving Corporation is responsible pursuant to this Agreement (except to the
extent that Pentacon or Newco has bona fide claims hereunder against the
Stockholders by reason of such liabilities); or (iv) any liability under the
1933 Act, the 1934 Act or other Federal or state law or regulation, at common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact relating to Pentacon, Newco or any of the
Other Founding Companies contained in any preliminary prospectus, the
Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact relating to
Pentacon or Newco or any of the Other Founding Companies required to be stated
therein or necessary to make the statements therein not misleading.
-44-
<PAGE>
11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the
"Indemnified Party") has received notice of or has actual knowledge of any claim
by a Person (including a governmental agency) not a party to this Agreement
("Third Person"), or the commencement of any action or proceeding by a Third
Person, with respect to which the Indemnified Person would be entitled to
receive indemnification pursuant to Section 11, the Indemnified Party shall, as
a condition precedent to a claim with respect thereto being made against any
party obligated to provide indemnification pursuant to Section 11.1 or 11.2
hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party
written notice of such claim or the commencement of such action or proceeding.
Such notice shall state the nature and the basis of such claim and a reasonable
estimate of the amount thereof. The Indemnifying Party shall have the right to
defend and settle, at its own expense and by its own counsel, any such matter so
long as the Indemnifying Party pursues the same in good faith and diligently,
provided that the Indemnifying Party shall not settle any criminal proceeding
without the written consent of the Indemnified Party. If the Indemnifying Party
undertakes to defend or settle, it shall promptly notify the Indemnified Party
of its intention to do so, and the Indemnified Party shall cooperate with the
Indemnifying Party and its counsel in the defense thereof and in any settlement
thereof. Such cooperation shall include, but shall not be limited to, furnishing
the Indemnifying Party with any books, records or information reasonably
requested by the Indemnifying Party that are in the Indemnified Party's
possession or control. All Indemnified Parties shall use the same counsel, which
shall be the counsel selected by Indemnifying Party, provided that if counsel to
the Indemnifying Party shall have a conflict of interest that prevents counsel
for the Indemnifying Party from representing Indemnified Party, Indemnified
Party shall have the right to participate in such matter through counsel of its
own choosing and Indemnifying Party will reimburse the Indemnified Party for the
reasonable expenses of its counsel. After the Indemnifying Party has notified
the Indemnified Party of its intention to undertake to defend or settle any such
asserted liability, and for so long as the Indemnifying Party diligently pursues
such defense through appropriate proceedings, the Indemnifying Party shall not
be liable for any additional legal expenses incurred by the Indemnified Party in
connection with any defense or settlement of such asserted liability, except (i)
as set forth in the preceding sentence and (ii) to the extent such participation
is requested by the Indemnifying Party, in which event the Indemnified Party
shall be reimbursed by the Indemnifying Party for reasonable additional legal
expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept
a final and complete settlement of any such Third Person claim and the
Indemnified Party refuses to consent to such settlement, then the Indemnifying
Party's liability under this Section with respect to such Third Person claim
shall be limited to the amount so offered in settlement by said Third Person.
Upon agreement as to such settlement between said Third Person and the
Indemnifying Party, the Indemnifying Party shall, in exchange for a complete
release from the Indemnified Party, promptly pay to the Indemnified Party the
amount agreed to in such settlement and the Indemnified Party shall, from that
moment on, bear full responsibility for any additional costs of defense which it
subsequently incurs with respect to such claim and all additional costs of
settlement or judgment. If the Indemnifying Party does not undertake to defend
such matter to which the Indemnified Party is entitled to indemnification
hereunder, or fails diligently to pursue such defense, the Indemnified Party may
undertake such defense through counsel of its choice, at the cost and expense of
the Indemnifying Party, and the Indemnified Party may settle such matter, and
the Indemnifying Party shall reimburse the
-45-
<PAGE>
Indemnified Party for the amount paid in such settlement and any other
liabilities or expenses incurred by the Indemnified Party in connection
therewith, provided, however, that under no circumstances shall the Indemnified
Party settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
All settlements hereunder shall effect a complete release of the Indemnified
Party, unless the Indemnified Party otherwise agrees in writing. The parties
hereto will make appropriate adjustments for insurance proceeds in determining
the amount of any indemnification obligation under this Section.
11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this
Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any
action seeking damages or any other form of monetary relief brought by any party
to this Agreement against another party, provided that, nothing herein shall be
construed to limit the right of a party, in a proper case pursuant to Section
14.3 or otherwise, to seek injunctive or other equitable relief (except for
rescission which shall not be available) for a breach or threatened breach of
this Agreement. Any indemnity payment under this Section 11 shall be treated as
an adjustment to the exchange consideration for tax purposes unless a final
determination (which shall include the execution of a Form 870-AD or successor
form) with respect to the indemnified party or any of its affiliate causes any
such payment not to be treated as an adjustment to the exchange consideration
for U.S. Federal Income Tax purposes.
(b) Nothing in this Article 11 shall restrict the Stockholders from
subrogation or seeking reimbursement from third parties other than the Company.
11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving
Corporation and the other persons or entities indemnified pursuant to Section
11.1 or 11.2 shall not assert any claim for indemnification hereunder against
the Stockholders after the applicable Expiration Date and in no event until such
time as, and solely to the extent that, the aggregate of all claims which such
persons may have against the Stockholders shall exceed the greater of 1% of the
value of the total consideration (including stock and cash) received by the
Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and
then only to the extent of the excess over the Indemnification Threshold.
Stockholders shall not assert any claim for indemnification hereunder against
Pentacon or Newco after the applicable Expiration Date and in no event until
such time as, and solely to the extent that, the aggregate of all claims which
Stockholders may have against Pentacon or Newco shall exceed the Indemnification
Threshold, and then only to the extent of the excess over the Indemnification
Threshold.
The Indemnification Threshold and other limitations contained in this
Section 11.5 shall not be applicable to any breach of covenants made by the
Stockholders in this Agreement which require an action or inaction by such
Stockholders from and after the Closing Date (I.E., Article 10, Article 11,
Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall
be entitled to indemnification under this Section 11 if, and only to the extent
that such person's claim for indemnification is directly related to a breach by
such person of any representation, warranty, covenant or other agreement set
forth in this Agreement.
-46-
<PAGE>
The pursuit by Pentacon, the Surviving Corporation, Newco or the Company,
of any claim for indemnification hereunder against a Stockholder shall require a
majority vote of the board of directors of Pentacon excluding for the purposes
of such vote, any director who was previously a stockholder of the Company or is
a representative of the stockholders of the Company as existing prior to the
closing of the transactions contemplated in this Agreement.
Notwithstanding any other term of this Agreement, no Stockholder shall be
liable (in the aggregate from time to time taking into account all
indemnification payments made hereunder) under this Section 11(a) for any amount
which is less than or equal to the Indemnification Threshold (and then only to
the extent of the excess over the Indemnification Threshold) or (b) for any
amount which exceeds the amount of proceeds (including cash and stock) received
by such Stockholder in connection with the Merger. Each Stockholder shall have
the option of satisfying his or her indemnity obligation in cash and/or by
returning or transferring shares of Pentacon Stock to Pentacon or any other
Indemnified Party. For purposes of calculating the value of the Pentacon Stock
received by a Stockholder and satisfying any indemnity claim by returning or
transferring Pentacon Stock, Pentacon Stock shall be valued at its initial
public offering price as set forth in the Registration Statement.
Notwithstanding any of the foregoing provisions of this Section 11 that
might be read to the contrary, it is the agreement of the parties that the
Indemnification Threshold be given full effect under all circumstances.
Accordingly, insofar as any of the foregoing provisions of this Section 11 may
hold harmless an Indemnified Party before the Indemnification Threshold has been
met, then Pentacon and the Stockholders shall cooperate in good faith to
establish an equitable procedure pursuant to which Pentacon reimburses or causes
the reimbursement to the affected Stockholder(s) of all expenditures and
payments by Stockholders that are intended to be absorbed and borne by any
Indemnified Parties as a result of the prior application of the Indemnification
Threshold or otherwise takes such action as may be reasonably necessary to give
effect to the Indemnification Threshold.
12. TERMINATION OF AGREEMENT
12.1 TERMINATION. This Agreement may be terminated at any time prior to
the Consummation Date solely:
(i) by mutual consent of the boards of directors of Pentacon and the
Company;
(ii) by the Stockholders or the Company (acting through its board of
directors), on the one hand, or by Pentacon (acting through its board of
directors), on the other hand, if the transactions contemplated by this
Agreement to take place at the Closing shall not have been consummated by
February 28, 1998, unless the failure of such transactions to be
consummated is due to the willful failure of the party seeking to
terminate this Agreement to perform any of its obligations under this
Agreement to the extent required to be performed by it prior to or on the
Consummation Date;
-47-
<PAGE>
(iii) by the Stockholders or Company, on the one hand, or by
Pentacon, on the other hand, if a material breach or default shall be made
by the other party in the observance or in the due and timely performance
of any of the covenants or agreements contained herein, and the curing of
such default shall not have been made on or before the Consummation Date
or by the Stockholders or the Company, if the conditions set forth in
Section 8 hereof have not been satisfied or waived as of the Closing Date
or the Consummation Date, as applicable, or by Pentacon, if the conditions
set forth in Section 9 hereof have not been satisfied or waived as of the
Closing Date or the Consummation Date, as applicable;
(iv) pursuant to Section 7.8 hereof;
(v) pursuant to the termination provisions contained in Section 4
hereof; or
(vi) pursuant to the other express terms of this Agreement.
12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section
7.8 hereof, the termination of this Agreement will in no way limit any
obligation or liability of any party based on or arising from a breach or
default by such party with respect to any of its representations, warranties,
covenants or agreements contained in this Agreement including, but not limited
to, legal and audit costs and out of pocket expenses.
13. NONCOMPETITION
13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of
five (5) years following the Consummation Date, for any reason whatsoever,
directly or indirectly, for themselves or on behalf of or in conjunction with
any other person, persons, company, partnership, corporation or business of
whatever nature:
(i) except as disclosed in Schedule 13.1, engage, as an officer,
director, shareholder, owner, partner, joint venturer, or in a managerial
capacity, whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any fastener business or
operation or related services business in direct competition with Pentacon
or any of the subsidiaries thereof, within 100 miles of where the Company
or any of its subsidiaries conducted business prior to the effectiveness
of the Merger (the "Territory");
(ii) except with the prior written consent of Pentacon, call upon
any person who is, at that time, within the Territory, an employee of
Pentacon or any subsidiary thereof for the purpose or with the intent of
enticing such employee away from or out of the employ of Pentacon or any
subsidiary thereof;
(iii) call upon any person or entity which is, at that time, or
which has been, within one (1) year prior to the Consummation Date, a
customer of Pentacon or any subsidiary
-48-
<PAGE>
thereof, of the Company or of any of the Other Founding Companies within
the Territory for the purpose of soliciting or selling products or
services that are in direct competition with Pentacon within the
Territory;
(iv) call upon any prospective acquisition candidate, on any
Stockholder's own behalf or on behalf of any competitor in the fastener
business, which candidate, to the actual knowledge of such Stockholder
after due inquiry, was called upon by Pentacon or any subsidiary thereof
or for which, to the actual knowledge of such Stockholder after due
inquiry, Pentacon or any subsidiary thereof made an acquisition analysis,
for the purpose of acquiring such entity; or
(v) disclose customers, whether in existence or proposed, of the
Company to any person, firm, partnership, corporation or business for any
reason or purpose relating to the fastener business except to the extent
that the Company has in the past disclosed such information to the public
for valid business reasons.
Notwithstanding the above, the foregoing covenant shall not be deemed to
prohibit any Stockholder from acquiring as a passive investment not more than
one percent (1%) of the capital stock of a competing business whose stock is
traded on a national securities exchange or over-the counter.
13.2 DAMAGES. Because of the difficulty of measuring economic losses to
Pentacon as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to Pentacon for which it
would have no other adequate remedy, each Stockholder agrees that the foregoing
covenant may be enforced by Pentacon in the event of breach by such Stockholder,
by injunctions and restraining orders.
13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this Section 13 impose a reasonable restraint on the
Stockholders in light of the activities and business of Pentacon and the
subsidiaries thereof on the date of the execution of this Agreement and the
current plans of Pentacon; but it is also the intent of Pentacon and the
Stockholders that such covenants be construed and enforced in accordance with
the changing activities; business and locations of Pentacon and its subsidiaries
throughout the term of this covenant. During the term of this covenant, if
Pentacon or one of its subsidiaries engages in new and different activities,
enters a new business or establishes new locations for its current activities or
business in addition to or other than the activities or business it is currently
conducting in the locations currently established therefor, then the
Stockholders will be precluded from soliciting the customers or employees of
such new activities or business or from such new location and from directly
competing with such new activities or business within 100 miles of its
then-established operating location(s) through the term of this covenant.
-49-
<PAGE>
13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are
severable and separate, and the unenforceability of any specific covenant shall
not affect the provisions of any other covenant. Moreover, in the event any
court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth are unreasonable, then it is the intention of
the parties that such restrictions be enforced to the fullest extent which the
court deems reasonable, and the Agreement shall thereby be reformed.
13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of any Stockholder
against Pentacon or any subsidiary thereof, whether predicated on this Agreement
or otherwise (except for a claim or cause of action based upon Pentacon's
failure to pay or otherwise tender any of the consideration due to the
Stockholders hereunder), shall not constitute a defense to the enforcement by
Pentacon of such covenants. It is specifically agreed that the period of five
(5) years stated at the beginning of this Section 13, during which the
agreements and covenants of each Stockholder made in this Section 13 shall be
effective, shall be computed by excluding from such computation any time during
which such Stockholder is in violation of any provision of this Section 13. The
covenants contained in Section 13 shall not be affected by any breach of any
other provision hereof by any party hereto and shall have no effect if the
transactions contemplated by this Agreement are not consummated.
13.6 MATERIALITY. The Company and the Stockholders hereby agree that this
covenant is a material and substantial part of this transaction.
14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
14.1 STOCKHOLDERS. The Stockholders and each of the Other Stockholders by
their execution of the Limited Joinder hereto recognize and acknowledge that
they had in the past, currently have, and in the future may possibly have,
access to certain confidential information of the Company, the Other Founding
Companies, and/or Pentacon, such as operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company's, the
Other Founding Companies' and/or Pentacon's respective businesses. The
Stockholders and Other Stockholders agree that they will not disclose such
confidential information to any person, firm, corporation, association or other
entity for any purpose or reason whatsoever, except (a) to authorized
representatives of Pentacon, (b) following the Closing, such information may be
disclosed by the Stockholders as is required in the course of performing their
duties for Pentacon or the Surviving Corporation and (c) to counsel and other
advisers, provided that such advisers (other than counsel) agree to the
confidentiality provisions of this Section 14.1, unless (i) such information
becomes known to the public generally through no fault of the Stockholders or
Other Stockholders (as the case may be), (ii) disclosure is required by law or
the order of any governmental authority under color of law, provided, that prior
to disclosing any information pursuant to this clause (ii), the Stockholders
shall, if possible, give prior written notice thereof to Pentacon and provide
Pentacon with the opportunity to contest such disclosure, or (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party.
-50-
<PAGE>
In the event of a breach or threatened breach by any of the Stockholders or
Other Stockholders of the provisions of this Section, Pentacon shall be entitled
to an injunction restraining such Stockholders or Other Stockholders from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting Pentacon from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
In the event the transactions contemplated by this Agreement are not
consummated, the Stockholders or Other Stockholders shall have none of the
above-mentioned restrictions on their ability to disseminate confidential
information with respect to the Company.
14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that
they had in the past and currently have access to certain confidential
information of the Company, including, but not limited to, customer and prospect
lists, financial information, operational policies, and pricing and cost
policies that are valuable, special and unique assets of the Company's business.
Pentacon and Newco agree that, prior to the Consummation Date, or if the
transactions contemplated by this Agreement are not consummated, they will not,
appropriate or make use of any such information, whether for its own benefit or
the benefit of any other person or entity, for any purpose whatsoever (except
pending the Consummation Date, effecting the transactions contemplated hereby)
disclose such confidential information to any person, firm, corporation,
association or other entity for any purpose or reason whatsoever, except (a) to
authorized representatives of the Company, (b) to counsel and other advisers,
provided that such advisers (other than counsel) agree to the confidentiality
provisions of this Section 14.2, (c) to the Other Founding Companies and their
representatives pursuant to Section 7.1(a), unless (i) such information becomes
known to the public generally through no fault of Pentacon or Newco, (ii)
disclosure is required by law or the order of any governmental authority under
color of law, provided, that prior to disclosing any information pursuant to
this clause (ii), Pentacon and Newco shall, if possible, give prior written
notice thereof to the Company and the Stockholders and provide the Company and
the Stockholders with the opportunity to contest such disclosure, or (iii) the
disclosing party reasonably believes that such disclosure is required in
connection with the defense of a lawsuit against the disclosing party, and (d)
to the public to the extent necessary or advisable in connection with the filing
of the Registration Statement and the IPO and the securities laws applicable
thereto and to the operation of Pentacon as a publicly held entity after the
IPO. In the event of a breach or threatened breach by Pentacon or Newco of the
provisions of this Section, the Company and the Stockholders shall be entitled
to an injunction restraining Pentacon and Newco from disclosing, in whole or in
part, such confidential information. Nothing herein shall be construed as
prohibiting the Company and the Stockholders from pursuing any other available
remedy for such breach or threatened breach, including the recovery of damages.
14.3 DAMAGES. Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 14.1 and 14.2, and
because of the immediate and irreparable damage that would be caused for which
they would have no other adequate remedy, the parties hereto agree that, in the
event of a breach or threatened breach by any of them of the foregoing
covenants, the covenant may be enforced against the other parties by injunctions
and
-51-
<PAGE>
restraining orders or other appropriate equitable relief, without posting any
bond or other security or having to prove irreparable harm or injury.
14.4 SURVIVAL. The obligations of the parties under this Article 14 shall
survive the termination of this Agreement for a period of five years from the
Consummation Date, or without limitation if the transactions contemplated hereby
are not consummated.
15. TRANSFER RESTRICTIONS
15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except
for transfers to immediate family members who agree to be bound by the
restrictions set forth in this Section 15.1 (or trusts or partnerships for the
benefit of charities, the Stockholders or Other Stockholders, family members,
the trustees or partners of which so agree), for a period of one year from the
Closing, except pursuant to Section 17 hereof, none of the Stockholders or Other
Stockholders shall sell, assign, exchange, transfer, encumber, pledge,
distribute, appoint, or otherwise dispose of any shares of Pentacon Stock
received by the Stockholders or Other Stockholders in the Merger. The
certificates evidencing the Pentacon Stock delivered to the Stockholders or
Other Stockholders pursuant to Section 3 of this Agreement will bear a legend
substantially in the form set forth below and containing such other information
as Pentacon may deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED,
TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED
OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT
OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE
WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE
THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT)
AFTER THE DATE SPECIFIED ABOVE.
16. FEDERAL SECURITIES ACT REPRESENTATIONS
16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of
Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement
have not been and will not be registered under the 1933 Act (except as provided
in Section 17 hereof) and therefore may not be resold without compliance with
the 1933 Act. The Pentacon Stock to be acquired by such Stockholders pursuant to
this Agreement is being acquired solely for their own respective accounts, for
investment purposes only, and with no present intention of distributing, selling
or otherwise disposing of it in connection with a distribution. The Stockholders
covenant, warrant and represent that none of the shares of Pentacon Stock issued
to such Stockholders will be offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the 1933 Act and the rules and regulations of the
SEC. All the Pentacon
-52-
<PAGE>
Stock shall bear the following legend in addition to the legend required under
Section 15 of this Agreement:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER
HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW.
16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the
economic risk of an investment in the Pentacon Stock to be acquired pursuant to
this Agreement and can afford to sustain a total loss of such investment and
have such knowledge and experience in financial and business matters that they
are capable of evaluating the merits and risks of the proposed investment in the
Pentacon Stock. The Stockholders party hereto have had an adequate opportunity
to ask questions and receive answers from the officers of Pentacon concerning
any and all matters relating to the transactions described herein including,
without limitation, the background and experience of the current and proposed
officers and directors of Pentacon, the plans for the operations of the business
of Pentacon, the business, operations and financial condition of the Founding
Companies other than the Company, and any plans for additional acquisitions and
the like. The Stockholders have asked any and all questions in the nature
described in the preceding sentence and all questions have been answered to
their satisfaction.
17. REGISTRATION RIGHTS
17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing,
whenever Pentacon proposes to register any Pentacon Stock for its own or others
account under the 1933 Act for a public offering, other than (i) any shelf or
other registration of shares to be used as consideration for acquisitions of
additional businesses by Pentacon and (ii) registrations relating to employee
benefit plans, Pentacon shall give each of the Stockholders and Other
Stockholders prompt written notice of its intent to do so. Upon the written
request of any of the Stockholders given within 30 days after receipt of such
notice, Pentacon shall cause to be included in such registration all of the
Pentacon Stock issued to the Stockholders and Other Stockholders pursuant to
this Agreement (including any stock issued as (or issuable upon the conversion
or exchange of any convertible security, warrant, right or other security which
is issued by Pentacon as) a dividend or other distribution with respect to, or
in exchange for, or in replacement of such Pentacon Stock) which any such
Stockholder and Other Stockholder requests, provided that Pentacon shall have
the right to reduce the number of shares included in such registration to the
extent that inclusion of such shares would, in the written opinion of tax
counsel to Pentacon or its independent auditors, reasonably be likely to
jeopardize the status of the transactions contemplated hereby and by the
Registration Statement as a tax-free organization under Section 351 of the Code.
In addition, if Pentacon is advised in writing in good faith by any managing
underwriter of an underwritten offering of the securities being offered pursuant
to any registration statement under this Section 17.1 that the number of shares
to be sold by persons other than Pentacon is greater than the number of such
shares which can be offered without adversely affecting the offering, Pentacon
may reduce pro rata the
-53-
<PAGE>
number of shares offered for the accounts of such persons (based upon the number
of shares held by such person) to a number deemed satisfactory by such managing
underwriter, provided, that, for each such offering made by Pentacon after the
IPO, such reduction shall be made first by reducing the number of shares to be
sold by persons other than Pentacon, the Stockholders and Other Stockholders and
the Stockholders of the Other Founding Companies (collectively, the
Stockholders, the Other Stockholders and the Stockholders of the other Founding
Companies being referred to herein as the "Founding Stockholders"), and
thereafter, if a further reduction is required, by reducing the number of shares
to be sold by the Founding Stockholders.
17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register
shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as
expeditiously as possible:
(i) Prepare and file with the SEC a registration statement with
respect to such shares and use its best efforts to cause such registration
statement to become effective (provided that before filing a registration
statement or prospectus or any amendments or supplements or term sheets
thereto, Pentacon will furnish a representative of the Stockholders and
Other Stockholders with copies of all such documents proposed to be filed)
as promptly as practical;
(ii) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 120 days;
(iii) Furnish to each Stockholder or Other Stockholder who so
requests such number of copies of such registration statement, each
amendment and supplement thereto and the prospectus included in such
registration statement (including each preliminary prospectus and any term
sheet associated therewith), and such other documents as such Stockholder
or Other Stockholder may reasonably request in order to facilitate the
disposition of the relevant shares;
(iv) Use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Stockholders or Other Stockholders, and to keep such registration or
qualification effective during the period such registration statement is
to be kept effective, provided that Pentacon shall not be required to
become subject to taxation, to qualify to do business or to file a general
consent to service of process in any such states or jurisdictions;
(v) Cause all such shares of Pentacon Stock to be listed or included
on any securities exchanges or trading systems on which similar securities
issued by Pentacon are then listed or included;
-54-
<PAGE>
(vi) Notify each Stockholder or Other Stockholder at any time when a
prospectus relating thereto is required to be delivered under the 1933 Act
within the period that Pentacon is required to keep the registration
statement effective of the happening of any event as a result of which the
prospectus included in such registration statement, together with any
associated term sheet, contains an untrue statement of a material fact or
omits any fact necessary to make the statement therein not misleading,
and, at the request of such Stockholder or Other Stockholder, Pentacon
will prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of the covered shares, such
prospectus will not contain an untrue statement of material fact or omit
to state any fact necessary to make the statements therein not misleading.
All expenses incurred in connection with the registration under this
Article 17 (including all registration, filing, qualification, legal, printer
and accounting fees, but excluding underwriting commissions and discounts),
shall be borne by Pentacon.
17.3 INDEMNIFICATION.
(a) In connection with any registration hereunder, Pentacon shall
indemnify, to the extent permitted by law, each Stockholder and Other
Stockholder against all losses, claims, damages, liabilities and expenses
arising out of or resulting from any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or associated term sheet or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading except insofar as the same are caused by or
contained in or omitted from any information furnished in writing to Pentacon by
such indemnified party expressly for use therein or by any indemnified parties'
failure to deliver a copy of the registration statement or prospectus or any
amendment or supplements thereto after Pentacon has furnished such Indemnified
Party with a sufficient number of copies of the same.
(b) In connection with any registration hereunder, each Stockholder
or Other Stockholder shall furnish to Pentacon in writing such information as is
reasonably requested by Pentacon for use in any such registration statement or
prospectus and will indemnify, to the extent permitted by law, Pentacon, its
directors and officers and each person who controls Pentacon (within the meaning
of the 1933 Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement or material fact or any
omission or alleged omission of a material fact required to be stated in the
registration statement or prospectus or any amendment thereof or supplement
thereto necessary to make the statements therein not misleading, but only to the
extent that such untrue statement or omission is contained in information so
furnished in writing by such Stockholder specifically for use in preparing the
registration statement. Notwithstanding the foregoing, the liability of a
Stockholder or Other Stockholder under this Section 17.3 shall be limited to an
amount equal to the net proceeds actually received by such Stockholder or Other
Stockholder from the sale of the relevant shares covered by the registration
statement.
-55-
<PAGE>
(c) Any person entitled to indemnification under this Section will
(i) give prompt notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified parties'
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. Any failure to give prompt notice shall
deprive a party of its right to indemnification hereunder only to the extent
that such failure shall have adversely affected the indemnifying party. If the
defense of any claim is assumed, the indemnifying party will not be subject to
any liability for any settlement made without its consent (but such consent
shall not be unreasonably withheld). An indemnifying party who is not entitled
or elects not to assume the defense of a claim, will not be obligated to pay the
fees and expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party, a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant
to Section 17.1 covering an underwritten registered offering, Pentacon and each
participating holder agree to enter into a written agreement with the managing
underwriters in such form and containing such provisions as are customary in the
securities business for such an arrangement between such managing underwriters
and companies of Pentacon's size and investment stature, including
indemnification.
17.5 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the sale of Pentacon
stock to the public without registration, Pentacon agrees to use commercially
reasonable efforts to:
(i) make and keep public information regarding Pentacon available as
those terms are understood and defined in Rule 144 under the 1933 Act for
a period of four years beginning 90 days following the effective date of
the Registration Statement;
(ii) file with the SEC in a timely manner all reports and other
documents required of Pentacon under the 1933 Act and the 1934 Act at any
time after it has become subject to such reporting requirements; and
(iii) so long as a Stockholder or Other Stockholder owns any
restricted Pentacon Stock, furnish to each Stockholder or Other
Stockholder forthwith upon written request a written statement by Pentacon
as to its compliance with the reporting requirements of Rule 144 (at any
time from and after 90 days following the effective date of the
Registration Statement, and of the 1933 Act and the 1934 Act (any time
after it has become subject to such reporting requirements), a copy of the
most recent annual or quarterly report of Pentacon, and such other reports
and documents so filed as a Stockholder or Other Stockholder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing a Stockholder or Other Stockholder to sell any such shares
without registration.
-56-
<PAGE>
18. GENERAL
18.1 COOPERATION. The Company, Stockholders or Other Stockholders,
Pentacon and Newco shall each deliver or cause to be delivered to the other on
the Consummation Date, and at such other times and places as shall be reasonably
agreed to, such additional instruments as the other may reasonably request for
the purpose of carrying out this Agreement. The Company will cooperate and use
its reasonable efforts to have the present officers, directors and employees of
the Company cooperate with Pentacon on and after the Consummation Date in
furnishing information, evidence, testimony and other assistance in connection
with any tax return filing obligations, actions, proceedings, arrangements or
disputes of any nature with respect to matters pertaining to all periods prior
to the Consummation Date.
18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
Pentacon, and the heirs and legal representatives of the Stockholders.
18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Stockholders, the
Company, Newco and Pentacon and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement, upon
execution, constitutes a valid and binding agreement of the parties hereto
enforceable in accordance with its terms and may be modified or amended only (i)
pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a
written instrument executed by the Stockholders, the Company, Newco and
Pentacon, acting through their respective officers or trustees, duly authorized
by their respective Boards of Directors. Any disclosure made on any Schedule
delivered pursuant hereto shall be deemed to have been disclosed for purposes of
any other Schedule required hereby, provided that the Company shall make a good
faith effort to cross reference disclosure, as necessary or advisable, between
related Schedules, and provided further that the failure to do so will not
affect the validity of such disclosure.
18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party
represents and warrants that it employed no broker or agent in connection with
this transaction and agrees to indemnify the other parties hereto against all
loss, cost, damages or expense arising out of claims for fees or commission of
brokers employed or alleged to have been employed by such indemnifying party.
-57-
<PAGE>
18.6 EXPENSES. Whether or not the transactions herein contemplated shall
be consummated, Pentacon will pay the fees, expenses and disbursements of
Pentacon and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement and any amendments thereto,
including all costs and expenses incurred in the performance and compliance with
all conditions to be performed by Pentacon under this Agreement, including the
fees and expenses of Ernst & Young LLP, Andrews & Kurth L.L.P., and any other
person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures
II, L.C., and the costs of preparing the Registration Statement. Except as
otherwise agreed in writing by Pentacon, each Stockholder and Other Stockholder
shall pay their respective fees, expenses and disbursements of counsel and other
professionals in connection with this transaction and shall pay all sales, use,
transfer, real property transfer, recording, gains, stock transfer and other
similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger,
other than Transfer Taxes, if any, imposed by the State of Delaware. Each
Stockholder and Other Stockholder shall file all necessary documentation and
Returns with respect to such Transfer Taxes. In addition, each Stockholder and
Other Stockholder acknowledges that he, and not the Company or Pentacon, will
pay all taxes due upon receipt of the consideration payable pursuant to Section
2 hereof. The Stockholders and Other Stockholders acknowledge that the risks of
the transactions contemplated hereby include tax risks, with respect to which
the Stockholders are relying solely on the opinion contemplated by Section 8.12
hereof.
18.7 NOTICES. All notices of communication required or permitted hereunder
shall be in writing and may be given by depositing the same in United States
mail, addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person to
an officer or agent of such party.
(a) If to Pentacon, or Newco, addressed to them at:
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
with copies to:
Bruce Taten, Esquire
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
and
Christopher S. Collins, Esquire
Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
-58-
<PAGE>
Houston, Texas 77002
(b) If to the Stockholders, addressed to them at:
Benjamin E. Spence, Jr.
3842 Crestwood Drive
Schnecksville, Pennsylvania 18078
Richard D. Knorr
49 Baynard Cove Road
Hilton Head, South Carolina 29928
with copies to:
Barry N. Mosebach
Stevens & Lee
190 Brodhead Road, Suite 200
P. O. Box 20830
Lehigh Valley, Pennsylvania 18002
(c) If to the Company, addressed to it at:
Benjamin E. Spence, Jr.
Sales Systems, Limited
810 Hickory Lane
Allentown, Pennsylvania 18106
(d) If to the Other Stockholders addressed to them at:
William C. Creecy
3602 Harding Drive
Chesapeake, Virginia 23321
with a copy to:
Cooper, Spong & Davis
Central Fidelity Bank Building
200 High Street - Suite 500
P. O. Box 1475
Portsmouth, Virginia 23705-1475
Attention: Albert J. Taylor Jr., Esquire
James D. Mitchell
-59-
<PAGE>
432 Springview Lane
Phoenixville, Pennsylvania 19460
with a copy to:
Garland D. Cherry, Sr., Esquire
202 A. North Monroe Street
Media, Pennsylvania 19063
or to such other address or counsel as any party hereto shall specify pursuant
to this Section 18.7 from time to time.
18.8 GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Delaware.
18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, covenants and agreements of the parties made herein and at the time
of the Closing or in writing delivered pursuant to the provisions of this
Agreement shall survive the consummation of the transactions contemplated hereby
and any examination on behalf of the parties until the applicable Expiration
Date.
18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
18.11 TIME. Time is of the essence with respect to this Agreement.
18.12 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
18.13 REMEDIES CUMULATIVE. Except as set forth in Section 11.4, no right,
remedy or election given by any term of this Agreement shall be deemed exclusive
but each shall be cumulative with all other rights, remedies and elections
available at law or in equity.
-60-
<PAGE>
18.14 CAPTIONS. The headings of this Agreement are inserted for
convenience only, shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
-61-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PENTACON, INC.
By:_________________________________
Mark E. Baldwin
Chief Executive Officer
SALES SYSTEMS LIMITED ACQUISITION
COMPANY
By:_________________________________
Mark E. Baldwin
President
SALES SYSTEMS, LIMITED
By:_________________________________
Benjamin E. Spence, Jr.
President
Stockholders:
____________________________________
BENJAMIN E. SPENCE, JR.
____________________________________
RICHARD D. KNORR
-62-
<PAGE>
ANNEX I (SSL)
CONSIDERATION TO BE PAID TO THE STOCKHOLDERS
STOCKHOLDER OR SHARES OF COMMON STOCK OF
OTHER STOCKHOLDER PENTACON, INC. MERGER CASH
------------- -------------
Benjamin Spence, Jr .................... 232,132 $1,169,856.50
Richard Knorr .......................... 232,132 $1,169,856.50
James D. Mitchell ...................... 59,003 0.00
William C. Creecy ...................... 25,287 0.00
------------- -------------
548,554 $2,339,713.00
============= =============
MINIMUM VALUE: ......................... $7,951,420.40
<PAGE>
ANNEX II
Sales Systems, Limited Stock Ownership
Benjamin Spence, Jr. 12.5 shares
Richard D. Knorr 12.5 shares
James D. Mitchell ___ shares
William C. Creecy ___ shares
<PAGE>
LIMITED JOINDER
JAMES D. MITCHELL, an adult individual with an address at 432
Springview Lane, Phoenixville, Pennsylvania 19460 ("Mitchell"), and WILLIAM C.
CREECY, an adult individual with an address at 3602 Harding Drive, Chesapeake,
Virginia 23321 ("Creecy") (Mitchell and Creecy shall be collectively referred to
herein as the "Other Stockholders"), each intending to be legally bound and to
induce Pentacon, Inc., a Delaware corporation ("Pentacon"), to enter into the
foregoing Agreement and Plan of Organization dated as of December 1, 1997 (the
"Agreement") among Pentacon, Sales Systems Limited Acquisition Corp. and Sales
Systems, Limited, hereby join in the Agreement for the purposes of making and
agreeing to perform and be bound by all of the representations, warranties,
covenants and agreements set forth in (a) Sections 5.3 and 5(B) of the Agreement
pertaining to title to the shares of Company Stock owned by the Other
Stockholders and various related matters and (b) Section 14 of the Agreement
relating to nondisclosure of confidential information all in accordance with
terms and conditions set forth in the Agreement (all of which terms and
conditions including, but not limited to, all defined terms relating thereto)
are hereby incorporated by reference into this Limited Joinder and made a part
hereof.
Capitalized terms used in this Limited Joinder that are not
otherwise defined herein shall have the respective meanings assigned to them in
the Agreement.
This Limited Joinder has been duly executed by the Other
Shareholders as of the 1st day of December, 1997.
Witness:
_____________________________ _________________________________ (SEAL)
James D. Mitchell
_____________________________ _________________________________ (SEAL)
William C. Creecy
EXHIBIT 21.1
SUBSIDIARIES
1. Alatec Products Acquisition Company, a Delaware corporation
2. AXS Solutions Acquisition Company, a Delaware corporation
3. Maumee Industries Acquisition Company, a Delaware corporation
4. Sales Systems Limited Acquisition Company, a Delaware corporation
5. Capitol Bolt & Supply Acquisition Company, a Delaware corporation
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated October 16, 1997, with respect to the financial
statements of Pentacon, Inc., dated November 21, 1997 (except for Note 3, as to
which the date is November 26, 1997) with respect to the financial statements of
Alatec Products, Inc., dated November 7, 1997 with respect to the financial
statements of AXS Solutions, Inc., dated October 15, 1997 with respect to the
financial statements of Maumee Industries, Inc., and dated October 20, 1997 with
respect to the financial statements of Sales Systems, Limited included in the
Registration Statement (Form S-1) and related Prospectus of Pentacon, Inc.
ERNST & YOUNG LLP
Houston, Texas
December 1, 1997
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement and related
prospectus on Form S-1 of our report, dated November 21, 1997 (except for Note
3, as to which the date is November 26, 1997), relating to the consolidated
financial statements of Alatec Products, Inc. as of December 31, 1996 and for
the year then ended. We also consent to the reference to our Firm under the
caption "Experts" appearing in the prospectus.
MCGLADREY & PULLEN, LLP
Pasadena, California
December 1, 1997
EXHIBIT 23.4
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Pentacon, Inc.
("Pentacon") as a director to be appointed after consummation of the initial
public offering of Pentacon.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 2nd day of December, 1997.
/s/ DONALD LIST
Donald List
EXHIBIT 23.5
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Pentacon, Inc.
("Pentacon") as a director to be appointed after consummation of the initial
public offering of Pentacon.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 2nd day of December, 1997.
/s/ JACK FATICA
Jack Fatica
EXHIBIT 23.6
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Pentacon, Inc.
("Pentacon") as a director to be appointed after consummation of the initial
public offering of Pentacon.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 2nd day of December, 1997.
/s/ MICHAEL PETERS
Michael Peters
EXHIBIT 23.7
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Pentacon, Inc.
("Pentacon") as a director to be appointed after consummation of the initial
public offering of Pentacon.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 2nd day of December, 1997.
/s/ BENJAMIN SPENCE
Benjamin Spence
EXHIBIT 23.8
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Pentacon, Inc.
("Pentacon") as a director to be appointed after consummation of the initial
public offering of Pentacon.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 2nd day of December, 1997.
/s/ MARY MCCLURE
Mary McClure
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1050
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1050
<PP&E> 7210
<DEPRECIATION> 0
<TOTAL-ASSETS> 276,398
<CURRENT-LIABILITIES> 292,945
<BONDS> 0
0
0
<COMMON> 23,800
<OTHER-SE> (40,347)
<TOTAL-LIABILITY-AND-EQUITY> 276,398
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,597)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,597)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,597)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
