AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1998.
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)
5085
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
DELAWARE 76-0531585
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9432 OLD KATY ROAD, SUITE 222
HOUSTON, TEXAS 77055
(713) 463-8852
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRIAN FONTANA
CHIEF FINANCIAL OFFICER
9432 OLD KATY ROAD, SUITE 222
HOUSTON, TEXAS 77055
(713) 463-8852
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRUCE M. TATEN MICHAEL C. BLANEY
SENIOR VICE PRESIDENT AND GENERAL COUNSEL ANDREWS & KURTH L.L.P.
PENTACON, INC. 600 TRAVIS STREET, SUITE 4200
9432 OLD KATY ROAD, SUITE 222 HOUSTON, TEXAS 77002
HOUSTON, TEXAS 77055 (713) 220-4200
(713) 463-8850
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time 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. [X]
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 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 Secrities Act
registration 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. [ ]
REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C>
Common Stock, par value $.01 3,350,000 (1) $ 42,712,500 $ 12,601 (2)
</TABLE>
(1) The number of shares of Common Stock registered herein is subject to
adjustment to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c), based on the average of the high and low
prices of the Common Stocks on the New York Stock Exchange on April 7,
1998.
-----------------------
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>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used by the registrant in connection with the issuance and sale from time to
time by the registrant of Common Stock in connection with its acquisition of the
securities and assets of other businesses (the "Company Prospectus") and one to
be used by certain persons who have received Common Stock of the registrant in
connection with acquisitions by the registrant of securities or assets held by
such persons, or their transferees, and who wish to offer and sell such Common
Stock in transactions in which they and any broker-dealer through whom such
Common Stock are sold may be deemed to be Underwriters within the meaning of the
Securities Act of 1933, as amended (the "Selling Stockholders Prospectus"). The
Company Prospectus and the Selling Stockholders Prospectus will be identical in
all respects except that they will contain different front and back cover pages
and the Selling Stockholders Prospectus will contain an additional section under
the caption "Manner of Offering." The Company Prospectus is included herein and
is followed by those pages to be used in the Selling Stockholders Prospectus
which differ from, or are in addition to, those in the Company Prospectus. Each
of the alternate or additional pages for the Selling Stockholders Prospectus
included herein has been labeled "Alternate Page for Selling Stockholders
Prospectus." If required pursuant to Rule 424(b) of the General Rules and
Regulations under the Securities Act of 1933, as amended, ten copies of each of
the prospectuses in the forms in which they are used after the registration
statement becomes effective will be filed with the Securities and Exchange
Commission.
<PAGE>
PROSPECTUS
3,350,000 Shares
Pentacon, Inc.
(Logo)
Common Stock
------------------
This Prospectus relates to the offer and sale from time to time by
Pentacon, Inc., (the "Company" or "Pentacon") of up to 3,350,000 shares of
Common Stock, in connection with acquisitions of other businesses, properties,
or securities. The consideration for any such acquisition may consist of Common
Stock, cash, notes or other evidences of debt, assumptions of liabilities or a
combination thereof. The Common Stock covered by this Prospectus may be issued
in exchange for shares of capital stock, partnership interests or other assets
representing an interest, direct or indirect, in other companies or other
entities, in exchange for assets used in or related to the business of such
entities or otherwise pursuant to the agreements providing for such
acquisitions. The terms of such acquisitions and of the issuance of Common Stock
under the acquisition agreements will generally be determined by direct
negotiations with the owners or controlling persons of the business or
properties to be acquired or, in the case of entities that are more widely held,
through exchange offers to Stockholders or documents soliciting the approval of
statutory mergers, consolidations or sales of assets. It is anticipated that the
Common Stock issued in any such acquisition will be valued at a price reasonably
related to the market value of the Common Stock either at the time of agreement
on the terms of an acquisition or at the time of delivery of the Common Stock.
It is not expected that underwriting discounts or commissions will be paid
by the Company in connection with issuances of Common Stock under this
Prospectus. However, finders' fees or brokers' commissions may be paid from time
to time in connection with specific acquisitions, and such fees may be paid
through the issuance of Common Stock covered by this Prospectus. Any person
receiving such a fee may be deemed to be an underwriter within the meaning of
the Securities Act of 1933.
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "JIT." The Company will apply to have the Common Stock offered
hereby approved for trading on the NYSE. On April 7, 1998, the closing price of
the Common Stock on the NYSE was $12.75 per share. As of March 31, 1998 the
Company had 14,750,000 shares of Common Stock outstanding.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 HEREOF.
------------------
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.
------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
PROSPECTUS SUMMARY
CONCURRENTLY WITH THE CLOSING OF ITS INITIAL OFFERING (THE "OFFERING")
ON MARCH 10, 1998, PENTACON ACQUIRED, 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 HAVE BEEN ADJUSTED FOR THE EFFECTS OF CERTAIN PRO FORMA ADJUSTMENTS
TO THE HISTORICAL FINANCIAL STATEMENTS. 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 acquired the five Founding
Companies, which have been in business an average of 25 years and which had
combined net sales of $120.0 million for the twelve months ended December 31,
1996 and $151.8 million for the twelve months ended December 31, 1997. While
total U.S. sales of fasteners have increased at a compound annual rate of
approximately 4.1% during the four years ended December 31, 1996, the combined
net sales of the Founding Companies have increased at a compound annual rate of
approximately 13.3% 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.
1
<PAGE>
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,
Dana 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 or be in compliance
with the International Standards Organization ("ISO") standards for
distribution companies. Two of the Founding Companies are already
ISO-9002 certified. The other Founding Companies have commenced
application for ISO-9002 or similar certification, and the Company
expects the substantial majority of its currently uncertified locations
to be ISO compliant or certified in 1998.
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.
2
<PAGE>
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.
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.
3
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
Pentacon acquired the Founding Companies simultaneously with the
closing 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." 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.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
PRO FORMA COMBINED(1) PRO FORMA COMBINED(1) PRO FORMA COMBINED(1)(9)
--------------------- --------------------- ------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues ........................... $ 146,117 $ 39,042 $ 151,844
Cost of goods sold ................. 96,659 25,367 99,697
--------------------- --------------------- ------------------------
Gross profit ..................... 49,458 13,675 52,147
Selling, general and administrative
expenses(2) ..................... 35,551 10,819 37,860
Goodwill amortization(3) ........... 1,463 366 1,463
--------------------- --------------------- ------------------------
Operating income ................. 12,444 2,490 12,824
Interest and other income (expense),
net(4) .......................... (909) (229) (869)
--------------------- --------------------- ------------------------
Income before income taxes ....... 11,535 2,261 11,955
Income taxes ....................... 5,336 1,077 5,508
--------------------- --------------------- ------------------------
Net income ....................... $ 6,199 $ 1,184 $ 6,447
===================== ===================== ========================
Net income per share ............... $ 0.42 $ 0.08 $ 0.44
Shares used in computing pro forma
net income per share(5) ......... 14,770,000 14,770,000 14,770,000
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA COMBINED(6) AS ADJUSTED(7)
--------------------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash ................................................ $ 1,856 $ 1,856
Working capital ..................................... 23,899 32,779
Total assets ........................................ 133,029 132,089
Total debt (including capital lease obligations)(8) . 58,893 13,844
Stockholders' equity ................................ 49,053 93,163
</TABLE>
- ------------
(1) The pro forma combined income statement data assumes that the
Acquisitions and Offering were closed at the beginning of the period
presented (except for Capitol, whose historical results for twelve
months from September 1, 1996 to August 31, 1997 were used for the
twelve months ended September 30, 1997 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 is 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
4
<PAGE>
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 twelve months ended September 30, 1997, the three months ended
December 31, 1997 and the twelve months ended December 31, 1997 pro
forma combined income statement data reflects an aggregate of
approximately $2,975,000, $1,056,000 and $3,202,000, respectively, in
pro forma reductions in salary and benefits of the owners of the
Founding Companies to which they have agreed prospectively, and
$600,000, $150,000 and $600,000, respectively, in pro forma increases
in salary and benefits to the corporate management and $159,000,
$40,000 and $159,000, respectively, 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 respective 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 for the twelve
months ended September 30, 1997, the three months ended December 31,
1997 and the twelve months ended December 31, 1997 of $1,545,000,
$331,000 and $ 1,490,000, respectively, related to repayment of
indebtedness with the proceeds from the Offering.
(5) Consists of (i) 6,720,000 shares to be issued to the owners of the
Founding Companies, (ii) 515,000 shares issued to the management of
Pentacon, (iii) 20,000 shares granted under restricted stock grants to
two non-employee directors, (iv) 2,295,000 shares issued to the
Company's original investor, McFarland, Grossman Capital Ventures, II,
L.C. ("MGCV"), (v) 5,200,000 shares sold in the Offering, and (vi) the
dilutive effect of warrants to purchase 50,000 shares at an exercise
price equal to $6.00 per share using the treasury stock method.
Subsequent to September 30, 1997 options to purchase 1,050,000 shares
at the initial public offering price were issued to officers, directors
and employees of the Company and are currently outstanding.
(6) The pro forma combined balance sheet data assumes that the Acquisitions
were closed on December 31, 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 a price of $10.00 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 "Certain Transactions."
(8) The pro forma combined debt includes $28,662,381 for the obligation to
pay the cash portion of the purchase price for the Founding Companies.
(9) Pro forma combined income statement data has been included to provide a
presentation of such financial data for the Company's most recently
completed twelve-month period.
5
<PAGE>
SUMMARY INDIVIDUAL FOUNDING COMPANY AND COMBINED FINANCIAL DATA
The following table presents summary historical financial data for the
Founding Companies and Pentacon 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, nor does it 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 Company
has adopted a fiscal year-end of September 30. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Introduction."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED NINE MONTHS ENDED TWELVE MONTHS
DECEMBER 31, ENDED DECEMBER 31, ENDED
--------------------- SEPTEMBER 30, -------------------- DECEMBER 31,
1995 1996 1997 1996 1997 1997
--------- -------- ------------ -------- -------- ------------
(IN THOUSANDS)
UNAUDITED
------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALATEC:
Net sales ...................................... $ 41,204 $ 44,726 $ 42,296 $ 11,458 $ 14,502 $ 56,798
Gross profit ................................... 15,008 18,019 17,182 4,488 5,948 23,130
Operating income ............................... 3,723 5,201 5,518 1,007 531 6,049
AXS:
Net sales ...................................... $ 20,228 $ 23,177 $ 22,002 $ 8,566 $ 7,412 $ 29,414
Gross profit ................................... 7,234 8,124 6,726 2,960 2,426 9,152
Operating income ............................... 2,524 2,477 1,747 1,063 628 2,375
CAPITOL(1):
Net sales ...................................... $ 9,769 $ 10,234 $ 9,043 $ 2,494 $ 2,839 $ 11,882
Gross profit ................................... 2,882 3,135 2,717 797 898 3,615
Operating income (loss) ........................ 233 167 247 18 (34) 213
MAUMEE:
Net sales ...................................... $ 20,582 $ 26,235 $ 27,473 $ 7,072 $ 10,542 $ 38,015
Gross profit ................................... 4,482 6,522 7,916 1,549 3,109 11,025
Operating income (loss) ........................ (144) 1,245 1,287 38 963 2,250
SSL:
Net sales ...................................... $ 12,274 $ 15,663 $ 11,988 $ 3,725 $ 3,747 $ 15,735
Gross profit ................................... 4,238 5,168 3,931 1,192 1,294 5,225
Operating income (loss) ........................ 512 569 834 (369) (74) 760
PENTACON:
Net sales ...................................... $ -- $ -- $ -- $ -- $ -- $ --
Gross profit ................................... -- -- -- -- -- --
Operating loss ................................. -- -- (18) -- (4,786) (4,804)
HISTORICAL COMBINED:(2)
Net sales ...................................... $ 104,057 $120,035 $ 112,802 $ 33,315 $ 39,042 $ 151,844
Gross profit ................................... 33,844 40,968 38,472 10,986 13,675 52,147
Operating income (loss) ........................ 6,848 9,659 9,615 1,757 (2,772) 6,843
PRO FORMA COMBINED(3):
Net sales ...................................................................................................... $ 151,844
Gross profit ................................................................................................... 52,147
Operating income(4) ............................................................................................ 12,824
</TABLE>
6
<PAGE>
- ------------
(1) The financial data presented on a historical basis for Capitol is based
on the years ended October 31, 1995 and 1996, the nine months ended
August 31, 1997, the three months ended November 30, 1996, and the
three months ended December 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, 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 is 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) $3,202,000 in pro
forma reductions in salary and benefits to the owners of the Founding
Companies; (ii) $600,000 increases in salary and benefits to corporate
management; (iii) $159,000 of expense reductions for the effect of
revisions of certain lease agreements between certain stockholders of
the Founding Companies and those Founding Companies; (iv) a charge of
approximately $1,463,000 related to amortization of goodwill over a
40-year period for the twelve months to be recorded as a result of the
Acquisitions; and (v) the elimination of the non-recurring, non-cash
compensation charge of $4,680,000 recorded by Pentacon, Inc.
7
<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 March 1997 but until March 10, 1998 conducted
no operations other than in connection with the Offering and the Acquisitions.
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 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
8
<PAGE>
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 has obtained a bank line
of credit of approximately $50 million, and a commitment for a best efforts to
syndicate a $25 million loan facility, 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 "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 enter new
markets successfully. 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") 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 economically or that the Company will not
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 achieve
fully certain contemplated operating efficiencies and competitive advantages
until it has fully coordinated and integrated the MIS. Until the Company
establishes coordinated and integrated MIS, which may not occur for several
years, it will rely primarily on the separate systems of the Founding Companies.
After the MIS are integrated, the Company will rely heavily on them in its daily
operations. Consequently, any interruption in the operation of the MIS may have
a material adverse effect on the Company's business, financial condition and
results of operations.
9
<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."
10
<PAGE>
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's executive officers and directors, former stockholders of
the Founding Companies and entities affiliated with them beneficially own
approximately 61.5% of the outstanding shares of Common Stock. These holders of
Common Stock, if acting in concert, are 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."
PRIVATE SALE OF COMMON STOCK TO STOCKHOLDERS OF THE FOUNDING COMPANIES
Due to changes in market conditions and certain delays in the
consummation of the Offering, the stockholders of the Founding Companies who are
parties to the agreements (the "Acquisition Agreements") in connection with the
Acquisitions (the "Founding Company Stockholders") may have had a right under
certain provisions of the Acquisition Agreements to terminate the Acquisition
Agreements. The Founding Company Stockholders have agreed, however, not to
exercise such rights and to proceed with the transactions contemplated by the
Acquisition Agreements. The decision by the Founding Company Stockholders not to
exercise any such termination rights could, arguably, impact the private
placement exemption available for the offer and sale of Common Stock pursuant to
the Acquisition transactions. More specifically, if the offers and sales of
Common Stock pursuant to the Acquisition Agreements were deemed to be integrated
with the Offering (i.e., to be part of the public offering), a private placement
exemption from the registration requirements of the Securities Act would not be
available and certain rescission rights would be available to the Founding
Company Stockholders under the Securities Act. The Company, however, believes
that the offer and sale of Common Stock to the Founding Company Stockholders
would not be integrated with the Offering and would continue to qualify for a
private placement exemption. Furthermore, the Founding Company Stockholders
entered into agreements with the Company pursuant to which the Founding Company
Stockholders agreed (i) not to pursue any rescission rights which might be
available and (ii) to contribute any such rights to the Company in exchange for
the merger consideration payable under the Acquisition Agreements. There can be
no assurances that the Founding Company Stockholders' agreement to not pursue
any rescission rights will be enforceable under State securities laws.
Furthermore, Section 14 of the Securities Act provides that any provision
requiring any person acquiring securities to waive compliance with the
provisions of the Securities Act is void. In the event that a claim for
rescission is brought by a substantial number of the Founding Company
Stockholders and a court were to hold that (i) the private placement exemption
was not available for the sale of Common Stock to the Founding Company
Stockholders, (ii) the Founding Company Stockholders are entitled to rescission
rights, (iii) the waiver agreements are unenforceable and (iv) the
recontribution agreements are unenforceable, the Company's operating results and
financial condition could be materially adversely affected. The total value of
the Common Stock delivered to the Founding Company Stockholders in connection
with the Acquisitions was $53.8 million. The Company believes that a private
placement exemption continues to exist and would vigorously resist any efforts
by the Founding Company Stockholders to assert rescission rights or any
noncompliance by the Founding Company Stockholders with the waiver or
recontribution agreements. See "Certain Transactions -- Organization of the
Company."
VOLATILITY OF MARKET PRICE
The market price of the Common Stock may 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.
11
<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of March 31, 1998, 14,750,000 shares of Common Stock, including
667,000 shares of Restricted Common Stock were outstanding. The 5,200,000 shares
sold in the Offering (other than shares purchased by affiliates of the Company)
are 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. As of March 31,
1998, the Company also had outstanding options to purchase 1,050,000 shares of
Common Stock at $10.00 per share and warrants to purchase 50,000 shares at $6.00
per share. Currently, options to purchase an additional 565,000 shares are
issuable pursuant to the Company's 1998 Stock Plan. The Company has filed a
registration statement under the Securities Act for all shares issuable upon
exercise of options granted under the Company's 1998 Stock Plan. 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
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 Second Amended and Restated 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 Second Amended and Restated 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."
12
<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 acquired the Founding Companies simultaneously
with 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 for
the twelve months ended December 31, 1996 and $151.8 million for the twelve
months ended December 31, 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 274 people. Donald
B. List, the President of Alatec, has been employed by Alatec for 20 years,
signed a five-year employment agreement with Alatec to continue to serve as
President of Alatec following consummation of the Offering and is 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 incorporated in 1965 and Champion
was incorporated in 1967. 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 or its predecessors for
more than 30 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 signed a five-year employment agreement with AXS to
continue in his current position. Following the consummation of the Offering,
Jack L. Fatica became 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, signed a five-year employment agreement with Capitol to continue
to serve as President of Capitol following consummation of the Offering and
became 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 142 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. Upon consummation of the Offering, Mr.
Peters signed a five-year employment agreement with Maumee to continue to serve
in his current position. Mr. Black has signed an Advisory Agreement with
Pentacon to provide advisory services to Pentacon. Following the consummation of
the Offering, Mr. Peters became a director of the Company.
13
<PAGE>
SALES SYSTEMS, LIMITED -- Sales Systems, Limited ("SSL"), headquartered
in Allentown, Pennsylvania, was founded in 1979 and prior to consummation of the
Offering, was 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 signed a five-year employment agreement with
SSL to continue to serve in their current positions. Following the consummation
of the Offering, Mr. Spence became a director of the Company.
Pentacon's executive offices are located at 9432 Old Katy Road, Suite
222, Houston, Texas 77055, and its telephone number is 713-463-8850.
14
<PAGE>
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered
and issued by the Company from time to time in connection with the acquisitions
of the securities and assets of other businesses. Other than the securities and
assets acquired, there will be no proceeds to the Company from these offerings.
As of the date of this Prospectus, the Company did not have any probable
material acquisitions.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has traded on the NYSE since March 10, 1998.
The high and low sale prices for the Common Stock for the period from March 10,
1998 through April 7, 1998 were $14.00 and $11.00, respectively. At March 31,
1998, there were approximately 77 stockholders of record of the Company's Common
Stock. On April 7, 1998, the last reported sale of the Common Stock on the NYSE
was $12.75 per share.
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 contains certain restrictions on
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."
15
<PAGE>
SELECTED FINANCIAL DATA
Pentacon acquired the Founding Companies simultaneously with the
consummation of the Offering. Pentacon has adopted a fiscal year-end of
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, and as of and for the three months ended December 31, 1996
and 1997 has 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>
ALATEC
------------------------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ................................................ $ 30,935 $ 33,700 $ 41,204 $ 44,726 $ 42,296
Cost of goods sold ....................................... 20,004 21,926 26,196 26,707 25,114
-------- -------- -------- -------- --------
Gross profit ........................................... 10,931 11,774 15,008 18,019 17,182
Selling, general and admini-
strative expenses(2) ................................... 9,795 10,238 11,285 12,818 11,664
Goodwill amortization(3) ................................. -- -- -- -- --
-------- -------- -------- -------- --------
Operating income ....................................... 1,136 1,536 3,723 5,201 5,518
Interest and other income
(expense), net(4) ...................................... (885) (699) (1,304) (1,062) (989)
-------- -------- -------- -------- --------
Income before income
taxes ................................................ 251 837 2,419 4,139 4,529
Income taxes ............................................. 97 384 995 1,628 1,860
-------- -------- -------- -------- --------
Net income ............................................. $ 154 $ 453 $ 1,424 $ 2,511 $ 2,669
======== ======== ======== ======== ========
Net income per share ................................................................................................
Shares used in computing pro forma net income per share(5)...........................................................
<CAPTION>
THE COMPANY
ALATEC -----------------------------
------------------- PRO FORMA COMBINED
THREE MONTHS -----------------------------
ENDED TWELVE MONTHS
DECEMBER 31, ENDED THREE MONTHS
------------------- SEPTEMBER 30, DECEMBER 31,
1996 1997 1997(1) 1997(1)
-------- ------- ------------ ------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ................................................ $ 11,458 $14,502 $ 146,117 $ 39,042
Cost of goods sold ....................................... 6,970 8,554 96,659 25,367
-------- ------- ------------ ------------
Gross profit ........................................... 4,488 5,948 49,458 13,675
Selling, general and admini-
strative expenses(2) ................................... 3,481 5,417 35,551 10,819
Goodwill amortization(3) ................................. -- -- 1,463 366
-------- ------- ------------ ------------
Operating income ....................................... 1,007 531 12,444 2,490
Interest and other income
(expense), net(4) ...................................... (215) 283 (909) (229)
-------- ------- ------------ ------------
Income before income
taxes ................................................ 792 248 11,535 2,261
Income taxes ............................................. 317 103 5,336 1,077
-------- ------- ------------ ------------
Net income ............................................. $ 475 $ 145 $ 6,199 $ 1,184
======== ======= ============ ============
Net income per share ........................................................... $ 0.42 $ 0.08
Shares used in computing pro forma net income per share(5)...................... 14,770,000 14,770,000
<CAPTION>
ALATEC
--------------------------------------------------------------------- THE COMPANY
AS OF DECEMBER 31, AS OF AS OF ----------------------------
------------------------------------- SEPTEMBER 30, DECEMBER 31, PRO FORMA AS
1993 1994 1995 1996 1997 1997 COMBINED(6) ADJUSTED(7)
------- ------- ------- ------- -------------- -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash ......................... $ 95 $ 237 $ 117 $ 256 $ 733 $ -- $ 1,856 $ 1,856
Working capital .............. 3,611 3,835 13,308 17,130 20,155 20,479 23,899 32,779
Total assets ................. 15,255 19,902 23,226 28,519 34,911 36,855 133,029 132,089
Total debt (including capital
lease obligations) ........ 7,403 9,671 10,698 11,588 14,050 14,298 58,893(8) 13,844
Stockholders' equity ......... 3,662 3,695 5,119 7,630 8,384 8,529 49,053 93,163
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
16
<PAGE>
- -----------
(1) The pro forma combined income statement data assumes that the
Acquisitions and Offering were closed at the beginning of the period
presented (except for Capitol, whose historical results for twelve
months from September 1, 1996 to August 31, 1997 were used for the
twelve months ended September 30, 1997 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 is 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 twelve months ended September 30, 1997 and the three months ended
December 31, 1997 pro forma combined income statement data reflects an
aggregate of approximately $2,975,000 and $1,056,000, respectively, in
pro forma reductions in salary and benefits of the owners of the
Founding Companies to which they have agreed prospectively, and
$600,000 and $150,000, respectively, in pro forma increases in salary
and benefits to the corporate management and $159,000 and $40,000,
respectively, 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 respective 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 for the twelve
months ended September 30, 1997 and the three months ended December 31,
1997 of $1,545,000 and $ 331,000, respectively, related to repayment of
indebtedness with the proceeds from the Offering.
(5) Consists of (i) 6,720,000 shares issued to the owners of the Founding
Companies, (ii) 515,000 shares issued to the management of Pentacon,
(iii) 20,000 shares granted under restricted stock grants to two
non-employee directors, (iv) 2,295,000 shares issued to MGCV, (v)
5,200,000 shares sold in the Offering, and (vi) the dilutive effect of
warrants to purchase 50,000 shares at an exercise price equal to $6.00
per share using the treasury stock method. Subsequent to September 30,
1997 options to purchase 1,050,000 shares at the initial public
offering price were issued to officers, directors and employees of the
Company and are currently outstanding.
(6) The pro forma combined balance sheet data assumes that the Acquisitions
were closed on December 31, 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 a price of $10.00 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 "Certain Transactions."
(8) Includes $28,662,381 for the obligation to pay the cash portion of the
purchase price for the Founding Companies.
17
<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 $3.2 million in
their compensation and related benefits in connection with their acquisition by
the Company on a pro forma basis for the twelve months ended December 31, 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
$159,000 on a pro forma basis for the twelve months ended December 31, 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.
In November 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 March 1998, the Company recorded a non-cash, non-recurring
charge of approximately $1.8 million to reflect compensation related to the
revaluation of some of the shares of Common Stock sold to management. In the
first calendar quarter of 1998, the Company made a restricted stock grant of an
aggregate of 85,000 shares to an employee and two non-employee directors of the
Company. The total of 85,000 shares will vest ratably over three years. The
Company will recognize approximately $680,000 of compensation expense ratably
over three years, based on the initial public offering price net of a 20%
marketability discount. 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 was 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. The initial amount of goodwill will be $58.5
million and the pro forma impact of this amortization expense, which is
non-deductible for tax purposes, is expected to be approximately $1.5 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-end of September 30, and the
accounting acquiror, Alatec, has changed its fiscal year to September 30 to
conform
18
<PAGE>
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, 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>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED THREE MONTHS ENDED
---------------------------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1996 1997
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................... $104.1 100.0% $120.0 100.0% $112.8 100.0% $ 33.3 100.0% $ 39.0 100.0%
Cost of sales ....................... 70.3 67.5 79.0 65.8 74.3 65.9 22.3 67.0 25.3 64.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit ........................ 33.8 32.5 41.0 34.2 38.5 34.1 11.0 33.0 13.7 35.1
</TABLE>
COMBINED THREE MONTHS ENDED DECEMBER 31, 1997
COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1996
NET SALES. Combined net sales increased $5.7 million, or 17.1%, from
$33.3 million for the three months ended December 31, 1996 to $39.0 million for
the three months ended December 31, 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 and Maumee,
partially offset by a decrease in net sales at AXS. Net sales for Alatec
increased $3.0 million from the three months ended December 31, 1996 to the
three months ended December 31, 1997 due to an increase in net sales to existing
customers. Net sales for Maumee increased $3.5 million from the three months
ended December 31, 1996 to the three months ended December 31, 1997 due to an
increase in net sales to new and existing customers. Net sales for AXS decreased
$1.2 million from the three months ended December 31, 1996 to the three months
ended December 31, 1997 due to the loss of a customer and a decrease in net
sales to existing customers.
COST OF SALES. Combined cost of sales increased $3.0 million, or 13.5%,
from $22.3 million for the three months ended December 31, 1996 to $25.3 million
for the three months ended December 31, 1997. As a percentage of combined net
sales, combined cost of sales decreased from 67.0% in the three months ended
December 31, 1996 to 64.9% in the three months ended December 31, 1997. The
decrease was primarily due to reductions at Alatec and
19
<PAGE>
Maumee, partially offset by an increase in the cost of sales percentage at AXS.
As a percentage of net sales, Alatec's cost of sales decreased from 60.9% in the
three months ended December 31, 1996 to 59.3% in the three months ended December
31, 1997. The decrease was due to an increase in sales of products with higher
margins. As a percentage of net sales, Maumee's cost of sales decreased from
78.6% in the three months ended December 31, 1996 to 70.5% in the three months
ended December 31, 1997. The decrease was due to an increase in sales of
products with higher margins. As a percentage of net sales, AXS' cost of sales
increased from 65.1% in the three months ended December 31, 1996 to 67.6% in the
three months ended December 31, 1997. The increase in costs was due to initial
implementations of inventory management systems at customer locations.
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 that accounted for $5.0 million of the
increase, three new customers that 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 an approximately $4.5
million increase in sales to new customers and an approximately $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.
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.
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 that 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.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a combined basis, the Founding Companies used $0.3 million of net
cash from operating activities during the three months ended December 31, 1997,
primarily for working capital requirements. Net cash used in investing
activities was $0.3 million, primarily for capital expenditures. Net cash used
in financing activities was $1.2 million for the three months ended December 31,
1997 and primarily consisted of reductions in net borrowings under lines of
credit of $1.7 million and net increases in stockholder borrowings of $0.4
million. At December 31, 1997, the combined Founding Companies had cash of $1.9
million, working capital of $20.8 million and total debt of $30.7 million
(including $13.2 million of debt to related parties).
20
<PAGE>
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 September
30, 1997, the combined Founding Companies had cash of $3.6 million, working
capital of $26.0 million and total debt of $26.1 million (including $7.0 million
of debt to related parties).
On a combined basis, the Founding Companies generated $0.4 million of
net cash from operating activities during the three months ended December 31,
1996, primarily for working capital requirements. Net cash used in investing
activities was $0.3 million, primarily for capital expenditures. Net cash
generated by financing activities was $0.2 million for the three months ended
December 31, 1996 and primarily consisted of reductions in net borrowings under
lines of credit.
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 has entered into a credit agreement with a bank for a
credit facility of $50 million. The bank has also agreed to use its best efforts
to form a syndicate for an additional $25 million credit facility. The Company
intends to use such facilities for working capital, payoff of indebtedness of
the Founding Companies and acquisitions. The $25 million credit facility will be
subject to customary drawing conditions and the completion of negotiations with
the lender and the execution of appropriate loan documentation.
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. 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 $6.0 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. The funds to pay such costs
will be obtained from cash flow, the Company's credit facilities, or both.
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.
21
<PAGE>
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 THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------------------- SEPTEMBER 30, ----------------------------------
1995 1996 1997 1996 1997
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................... $ 41.2 100.0% $ 44.7 100.0% $ 42.3 100.0% $ 11.5 100.0% $ 14.5 100.0%
Cost of sales ....................... 26.2 63.6 26.7 59.7 25.1 59.3 7.0 60.9 8.6 59.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit ........................ 15.0 36.4 18.0 40.3 17.2 40.7 4.5 39.1 5.9 40.7
Selling, general
and administrative
expenses .......................... 11.3 27.4 12.8 28.6 11.7 27.7 3.5 30.4 5.4 37.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income .................... $ 3.7 $ 9.0% $ 5.2 11.7% $ 5.5 13.0% $ 1.0 8.7% $ 0.5 3.5%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
ALATEC THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED
TO THREE MONTHS ENDED DECEMBER 31, 1996
NET SALES. Net sales increased $3.0 million, or 26.1%, from $11.5
million for the three months ended December 31, 1996 to $14.5 million for the
three months ended December 31, 1997. The increase in net sales was due to an
increase in net sales to existing customers.
COST OF SALES. Cost of sales increased $1.6 million, or 22.9%, from $
7.0 million for the three months ended December 31, 1996 to $8.6 million for the
three months ended December 31, 1997. As a percentage of net sales, cost of
sales decreased from 60.9% in the three months ended December 31, 1996 to 59.3%
in the three months ended December 31, 1997. The decrease was due to an increase
in sales of products with higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.9 million, or 54.3%, from $3.5 million in
the three months ended December 31, 1996 to $5.4 million in the three months
ended December 31, 1997. As a percentage of net sales, selling, general and
administrative expenses increased from 30.4% for the three months ended December
31, 1996 to 37.2% for the three months ended December 31, 1997. This increase
was primarily due to increased personnel to support increased sales volume,
compensation increases, increased commissions on increased sales and
professional fees incurred in connection with the purchase transaction.
OPERATING INCOME. Due to the factors discussed above, operating income
decreased $0.5 million from $1.0 million for the three months ended December 31,
1996 to $0.5 million for the three months ended December 31, 1997. As a
percentage of net sales, operating income decreased from 8.7% for the three
months ended December 31, 1996 to 3.5% for the three months ended December 31,
1997.
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 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% in 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
22
<PAGE>
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 December 31, 1997, Alatec had working capital of $ 20.5 million,
compared to working capital of $17.1 million and $20.2 million at December 31,
1996 and September 30, 1997, respectively. 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, the nine months ended September 30, 1997 and the
three months ended December 31, 1996 and 1997 was $(1.1) million, $(0.4)
million, $0.1 million, $ .04 million and $(0.8) million, respectively. Net cash
used in investing activities for the years ended December 31, 1995 and 1996, the
nine months ended September 30, 1997 and the three months ended December 31,
1996 and 1997 was $0.1 million, $0.3 million, $0.1 million $0.3 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, the nine months ended September 30, 1997 and the three months
ended December 31, 1996 and 1997 was $1.0 million, $0.9 million, $0.5 million ,
$0.2 million and $0.2 million, respectively.
As of December 31, and 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 December 31, 1997, approximately $1.0 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.
23
<PAGE>
However, at September 30, 1997, Alatec was not in compliance with certain
nonfinancial covenants relating to providing information and notice of defined
transactions and events to the bank. The bank provided a written waiver for
these covenant violations and the Company was in compliance with these covenants
at December 31, 1997. 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 THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------------ SEPTEMBER 30, ------------------------------------
1995 1996 1997 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 20.2 100.0% $ 23.2 100.0% $ 22.0 100.0% $ 8.6 100.0% $ 7.4 100.0%
Cost of sales........ 13.0 64.4 15.1 65.1 15.3 69.6 5.6 65.1 5.0 67.6
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross profit......... 7.2 35.6 8.1 34.9 6.7 30.4 3.0 34.9 2.4 32.4
Selling, general
and administrative
expenses........... 4.7 23.3 5.6 24.1 5.0 22.7 1.9 22.1 1.8 24.3
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Operating income..... $ 2.5 $ 12.3% $ 2.5 10.8% $ 1.7 7.7% $ 1.1 12.8% $ 0.6 8.1%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
AXS THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1996
NET SALES. Net sales decreased $1.2 million, or 14.0%, from $8.6
million for the three months ended December 31, 1996 to $7.4 million for the
three months ended December 31, 1997. Approximately $0.6 million of this
decrease was attributable to the loss of a customer in March 1997, approximately
$0.4 million was due to a decrease in net sales to existing customers and
approximately $0.2 million was due to a reduction in sales to customers in the
power generation business.
COST OF SALES. Cost of sales decreased $0.6 million, or 10.7%, from
$5.6 million for the three months ended December 31, 1996 to $5.0 million for
the three months ended December 31, 1997. As a percentage of net sales, cost of
sales increased from 65.1% in the three months ended December 31, 1996 to 67.6%
in the three months ended December 31, 1997. The increase in costs was due to
initial implementations of inventory management systems at customer locations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses increased from 22.1% in the
three months ended December 31, 1996 to 24.3% in the three months ended December
31, 1997. This increase was due to the reduced level of net sales as the amount
of selling, general and administrative expenses remained the same.
OPERATING INCOME. Operating income decreased $0.5 million from $1.1
million for the three months ended December 31, 1996 to $0.6 million for the
three months ended December 31, 1997 due to the factors discussed above. As a
percentage of net sales, operating income decreased from 12.8% for the three
months ended December 31, 1996 to 8.1% for the three months ended December 31,
1997.
24
<PAGE>
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 of approximately $700,000. The inventory
written down to market was not concentrated in any particular class or classes
of inventory and resulted from more inventory meeting the Company's slow-moving
or obsolescence criteria in a variety of classes of inventory.
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 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 December 31, 1997, AXS' working capital was $4.3 million, compared
to working capital of $4.3 million and $6.4 million at September 30, 1997 and
December 31, 1996, respectively. 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.
25
<PAGE>
Net cash provided by operating activities for the years ended December
31, 1995 and 1996, the nine months ended September 30, 1997 and the three months
ended December 31, 1996 and 1997 was $3.4 million, $2.5 million, $1.9 million,
$0.6 million and $0.8 million, respectively. Net cash provided by (used in)
investing activities for the years ended December 31, 1995 and 1996, the nine
months ended September 30, 1997 and the three months ended December 31, 1996 and
1997 was $(0.2) million, $0.3 million, $(0.1) million, $(0.01) million and
$(0.01) 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, the nine months ended September 30, 1997 and the three months
ended December 31, 1996 and 1997 was $2.5 million, $0.9 million, $2.5 million,
$0.2 million and $1.9 million, respectively.
The Company continuously evaluates its inventory for slow-moving and
obsolete inventory and makes appropriate non-cash charges to cost of sales to
write any such inventory down to market. During the nine months ended September
30, 1997, the Company wrote down inventory by approximately $0.7 million as a
result of an increase of items which met the Company's slow-moving or obsolete
inventory criteria as compared to no write-down during the year ended December
31, 1996. The write-down was due to the accumulation of prior purchases in a
variety of inventory classes for which sales have slowed down or ceased. The
inventory that became slow-moving or obsolete in 1997 was not due to the loss of
any significant customer, and management does not believe the write-down in 1997
was the result of a continuing trend. Management is monitoring its purchasing
patterns to better reflect demand and does not expect this trend to continue.
As of September 30 and December 31, 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 December 31 and
September 30, 1997, approximately $2.7 million and $1.1 million, respectively,
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 THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------------ SEPTEMBER 30, ------------------------------------
1995 1996 1997 1996 1997
--------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 20.6 100.0% $ 26.2 100.0% $ 27.5 100.0% $ 7.0 100.0% $ 10.5 100.0%
Cost of sales........ 16.1 78.2 19.7 75.2 19.6 71.3 5.5 78.6 7.4 70.5
------- ----- -------- ------ -------- ------ -------- ------ -------- ------
Gross profit......... 4.5 21.8 6.5 24.8 7.9 28.7 1.5 21.4 3.1 29.5
Selling, general
and administrative
expenses........... 4.6 22.3 5.3 20.2 6.6 24.0 1.5 21.4 2.1 20.0
------- ----- -------- ------ -------- ------ -------- ------ -------- ------
Operating income..... $ (0.1) $(0.5)% $ 1.2 4.6% $ 1.3 4.7% $ 0.0 0.0% $ 1.0 9.5%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
26
<PAGE>
MAUMEE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED
TO THREE MONTHS ENDED DECEMBER 31, 1996
NET SALES. Net sales increased $3.5 million, or 50.0%, from $7.0
million for the three months ended December 31, 1996 to $10.5 million for the
three months ended December 31, 1997. Approximately $1.0 million of this
increase was attributable to new customers and approximately $2.4 million was
due to an increase in net sales to existing customers.
COST OF SALES. Cost of sales increased $1.9 million, or 34.5%, from
$5.5 million for the three months ended December 31, 1996 to $7.4 million for
the three months ended December 31, 1997. As a percentage of net sales, cost of
sales decreased from 78.6% in the three months ended December 31, 1996 to 70.5%
in the three months ended December 31, 1997. The decrease was due to a higher
margin product mix and the use of lower cost suppliers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.6 million, or 40.0%, from $1.5 million in
the three months ended December 31, 1996 to $2.1 million in the three months
ended December 31, 1997. This increase was primarily due to the higher level of
net sales, installation of a new computer system and increased professional fees
associated with the purchase transaction.
OPERATING INCOME. Operating income increased from breakeven for the
three months ended December 31, 1996 to $1.0 million for the three months ended
December 31, 1997. As a percentage of net sales, operating income increased to
9.5% for the three months ended December 31, 1997.
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 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.
27
<PAGE>
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 December 31, 1997, Maumee had a working capital deficit of $1.6
million, compared to a working capital deficit of $1.9 million and $3.0 million
at September 30, 1997 and December 31, 1996, respectively. 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 provided by (used in) operating activities for the years ended
December 31, 1995 and 1996, the nine months ended September 30, 1997 and the
three months ended December 31, 1996 and 1997 was $(0.6) million, $(0.03)
million, $(0.6) million, $0.3 million and $0.5 million, respectively. The usage
of cash from operations during those periods is due to the working capital
requirements to fund the growth and successful turnaround of the Company. During
the three periods the Company has been focused on increasing sales volume and
returning the Company to profitability. As noted above, sales have increased
27.2% from 1995 to 1996 and increased 43.2% for the nine months ended September
30, 1996 to the nine months ended September 30, 1997. The usage of cash from
operations has primarily been to support the increase in inventory and accounts
receivable offset by an increase in accounts payable related to the increase in
sales volume. As sales volumes have increased, the Company's gross margins have
increased as a result of the Company's ability to decrease its costs to purchase
certain inventory and to focus on selling higher margin products. Management has
decreased its working capital deficit by $0.9 million during the nine months
ended September 30, 1997 and anticipates the Company's historical gross margin
will remain stable and result in the Company's ability to generate cash flows
from operations and generate working capital.
Net cash used in investing activities for the years ended December 31,
1995 and 1996, the nine months ended September 30, 1997 and the three months
ended December 31, 1996 and 1997 was $0.2 million, $0.1 million, $0.2 million,
$0.01 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 years ended
December 31, 1995 and 1996, the nine months ended September 30, 1997 and the
three months ended December 31, 1996 and 1997 was $0.8 million, $0.2 million,
$0.7 million, $(0.3) million and $(0.3) million, respectively.
As of December 31, 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. The
facility will expire May 31, 2000. At December 31, 1997, approximately $2.6
million was available for borrowings. It is anticipated that the bank credit
facility will be repaid upon consummation of the Offering.
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.
28
<PAGE>
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 THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------------ SEPTEMBER 30, -----------------------------------
1995 1996 1997 1996 1997
---------------- ---------------- ---------------- --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 12.2 100.0% $ 15.7 100.0% $ 12.0 100.0% $ 3.7 100.0% $ 3.7 100.0%
Cost of sales........ 8.0 65.6 10.5 66.9 8.1 67.5 2.5 67.6 2.4 64.9
-------- ------ -------- ------ -------- ------ ------- ----- ------- -----
Gross profit......... 4.2 34.4 5.2 33.1 3.9 32.5 1.2 32.4 1.3 35.1
Selling, general
and administrative
expenses........... 3.7 30.3 4.6 29.3 3.1 25.8 1.6 43.2 1.4 37.8
-------- ------ -------- ------ -------- ------ ------- ----- ------- -----
Operating income..... $ 0.5 $ 4.1% $ 0.6 3.8% $ 0.8 6.7% $ (0.4) (10.8)% $ (0.1) (2.7)%
======== ====== ======== ====== ======== ====== ======== ====== ======== =====
</TABLE>
SSL THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED
TO THREE MONTHS ENDED DECEMBER 31, 1996
NET SALES. Net sales were unchanged at $3.7 million for the three
months ended December 31, 1996 and 1997. Approximately $0.1 million of net sales
increase was attributable to new customers offset by approximately $0.1 million
of reduced net sales to existing customers.
COST OF SALES. Cost of sales decreased $0.1 million, or 4.0%, from $2.5
million for the three months ended December 31, 1996 compared to $2.4 million
for the three months ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million or 12.5% from $1.6 million in the
three months ended December 31, 1996 to $1.4 million in the three months ended
December 31, 1997. This decrease was primarily due to a reduction in personnel
and related expenses.
OPERATING INCOME. Operating loss decreased $0.3 million from $0.4
million for the three months ended December 31, 1996 to $0.1 million for the
three months ended December 31, 1997. As a percentage of net sales, operating
loss decreased from 10.8% for the three months ended December 31, 1996 to 2.7%
for the three months ended December 31, 1997 due to the factors discussed above.
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.
29
<PAGE>
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.
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 December 31, 1997, SSL had a working capital deficit of $3.2
million, compared to working capital of $1.9 million and $1.4 million at
September 30, 1997 and December 31, 1996, respectively. 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, the nine months ended September 30, 1997 and the three
months ended December 31, 1996 and 1997 was $(0.1) million, $1.2 million, $(0.5)
million and $(0.1) million, respectively. Net cash used in investing activities
for the fiscal year ended December 31, 1996, the nine months ended September 30,
1997 and the three months ended December 31, 1996 and 1997 was $0.2 million,
$0.1 million, $0.1 million and $0.01 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, the nine months ended September 30, 1997 and the three
months ended December 31, 1996 and 1997 was $0.3 million, $(1.2) million, $0.7
million and $0.3 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 December 31 and 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 December 31 and
September 30, 1997, approximately $0.7 million and $0.9 million was available
for borrowings, respectively. It is anticipated that the bank credit facility
will be repaid upon consummation of the Offering.
30
<PAGE>
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 acquired the five Founding
Companies, which have been in business an average of 25 years and which had
combined net sales of $120.0 million for the twelve months ended December 31,
1996 and $151.8 million for the twelve months ended December 31, 1997. While
total U.S. sales of fasteners have increased at a compound annual rate of
approximately 4.1% 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 13.3% 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
32
<PAGE>
U.S. fastener market, while the MRO market accounts for 13%. Construction and
other markets account 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 5% 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
SALES VOLUME NUMBER OF PRIVATE
(DOLLARS IN MILLIONS) COMPANIES
$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 has 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, small distributors 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.
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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 has engaged in
preliminary discussions with a few potential acquisition candidates; however,
the Company has not engaged in any material negotiations with such candidates,
and the Company does not have any
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agreements, understandings, arrangements or commitments with respect to any
acquisitions other than the acquisitions of the Founding Companies.
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. 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' processes. The Company's
services include:
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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 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 decrease
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. The Company expects the substantial majority of
its currently uncertified locations to be ISO compliant or certified in
1998.
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
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fasteners and components based upon the specifications of the customer.
These services often lower the customers' cost by reducing the number
of fasteners required to assemble the product, replacing expensive
special fasteners with less expensive 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.
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, Dana
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 ended September 30, 1997. No other
customer represented more than 9% of the Company's net sales in the nine months
ended September 30, 1997. Most 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. The Company accepts returns of fasteners and other small
parts and issues a credit in exchange for such returns. Historically, returns
have not been of an amount to materially affect the Company's business.
Approximately 8% 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%
======== ==========
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BACKLOGS
The Company does not have any significant backlog of orders; as noted
above, most of the Company's contracts for the supply of fasteners and parts may
be canceled by either party on no more than 60 days notice.
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
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 15 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 is reviewing its supplier base 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
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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 which 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 include 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
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 enacted 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
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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.
The Company's operations are subject to various federal, state and
local laws and regulations, including those relating to worker safety and
protection of the environment. The Company is a distributor and does not
generally engage in manufacturing. As a result, environmental laws generally
have a minimal effect on its operations. The Company believes it is in
substantial compliance with applicable regulatory requirements.
EMPLOYEES
At September 30, 1997, the Company had approximately 580 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 70,000
square feet, and generally consist of warehouse space with a small amount of
associated office space. Four of the facilities include laboratory space for
quality testing. All of the facilities are leased. The Company's leases expire
between 1998 and 2012. The Company believes that suitable replacement space will
be available as required. Additional detail regarding certain leases is
contained herein under "Certain Transactions Transactions Involving Certain
Officers, Directors and Stockholders - Leases of Real Property by Founding
Companies." The Company believes that its current facilities are adequate for
its expected needs over the next several years. However, the Company may add new
facilities as a result of acquisitions or due to a customer's request for an
on-site or local facility.
The Company's corporate headquarters are located in space subject to a
short-term lease in Houston, Texas. The Company is in the process of obtaining
office space in Houston, Texas under a longer term lease for its corporate
headquarters.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers:
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......... 42 Senior Vice President, Chief Administrative
Officer and General Counsel
James C. Jackson....... 44 Vice President, Corporate Controller
Cary M. Grossman....... 44 Director
Donald B. List......... 42 Director
Mary E. McClure........ 57 Director
Michael W. Peters...... 38 Director
Benjamin E. Spence, Jr. 44 Director
Robert M. Chiste....... 50 Director
Clayton K. Trier....... 45 Director
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 became President, Chief Operating Officer and director
of the Company upon consummation of the Offering. Mr. Fatica has in excess of 30
years of experience in the fastener distribution business. He has been employed
by AXS or its predecessors since 1967 and currently serves as its President.
Brian Fontana became Senior Vice President and 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 1985 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 Senior 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.
James C. Jackson became Vice President and Corporate Controller of the
Company in January 1998. From 1991 to 1998, Mr. Jackson was employed by Cooper
Industries, Inc., a publicly traded international manufacturer of electrical
products, tools and hardware and automotive products, serving most recently as
Director-Corporate Accounting & Consolidations. From 1976 to 1991, Mr. Jackson
was employed by Price Waterhouse. Mr. Jackson is a C.P.A. and received a B.B.A.
degree in accounting from Ohio University.
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Cary M. Grossman has been a director of the Company since it was formed
and served as President until the consummation of the Offering. Mr. Grossman was
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 became 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 1981.
Mary E. McClure became 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 became 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. became 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.
Robert M. Chiste became a director of the Company upon consummation of
the Offering. Mr. Chiste has been President, Industrial Services Group, of
Philip Services Corp. since August 1997. He served as Vice Chairman of Allwaste,
Inc. ("Allwaste"), a provider of industrial and environmental services, from May
1997 through July 1997, President and Chief Executive Officer of Allwaste from
November 1994 through July 1997 and a director of Allwaste from January 1995
through August 1997. Philip Services Corp. acquired Allwaste effective July 31,
1997. Mr. Chiste served as Chief Executive Officer and President of America
National Power, Inc., a successor company of Transco Energy Ventures Company,
from its creation in 1986 until August 1994. During the same period he served as
Senior Vice President of Transco Energy Company. Mr. Chiste also serves as a
director of Franklin Credit Management Corp., a New York-based financial
services company, and of Innovative Valve Technology, Inc.
Clayton K. Trier became a director of the Company upon consummation of
the Offering. Mr. Trier is a private investor. In 1993, he was a founder of U.S.
Delivery Systems, Inc. ("U.S. Delivery"), a company created to consolidate the
highly fragmented local delivery industry, and Mr. Trier served as Chairman and
Chief Executive Officer of U.S. Delivery from its inception until April 1997. In
March 1996, U.S. Delivery, an NYSE-listed company at that time, was acquired by
Corporate Express, Inc., a large publicly owned office products company, and Mr.
Trier served as a director of Corporate Express, Inc. from the acquisition date
until January 1997. From 1991 to 1993, Mr. Trier was President of Trier &
Partners, Inc., a consulting firm. From 1987 through 1990, Mr. Trier served as
President and Co-Chief Executive Officer of Allwaste, a provider of industrial
and environmental services listed on the NYSE. From 1974 to 1987, Mr. Trier was
at the international accounting firm of Arthur Andersen & Co., in which he was a
partner from 1983 to 1987.
Directors are elected at each annual meeting of stockholders. The Board
of Directors is divided into three classes of directors, with directors serving
staggered three-year terms, expiring at the annual meeting of stockholders for
fiscal years 1999, 2000 and 2001, 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's, Fatica's and Chiste's terms expire in 2001; Messrs. Spence's, Peters'
and Trier's terms expire in 2000 and Ms. McClure's, Mr. Baldwin's and Mr.
Grossman's terms expire in 1999. 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
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of the Offering. All officers serve at the discretion of the Board of Directors,
subject to the terms of their respective employment agreements. See
"--Employment Agreements" and "Description of Capital Stock."
The Board of Directors has established an Audit Committee and a
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. Messrs.
Chiste and Trier 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 15,000 shares of
Common Stock upon election to the Board of Directors and an annual grant of
5,000 options. See "-- 1998 Stock Plan." Upon consummation of the Offering, the
Company granted each of Messrs. Chiste and Trier 10,000 shares of Common Stock
pursuant to restricted stock grants under the 1998 Stock Plan.
EXECUTIVE COMPENSATION
The Company was incorporated in March 1997 and, prior to the Offering,
had 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 and for
Mr. Jackson, $100,000. Options for a total of 185,000, 100,000, 85,000 and
50,000 shares of Common Stock at the initial public offering price have been
granted to Messrs. Baldwin, Taten, Fontana and Jackson, respectively. Thirty
percent of the options vest on the second anniversary of the employment
agreements and the remainder vest on the third anniversary. The Company has
granted Mr. Jackson 65,000 shares of Common Stock pursuant to a restricted stock
grant under the 1998 Stock Plan. The restrictions expire on one-third of the
shares on each of the first three anniversaries of the date of grant.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each executive
officer of the Company that prohibit such officers from disclosing the Company's
confidential information and trade secrets and generally restrict 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 and the agreement for Mr.
Jackson has an initial term of one year. 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 thirty 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 Messrs. Baldwin, Taten and Fontana 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-in-control situation, such officer may elect to terminate
his employment by giving ten days' written notice
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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. The
change-of-control provisions in the employment agreements may discourage bids to
acquire the Company or reduce the amount an acquiror is willing to pay for the
Company.
1998 STOCK PLAN
The Board of Directors has adopted, and the stockholders of the Company
have approved, the Pentacon, Inc. 1998 Stock Plan (the "1998 Stock Plan"). The
purpose of the 1998 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 or other awards may be granted may not exceed 1,700,000 shares
(subject to adjustment to reflect stock splits). As of March 31, 1998, the
Company had granted options and other awards for a total of 1,135,000 shares
under the 1998 Stock Plan.
The 1998 Stock Plan will be administered by the Compensation Committee,
which will be composed primarily of non-employee directors (the "Committee").
Subject to the terms of the 1998 Stock Plan, the Committee generally determines
to whom options will be granted and the terms and conditions of option grants.
Options granted under the 1998 Stock Plan may be either non-qualified stock
options, or may qualify as incentive stock options (as used under "- 1998 Stock
Plan," "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 year under
all plans of the Company and any parent or subsidiary corporation shall not
exceed $100,000. No employee or consultant may receive an option in any year to
purchase more than 250,000 shares of Common Stock. The Committee determines the
period over which options become exercisable, provided that all options become
immediately exercisable upon death of the grantee or upon a change-in-control
(as defined in the 1998 Stock Plan) of the Company.
The 1998 Stock Plan also provides for automatic option grants to
directors who are not otherwise employed by the Company or its subsidiaries.
Upon commencement of service, a non-employee director will receive a
non-qualified option to purchase 15,000 shares of Common Stock, and continuing
non-employee directors annually will receive options to purchase 5,000 shares of
Common Stock. Options granted to non-employee directors are immediately
exercisable in full (subject to applicable securities laws).
Options that 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 1998 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 ten years.
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.
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An optionee will not be subject to federal income taxation upon the
exercise of ISOs granted under the 1998 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.
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, on November 18, 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 20% marketability discount. In February 1997, the Company also granted two
consultants warrants to purchase an aggregate of 50,000 shares of Common Stock
at $6.00 per share. The consultants provided business and legal consulting
services for the Company in connection with its formation in the first four
months of 1997.
The Company has reimbursed MGCV for approximately $1.4 million of
expenses incurred by MGCV in connection with the Acquisitions and the Offering.
The Company paid Donald Luke, a manager of MGCV, a success fee of $100,000 upon
consummation of the Offering. The Company paid McFarland, Grossman & Company,
Inc. ("McFarland, Grossman"), an affiliate of MGCV, customary fees in connection
with its placement of the Company's senior debt facility; 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 acquired
by merger all of the issued and outstanding capital stock of the Founding
Companies, at which time each Founding Company became a wholly owned subsidiary
of the Company. The aggregate consideration paid by the Company to acquire the
Founding Companies consisted of (i) approximately $28.7 million in cash and (ii)
6,720,000 shares of Common Stock.
The following table sets forth for each Founding Company the
approximate consideration 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.
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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 made distributions of approximately $4.7 million,
representing S-corporation earnings previously taxed to their respective
stockholders. The amount of such distributions was 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, together with trusts for
which they act as trustees, received 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...................... $ 12,666 2,969,493
Jack L. Fatica...................... 3,423 802,656
Michael Black....................... 3,844 901,321
Benjamin E. Spence, Jr.............. 1,170 232,132
Mary E. McClure..................... 661 154,898
---------- --------------
Total.......................... $ 21,764 5,060,500
========== ==============
Certain of the Founding Companies had incurred indebtedness that had
been personally guaranteed by their stockholders or by entities controlled by
their stockholders. At December 31, 1997, the aggregate amount of indebtedness
of these Founding Companies that was subject to personal guarantees was
approximately $19.1 million. The Company used a portion of 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. Such indebtedness also included a $1.2 million loan from the Small
Business Administration.
The Founding Companies and Founding Company Stockholders agreed, prior
to the initial filing of the Registration Statement, to the terms of the
Acquisition Agreements. The offers and sales of Common Stock pursuant to the
Acquisition Agreements were not registered under the Securities Act and were
structured as private placements exempt from registration under the Securities
Act. Due to changes in market conditions and certain delays in the consummation
of the Offering, the Founding Company stockholders may have had a right under
certain provisions of the Acquisition Agreements to terminate the Acquisition
Agreements. The Founding Company Stockholders agreed, however, not to exercise
such rights and to proceed with the transactions contemplated by the Acquisition
Agreements. The decision by the Founding Company Stockholders not to exercise
any such termination rights could, arguably, impact the private placement
exemption available for the offer and sale of Common Stock pursuant to the
Acquisitions transactions. More specifically, if the offers and sales of Common
Stock pursuant to the Acquisition Agreements were deemed to be integrated with
the Offering (i.e., to be part of the public offering), a private placement
exemption from the registration requirements of the Securities Act would not be
available and certain rescission rights would be available to the Founding
Company Stockholders under the Securities Act. The Company, however, believes
that the offer and
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sale of Common Stock to the Founding Company Stockholders would not be
integrated with the Offering and would continue to qualify for a private
placement exemption. Furthermore, the Founding Company Stockholders entered into
agreements with the Company pursuant to which the Founding Company Stockholders
agreed (i) not to pursue any rescission rights which might be available and (ii)
to contribute any such rights to the Company in exchange for the merger
consideration payable under the Merger Agreements. There can be no assurances
that the Founding Company Stockholders' agreement to not pursue any rescission
rights will be enforceable under State securities laws. Furthermore, Section 14
of the Securities Act provides that any provision requiring any person acquiring
securities to waive compliance with the provisions of the Securities Act is
void. The Company believes that a private placement exemption continues to exist
and would vigorously resist any efforts by the Founding Company Stockholders to
assert rescission rights or any noncompliance by the Founding Company
Stockholders with the waiver or recontribution agreements.
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
Alatec leases its facilities located in Chatsworth, California from Mr.
List, who became 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 leases 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 leases 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 also pays
utilities and taxes on the premises. The Company believes that the rent for each
of these properties does not exceed fair market value.
AXS leases certain real property located in Erie, Pennsylvania from JFJ
Realty Company, an entity owned and controlled by Jeffrey Fatica and Jack
Fatica. Jack Fatica became 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 February 1, 2001. Furthermore, AXS shall pay taxes and utilities
on the leased premises. In addition, AXS leases 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
$157,500 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 pays utilities and taxes on the leased premises. The Company believes that
the rent for these properties does not exceed fair market value.
SSL leases certain real properties located in Chester, South Carolina
from Chester Associates, LLC, an entity owned and controlled by Messrs. Spence
and Knorr. Mr. Spence became a director of the Company upon the consummation of
the Offering. One facility in Chester, South Carolina is 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 is leased to SSL.
This warehouse is 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
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the CPI, not to exceed 4% in any one year. SSL is responsible for utilities. The
Company believes that the rent for these properties does not exceed fair market
value.
Maumee leases certain real property located in Fort Wayne, Indiana from
Mr. Black. The lease for the property expired March 31, 1998 and provided for an
annual rental of $312,000; the Company is currently negotiating a renewal of the
lease. In addition, Maumee is required to pay utilities and certain taxes and
assessments. 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 became an officer 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, agreed to indemnify Mr.
Grossman against various claims, damages, costs and expenses which might be
incurred by him as an officer of Alatec, including his execution of
representation letters to Alatec's accountants.
In March 1998, Jack L. Fatica acquired certain life insurance policies
from AXS for the cash surrender value of the policy.
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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock as of March 31, 1998, 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., 9432 Old Katy Road, Suite 222, Houston,
Texas 77055. All persons listed have sole voting and investment power with
respect to their shares unless otherwise indicated.
SHARES BENEFICIALLY OWNED
NUMBER PERCENT
--------- -------
Donald B. List(1)................................... 2,969,493 20.1%
Michael Black....................................... 901,321 6.1
Jack L. Fatica...................................... 802,656 5.4
Donald L. Luke(2)................................... 694,240 4.7
Cary M. Grossman(3)................................. 465,402 3.1
Michael W. Peters................................... 300,441 2.0
Benjamin E. Spence, Jr.............................. 253,332 1.7
Mark E. Baldwin..................................... 200,000 1.4
Mary E. McClure(4).................................. 154,898 1.1
Brian Fontana....................................... 125,000 *
Bruce M. Taten...................................... 125,000 *
James C. Jackson(5)................................. 65,000 *
Robert M. Chiste(6)................................. 35,000 *
Clayton K. Trier(6)................................. 35,000 *
All officers and directors as a group (12 persons).. 5,417,786 36.7
* Less than one percent.
(1) Includes an aggregate of 76,248 shares held by three trusts for the
benefit of Mr. List's minor children. Mr. List disclaims any beneficial
ownership of the shares owned by the trusts.
(2) Mr. Luke's address is 8 Greenway Plaza, Suite 1500, Houston, Texas
77046.
(3) Consists of 273,522 shares owned directly by Mr. Grossman and 191,880
shares owned by McFarland, Grossman & Company, Inc. Mr. Grossman owns a
50% interest in McFarland, Grossman & Company, Inc.
(4) Includes 71,759 shares of Common Stock owned by the Earl Milton
McClure, Jr. Residuary Trust of which Ms. McClure is trustee.
(5) Represents shares granted as restricted stock grants under the 1998
Stock Plan.
(6) Includes options to purchase 15,000 shares exercisable within 60 days
and 10,000 shares granted as restricted stock grants under the 1998
Stock Plan.
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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. There are 14,750,000 shares of Common Stock outstanding,
which are held of record by 77 stockholders, 667,000 shares of Restricted Common
Stock outstanding, which are held of record by stockholders, and no shares of
Preferred Stock outstanding. The Company has reserved 1,050,000 shares of Common
Stock for issuance upon exercise of outstanding options and warrants. 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 Second Amended and Restated 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 AND RESTRICTED 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 are 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 66 2/3% of the aggregate number of votes that 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)) or
(ii) in the event any person acquires beneficial ownership of 30% or more of the
outstanding shares of Common Stock. After January 1, 2003, the Board of
Directors may elect to convert any outstanding shares of Restricted Common Stock
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 Second Amended and Restated Certificate of 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
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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 Second Amended and Restated Certificate of
Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Second 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 Second Amended and Restated Certificate
of Incorporation, its Bylaws and the Delaware General Corporation Law. The
Company has obtained directors' and officers' liability insurance.
51
<PAGE>
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Second Amended and Restated Certificate of Incorporation
and Bylaws include provisions that may have the effect of discouraging, delaying
or preventing a change in control of the Company or an unsolicited acquisition
proposal that a stockholder might consider favorable, including a proposal that
might result in the payment of a premium over the market price for the shares
held by stockholders. These provisions are summarized in the following
paragraphs.
CLASSIFIED BOARD OF DIRECTORS. The Second Amended and Restated
Certificate of Incorporation provides for the Board of Directors to be divided
into three classes of directors serving staggered three-year terms. The
classification of the Board of Directors has the effect of requiring at least
two annual stockholders meetings, instead of one, to replace a majority of
members of the Board of Directors.
SUPERMAJORITY VOTING. The Second Amended and Restated Certificate of
Incorporation requires the approval of the holders of at least 75% of the then
outstanding shares of the Company's capital stock entitled to vote thereon on,
among other things, certain amendments to the Second Amended and Restated
Certificate of Incorporation. The Board of Directors may amend, alter, change or
repeal any bylaws without the assent or vote of the stockholders, but any bylaws
made by the Board of Directors may be altered, amended or repealed upon the
affirmative vote of at least 66 2/3% of the stock entitled to vote thereon.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK. The Company's
authorized capital, stock will consist of 50,000,000 shares of Common Stock,
1,000,000 shares of Restricted Common Stock, and 10,000,000 shares of preferred
stock. The Company has outstanding 14,750,000 shares of Common Stock and
Restricted Common Stock. The authorized but unissued (and in the case of
preferred stock, undesignated) stock may be issued by the Board of Directors in
one or more transactions. In this regard, the Company's Second Amended and
Restated Certificate of Incorporation grants the Board of Directors broad power
to establish the rights and preferences of authorized and unissued preferred
stock. The issuance of shares of preferred stock pursuant to the Board of
Directors' authority described above could decrease the amount of earnings and
assets available for distribution to holders of Common Stock and adversely
affect the rights and powers, including voting rights, of such holders and may
also have the effect of delaying, deferring or preventing a change in control of
the Company. The Board of Directors does not currently intend to seek
stockholder approval prior to any issuance of preferred stock, unless otherwise
required by law.
SPECIAL MEETING OF STOCKHOLDERS. The Second Amended and Restated
Certificate of Incorporation and Bylaws provide that special meetings of
stockholders of the Company may only be called by the Chairman of the Board of
Directors upon the written request of the Board of Directors pursuant to a
resolution approved by a majority of the whole Board of Directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT. The Second Amended and Restated
Certificate of Incorporation and Bylaws generally provide that any action
required or permitted by the stockholders of the Company must be effected at a
duly called annual or special meeting of the stockholders and may not be
effected by any written consent of the stockholders.
NOTICE PROCEDURES. The Bylaws establish advance notice procedures with
regard to stockholder proposals relating to the nomination of candidates for
election as director, the removal of directors and amendments to the Second
Amended and Restated Certificate of Incorporation or Bylaws to be brought before
annual meetings of stockholders of the Company. These procedures provide that
notice of such stockholder proposals must be timely given in writing to the
Secretary of the Company prior to the annual meeting. Generally, to be timely,
notice must be received at the principal executive offices of the Company not
less than 80 days prior to an annual meeting (or if fewer than 90 days' notice
or prior public disclosure of the date of the annual meeting is given or made by
the Company, not later than the tenth day following the date on which the notice
of the date of the annual meeting was mailed or such public disclosure was
made). The notice must contain certain information specified in the Bylaws,
including a brief description of the
52
<PAGE>
business desired to be brought before the annual meeting and certain information
concerning the stockholder submitting the proposal.
CHARTER PROVISIONS RELATING TO RIGHTS PLAN. The Second Amended and
Restated Certificate of Incorporation authorizes the Board of Directors of the
Company to create and issue rights (the "Rights") entitling the holders thereof
to purchase from the Company shares of capital stock or other securities. The
times at which, and the terms upon which, the Rights are to be issued may be
determined by the Board of Directors and set forth in the contracts or
instruments that evidence the Rights. The authority of the Board of Directors
with respect to the Rights includes, but is not limited to, the determination of
(i) the initial purchase price per share of the capital stock or other
securities of the Company to be purchased upon exercise of the Rights, (ii)
provisions relating to the times at which and the circumstances under which
Rights may be exercised or sold or otherwise transferred, either together with
or separately from, any other securities of the Company, (iii) provisions which
adjust the number or exercise price of the Rights or amount or nature of the
securities or other property receivable upon exercise of the Rights, (iv)
provisions which deny the holder of a specified percentage of the outstanding
securities of the Company the right to exercise the Rights and/or cause the
Rights held by such holder to become void, (v) provisions which permit the
Company to redeem the Rights and (vi) the appointment of a rights agent with
respect to the Rights. If authorized by the Board of Directors, the Rights would
be intended to protect the Company's stockholders from certain non-negotiated
takeover attempts which present the risk of a change of control on terms which
may be less favorable to the Company's stockholder than would be available in a
transaction negotiated with and approved by the Board of Directors. The Board of
Directors believes that the interests of the stockholders generally are best
served if any acquisition of the Company or a substantial percentage of the
Company's Common Stock results from arm's-length negotiation and reflects the
Board of Directors' careful consideration of the proposed terms of a
transaction. In particular, the Rights if issued would be intended to help (i)
reduce the risk of coercive two-tiered, front-end loaded or partial offers which
may not offer fair value to all stockholders of the Company, (ii) deter market
accumulators who through open market or private purchases may achieve a position
of substantial influence or control without paying to stockholders a fair
control premium and (iii) deter market accumulators who are simply interested in
putting the Company "in play."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American
Securities Transfer & Trust, Inc.
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. There are
14,750,000 shares of Common Stock issued and outstanding. All of the 5,200,000
shares sold in the Offering, except for shares acquired by affiliates of the
Company, are 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 hold, in the aggregate, an additional 2,810,000
shares of Common Stock including 667,000 shares of Restricted Common Stock. None
of these 9,530,000 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
53
<PAGE>
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 1,700,000 shares of
its Common Stock in accordance with the terms of the 1998 Stock Plan. Options to
purchase 1,050,000 shares and restricted stock grants for 85,000 shares have
been granted to certain officers, directors and employees of Pentacon under the
1998 Stock Plan. The Company has filed a registration statement on Form S-8
under the Securities Act registering the issuance of shares upon exercise of
options granted under the 1998 Stock Plan. As a result, such shares will be
eligible for resale in the public market.
The Company has issued to certain consultants warrants to purchase
50,000 shares of Common Stock with an exercise price equal to $6.00 per share.
The Company has agreed that it will not sell or offer 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 BT Alex. Brown Incorporated, except for shares issued (i) in
connection with acquisitions, (ii) pursuant to the exercise of options granted
under the 1998 Stock Plan, and (iii) upon conversion of shares of Restricted
Common Stock. Further, the Company's directors, officers and certain
stockholders who beneficially own approximately 9,530,000 shares in the
aggregate have agreed not to directly or indirectly sell or offer for sale or
otherwise dispose of any Common Stock for a period of 180 days after March 10,
1998 without the prior written consent of BT Alex. Brown Incorporated. Each of
the Founding Company Stockholders, the Company's senior officers and MGCV agreed
not to directly or indirectly sell or offer for sale or otherwise dispose of any
Common Stock for a period of one year after consummation of the Offering without
the prior written consent of the Company. MGCV has distributed all of the
2,295,000 shares owned by it at the time of the Offering to its members subject
to the restrictions on sale.
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 9,530,000
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.
54
<PAGE>
PLAN OF DISTRIBUTION
The shares of Common Stock covered by this Prospectus are available for
use in future acquisitions of businesses, properties or securities of entities.
The consideration offered by the Company in such acquisitions, in addition to
the shares of Common Stock offered by this Prospectus, may include cash, debt or
other Company securities, or assumption by the Company of liabilities of the
businesses being acquired, or a combination thereof. It is contemplated that the
terms of each acquisition will be determined by negotiations between the Company
and the management or the owners of the assets to be acquired or the owners of
the securities (including newly issued securities) to be acquired, with the
Company taking into account the quality of management, the past and potential
earning power and growth of the assets or securities to be acquired, and other
relevant factors. It is anticipated that the shares of Common Stock issued in
acquisitions hereunder will be valued at a price reasonably related to the
market value of the Common Stock either at the time the terms of the acquisition
are tentatively agreed upon or at or about the time or times of delivery of the
Common Stock.
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., Houston,
Texas.
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,
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, filed 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
55
<PAGE>
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.
56
<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-7
PENTACON, INC.
Report of Independent Auditors..... F-10
Balance Sheets..................... F-11
Statements of Operations........... F-12
Statements of Stockholders'
Deficit............................ F-13
Statements of Cash Flows........... F-14
Notes to Financial Statements...... F-15
FOUNDING COMPANIES(1)
ALATEC PRODUCTS, INC.
Report of Independent Auditors..... F-18
Independent Auditor's Report....... F-19
Consolidated Balance Sheets........ F-20
Consolidated Statements of
Income............................. F-21
Consolidated Statements of
Stockholders' Equity............... F-22
Consolidated Statements of Cash
Flows.............................. F-23
Notes to Consolidated Financial
Statements......................... F-24
AXS SOLUTIONS, INC.
Report of Independent Auditors..... F-32
Balance Sheets..................... F-33
Statements of Income............... F-34
Statements of Shareholders'
Equity............................. F-35
Statements of Cash Flows........... F-36
Notes to Financial Statements...... F-37
MAUMEE INDUSTRIES, INC.
Report of Independent Auditors..... F-43
Balance Sheets..................... F-44
Statements of Operations........... F-45
Statements of Stockholders'
Deficit............................ F-46
Statements of Cash Flows........... F-47
Notes to Financial Statements...... F-48
SALES SYSTEMS, LIMITED
Report of Independent Auditors..... F-53
Balance Sheets..................... F-54
Statements of Income and Retained
Earnings........................... F-55
Statements of Cash Flows........... F-56
Notes to Financial Statements...... F-57
(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 December 31, 1997. The unaudited pro
forma combined statement of operations gives effect to these transactions as if
they were consummated on as of the beginning of the periods presented.
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.
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
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MERGER
ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS
------------ -------- ------------ ----------- ------------ ----------- -----------
(NOTE 4)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash................................. $ -- $ 5,550 $ 1,748,814 $ -- $ -- $ 101,749 $ --
Accounts receivable.................. 8,607,000 -- 2,822,241 1,246,788 4,927,013 1,148,344 --
Inventory............................ 24,803,000 -- 5,448,850 1,950,005 6,555,095 2,346,057 --
Deferred taxes....................... 1,419,000 -- -- -- 137,680 -- --
Other................................ -- 2,243 18,644 58,289 42,083 18,632 --
------------ -------- ------------ ----------- ------------ ----------- -----------
Current assets....................... 34,829,000 7,793 10,038,549 3,255,082 11,661,871 3,614,782 --
Property, plant, and equipment, net.. 1,618,000 7,510 1,530,909 311,135 1,029,680 332,123 --
Deferred taxes....................... 65,000 -- -- 66,737 284,000 -- --
Intangible assets.................... -- -- 3,469,665 -- -- -- 58,500,000
Other................................ 343,000 939,870 1,111,097 4,251 -- 8,478 --
------------ -------- ------------ ----------- ------------ ----------- -----------
Total assets......................... $ 36,855,000 $955,173 $ 16,150,220 $ 3,637,205 $ 12,975,551 $ 3,955,383 $58,500,000
============ ======== ============ =========== ============ =========== ===========
PRO FORMA OFFERING AS
COMBINED ADJUSTMENTS ADJUSTED
------------- ----------- -------------
(NOTE 4)
ASSETS
Cash................................. $ 1,856,113 $ -- $ 1,856,113
Accounts receivable.................. 18,751,386 -- 18,751,386
Inventory............................ 41,103,007 -- 41,103,007
Deferred taxes....................... 1,556,680 -- 1,556,680
Other................................ 139,891 -- 139,891
------------- ----------- -------------
Current assets....................... 63,407,077 -- 63,407,077
Property, plant, and equipment, net.. 4,829,357 -- 4,829,357
Deferred taxes....................... 415,737 -- 415,737
Intangible assets.................... 61,969,665 -- 61,969,665
Other................................ 2,406,696 (939,870) 1,466,826
------------- ----------- -------------
Total assets......................... $ 133,028,532 $ (939,870) $ 132,088,662
============= =========== =============
</TABLE>
F-3
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED BALANCE SHEETS -- UNAUDITED (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ALATEC PENTACON AXS CAPITOL MAUMEE SSL
------------ ---------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES
Accounts payable..................... $ 9,219,000 $ -- $ 1,790,449 $ 760,368 $ 4,543,265 $ 1,048,562
Accrued expenses..................... 4,809,000 180,200 368,307 171,976 2,151,088 39,819
Notes payable and current portion of
capital lease obligations.......... 195,000 -- 378,055 479,758 5,527,360 720,928
Due to related parties............... 127,000 892,690 3,164,453 -- 997,181 5,020,139
------------ ---------- ------------ ----------- ------------ -----------
Current liabilities.................. 14,350,000 1,072,890 5,701,264 1,412,102 13,218,894 6,829,448
Loan payable......................... 9,968,000 -- -- -- -- 182,567
Capital lease obligations............ 1,480,000 -- 891,818 -- 255,708 --
Due to related parties............... 2,528,000 -- 324,483 -- -- 174,088
------------ ---------- ------------ ----------- ------------ -----------
13,976,000 -- 1,216,301 -- 255,708 356,655
STOCKHOLDERS' EQUITY
Common stock......................... 1,450,000 28,300 5,705,972 67,574 691,000 6,400
Additional paid-in capital........... -- 4,680,050 -- 195,184 -- --
Retained earnings.................... 9,769,000 (4,826,067) 3,526,683 2,063,575 (619,501) 1,810,078
Treasury stock....................... (2,690,000) -- -- (101,230) (570,550) (5,047,198)
------------ ---------- ------------ ----------- ------------ -----------
8,529,000 (117,717) 9,232,655 2,225,103 (499,051) (3,230,720)
------------ ---------- ------------ ----------- ------------ -----------
Total liabilities and stockholders'
equity............................. $ 36,855,000 $ 955,173 $ 16,150,220 $ 3,637,205 $ 12,975,551 $ 3,955,383
============ ========== ============ =========== ============ ===========
MERGER PRO FORMA OFFERING AS
ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
----------- ------------- ----------- -------------
(NOTE 4) (NOTE 4)
LIABILITIES
Accounts payable..................... $ -- $ 17,361,644 $ -- $ 17,361,644
Accrued expenses..................... -- 7,720,390 -- 7,720,390
Notes payable and current portion of
capital lease obligations.......... -- 7,301,101 (6,923,046) 378,055
Due to related parties............... (3,076,152) 7,125,311 (1,957,190) 5,168,121
----------- ------------- ----------- -------------
Current liabilities.................. (3,076,152) 39,508,446 (8,880,236) 30,628,210
Loan payable......................... -- 10,150,567 (7,333,159) 2,817,408
Capital lease obligations............ -- 2,627,526 -- 2,627,526
Due to related parties............... 28,662,387 31,688,958 (28,836,475) 2,852,483
----------- ------------- ----------- -------------
28,662,387 44,467,051 (36,169,634) 8,297,417
STOCKHOLDERS' EQUITY
Common stock......................... (7,853,746) 95,500 52,000 147,500
Additional paid-in capital........... 34,313,301 39,188,535 44,058,000 83,246,535
Retained earnings.................... (1,954,768) 9,769,000 -- 9,769,000
Treasury stock....................... 8,408,978 -- -- --
----------- ------------- ----------- -------------
32,913,765 49,053,035 44,110,000 93,163,035
----------- ------------- ----------- -------------
Total liabilities and stockholders'
equity............................. $58,500,000 $ 133,028,532 $ (939,870) $ 132,088,662
=========== ============= =========== =============
</TABLE>
F-4
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
THREE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MERGER
ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS
------------ ---------- ----------- ----------- ------------ ----------- -----------
(NOTE 5)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 14,501,616 $ -- $ 7,412,348 $ 2,839,281 $ 10,541,994 $ 3,746,387 $ --
Cost of sales........................ 8,554,019 -- 4,986,304 1,941,300 7,432,716 2,452,853 --
------------ ---------- ----------- ----------- ------------ ----------- -----------
Gross profit......................... 5,947,597 -- 2,426,044 897,981 3,109,278 1,293,534 --
Operating expenses................... 5,416,922 4,785,670 1,797,575 931,491 2,145,830 1,367,336 (946,045)
Goodwill amortization................ -- -- -- -- -- -- 365,625
------------ ---------- ----------- ----------- ------------ ----------- -----------
Operating income..................... 530,675 (4,785,670) 628,469 (33,510) 963,448 (73,802) 580,420
Other income (expense)............... -- -- (38,007) 6,912 10,814 -- --
Interest expense..................... (294,732) -- (36,132) -- (200,071) (21,064) --
Interest income...................... 12,304 -- -- -- -- -- --
------------ ---------- ----------- ----------- ------------ ----------- -----------
(282,428) -- (74,139) 6,912 (189,257) (21,064) --
------------ ---------- ----------- ----------- ------------ ----------- -----------
Income before taxes.................. 248,247 (4,785,670) 554,330 (26,598) 774,191 (94,866) 580,420
Income tax provision................. 103,436 -- 23,566 324,890 -- 489,336
------------ ---------- ----------- ----------- ------------ ----------- -----------
Net income (loss).................... $ 144,811 $(4,785,670) $ 554,330 $ (50,164) $ 449,301 $ (94,866) $ 91,084
============ ========== =========== =========== ============ =========== ===========
Net income per share.................
Shares used in computing net income
per share (Note 5.(6)).............
</TABLE>
PRO FORMA OFFERING AS
COMBINED ADJUSTMENTS ADJUSTED
------------ ----------- ------------
(NOTE 5)
Net sales........................... $ 39,041,626 $ -- $ 39,041,626
Cost of sales....................... 25,367,192 -- 25,367,192
------------ ----------- ------------
Gross profit........................ 13,674,434 -- 13,674,434
Operating expenses.................. 15,498,779 (4,680,000) 10,818,779
Goodwill amortization............... 365,625 -- 365,625
------------ ----------- ------------
Operating income.................... (2,189,970) 4,680,000 2,490,030
Other income (expense).............. (20,281) -- (20,281)
Interest expense.................... (551,999) 331,149 (220,850)
Interest income..................... 12,304 -- 12,304
------------ ----------- ------------
(559,976) 331,149 (228,827)
------------ ----------- ------------
Income before taxes................. (2,749,946) 5,011,149 2,261,203
Income tax provision................ 941,228 135,771 1,076,999
------------ ----------- ------------
Net income (loss)................... $ (3,691,174) $ 4,875,378 $ 1,184,204
============ =========== ============
Net income per share................ $ 0.08
============
Shares used in computing net income
per share (Note 5.(6))............ 14,770,000
============
F-5
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ALATEC PENTACON AXS CAPITOL MAUMEE SSL
------------ -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 53,754,416 $ -- $ 30,568,652 $ 11,537,257 $ 34,544,665 $ 15,712,070
Cost of sales........................ 32,083,788 -- 20,882,705 8,023,274 25,080,111 10,588,938
------------ -------- ------------ ------------ ------------ ------------
Gross profit......................... 21,670,628 -- 9,685,947 3,513,983 9,464,554 5,123,132
Operating expenses................... 15,145,074 17,597 6,875,915 3,249,632 8,139,229 4,658,244
Goodwill amortization................ -- -- -- -- -- --
------------ -------- ------------ ------------ ------------ ------------
Operating income..................... 6,525,554 (17,597) 2,810,032 264,351 1,325,325 464,888
Other expense........................ -- -- (124,611) -- (23,680) --
Other income......................... -- -- 22,226 40,625 8,162 17,912
Interest expense..................... (1,244,941) -- (278,247) (37,422) (748,549) (123,329)
Interest income...................... 40,740 -- -- -- (2,754) --
------------ -------- ------------ ------------ ------------ ------------
(1,204,201) -- (380,632) 3,203 (766,821) (105,417)
------------ -------- ------------ ------------ ------------ ------------
Income before taxes.................. 5,321,353 (17,597) 2,429,400 267,554 558,504 359,471
Income tax provision................. 2,176,481 -- -- 86,786 231,602 --
------------ -------- ------------ ------------ ------------ ------------
Net income (loss).................... $ 3,144,872 $(17,597) $ 2,429,400 $ 180,768 $ 326,902 $ 359,471
============ ======== ============ ============ ============ ============
Net income per share.................
Shares used in computing net income
per share (Note 5.(6)).............
MERGER PRO FORMA OFFERING AS
ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
----------- ------------- ----------- -------------
(NOTE 5) (NOTE 5)
Net sales............................ $ -- $ 146,117,060 $ -- $ 146,117,060
Cost of sales........................ -- 96,658,816 -- 96,658,816
----------- ------------- ----------- -------------
Gross profit......................... -- 49,458,244 -- 49,458,244
Operating expenses................... (2,534,267) 35,551,424 -- 35,551,424
Goodwill amortization................ 1,462,500 1,462,500 -- 1,462,500
----------- ------------- ----------- -------------
Operating income..................... 1,071,767 12,444,320 -- 12,444,320
Other expense........................ -- (148,291) -- (148,291)
Other income......................... -- 88,925 -- 88,925
Interest expense..................... -- (2,432,488) 1,544,760 (887,728)
Interest income...................... -- 37,986 -- 37,986
----------- ------------- ----------- -------------
-- (2,453,868) 1,544,760 (909,108)
----------- ------------- ----------- -------------
Income before taxes.................. 1,071,767 9,990,452 1,544,760 11,535,212
Income tax provision................. 2,207,987 4,702,856 633,352 5,336,208
----------- ------------- ----------- -------------
Net income (loss).................... $(1,136,220) $ 5,287,596 $ 911,408 $ 6,199,004
=========== ============= =========== =============
Net income per share................. $ 0.42
=============
Shares used in computing net income
per share (Note 5.(6))............. 14,770,000
=============
</TABLE>
F-6
<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. The Founding Companies have been presented for the twelve
months ended September 30, 1997, except for Capitol, which has been presented
for the twelve months ended August 31, 1997, and as of and for the three months
ended December 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-7
<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................................. $ -- $ -- $ -- $ 44,110,000 $ (44,110,000) $ --
Other assets......................... -- -- -- (939,870) -- (939,870)
Intangibles.......................... -- 58,500,000 58,500,000 -- -- --
Notes payable and current portion of
capital lease obligations.......... -- -- -- -- 6,923,046 6,923,046
Due to related parties............... 3,076,152 -- 3,076,152 939,870 1,017,320 1,957,190
Loan payable......................... -- -- -- -- 7,333,159 7,333,159
Due to related parties............... (3,076,152) (25,586,235) (28,662,387) -- 28,836,475 28,836,475
Common stock......................... -- 7,853,746 7,853,746 (52,000) -- (52,000)
Additional paid-in capital........... -- (34,313,301) (34,313,301) (44,058,000) -- (44,058,000)
Retained earnings.................... -- 1,954,768 1,954,768 -- -- --
Treasury stock....................... -- (8,408,978) (8,408,978) -- -- --
------------ ------------- ------------- ------------- ------------- -------------
$ -- $ -- $ -- $ -- $ -- $ --
============ ============= ============= ============= ============= =============
</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
December 31, 1997.
(b) Records the purchase of the Founding Companies consisting of $28.7 million
in cash and 6,720,000 shares of common stock to the Founding Companies,
2,295,000 shares of common stock held by McFarland, Grossman Capital
Ventures II, L.C. ("MGCV") and 225,000 of the 450,000 shares issued to
management for a total estimated purchase price of $102.6 million (based on
an estimated fair value per share which represents a marketability discount
of 20% from the initial public offering price) resulting in excess purchase
price over the fair market value of assets acquired of $58.5 million. The
Company has utilized a 20% discount for marketability in valuing the stock
issued in connection with the Acquisitions. Discounts for marketability are
subject to many factors which may be interpreted differently by different
parties. Any difference between the 20% marketability discount used by the
Company and a nominal discount rate would be immaterial to the financial
position and future results of operation of the Company.
(c) Records the proceeds of $44.1 million from the issuance of 5,200,000 shares
of common stock, net of estimated offering costs of $7.9 million (based on
an initial public offering price of $10.00).
(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-8
<PAGE>
PENTACON, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
Twelve months ended September 30, 1997 and three months ended December 31,
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) Reflects the elimination of the non-recurring, non-cash compensation
charge of $4.7 million recorded by Pentacon, Inc. during the three
months ended December 31, 1997 related to Common Stock issued to
management of the Company. Contemporaneously with the Offering, a
non-cash, non-recurring charge of approximately $1.8 million will be
recorded to reflect compensation related to the revaluation of 225,000
of the 450,000 shares of Common Stock issued to management in November
1997.
(6) Includes (i) 2,830,000 shares issued by Pentacon, Inc. prior to the
Offering (including 535,000 shares issued to management and
directors), (ii) 6,720,000 shares to be issued to the stockholders of
the Founding Companies in connection with the Acquisitions, (iii)
5,200,000 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 the lesser of $8.00 per share or 60%
of the initial public offering price using the treasury stock method.
Excludes 1,050,000 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-9
<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-10
<PAGE>
PENTACON, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,050 $ 5,550
Prepaid expenses and other current
assets............................ -- 2,243
------------- -----------
Total current assets.................... 1,050 7,793
Deferred offering costs................. 268,138 939,870
Property and equipment.................. 7,210 7,510
------------- -----------
Total assets............................ $ 276,398 $ 955,173
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued expenses................... $ -- $ 180,200
Amounts due to stockholder......... 292,945 892,690
------------- -----------
Total current liabilities..... 292,945 1,072,890
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 and 2,830,000
outstanding at September 30, 1997,
and December 31, 1997,
respectively...................... 23,800 28,300
Paid-in capital.................... 50 4,680,050
Accumulated deficit, net of
subscriptions receivable.......... (40,397) (4,826,067)
------------- -----------
Total stockholders' deficit............. (16,547) (117,717)
------------- -----------
Total liabilities and stockholders'
deficit............................... $ 276,398 $ 955,173
============= ===========
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
PENTACON, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM
INCEPTION
(MARCH 20, 1997) THREE MONTHS
THROUGH ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
---------------- --------------
(UNAUDITED)
Net sales............................ $-- $ --
Selling, general, and administrative
expenses........................... 17,597 (4,785,670)
---------------- --------------
Loss before income taxes............. (17,597) (4,785,670)
Income tax expense................... -- --
---------------- --------------
Net loss...................... $(17,597) $ (4,785,670)
================ ==============
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
PENTACON, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
<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)
Sale of common stock to officers
(unaudited)........................ 450,000 4,500 -- 4,680,000 -- 4,684,500
Net loss (unaudited)................. -- -- -- -- (4,785,670) (4,785,670)
----------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1997
(unaudited)........................ 2,830,000 $ 28,300 $ (22,800) $ 4,680,050 $(4,803,267) $ 117,717
=========== ========= ============= ============ =========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-13
<PAGE>
PENTACON, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
(MARCH 20, 1997) THREE MONTHS
THROUGH ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
---------------- --------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss........................... $ (17,597) $ (4,785,670)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and
amortization............... -- 395
Deferred offering costs....... (268,138) (671,732)
Stock compensation............ -- 4,680,000
Prepaid expenses and other
current assets............. -- (2,243)
Amounts due to stockholder.... 292,945 599,745
Accrued expenses.............. -- 180,200
---------------- --------------
Net cash provided by operating
activities....................... 7,210 695
INVESTING ACTIVITIES
Capital expenditures............... (7,210) (695)
---------------- --------------
Net cash used in investing
activities....................... (7,210) (695)
FINANCING ACTIVITIES
Proceeds from sale of common stock
and warrants..................... 1,050 4,500
---------------- --------------
Net cash provided by financing
activities....................... 1,050 4,500
---------------- --------------
Net increase in cash............... 1,050 4,500
Cash and cash equivalents at
beginning of period.............. -- 1,050
---------------- --------------
Cash and cash equivalents at end of
period........................... $ 1,050 $ 5,550
================ ==============
SEE ACCOMPANYING NOTES.
F-14
<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") and 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.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1997 has
not been audited by independent accountants. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the unaudited interim financial information. In the opinion of management
of the Company, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjusments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
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 approximately 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 a 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
F-15
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 20% marketability discount.
RESTRICTED COMMON STOCK
In December 1997, MGCV exchanged 667,000 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 such holder is 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 30% or more of the outstanding
shares of Common Stock of the Company, or (c) in the event any person acquires
30% or more of the total number of outstanding shares of Common Stock.
After January 1, 2003, 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 has adopted the Pentacon, Inc. 1998
Stock Plan (the "Plan"). The Company anticipates that upon or shortly after
the consummation of its Offering, it will have granted options to purchase up to
approximately 1.0 million shares of common stock. Subsequent to September 30,
1997, the Company has granted certain members of management options for 420,000
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. It is not expected that existing management team will be granted
additional options under the 1998 Stock Option Plan and, in any event, such
persons should not be issued additional options under the 1998 Stock Option Plan
for several years following the Offering. It is expected that substantially all
of the additional options available to be granted during this time period will
be awarded to various employees of the Founding Companies. 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
F-16
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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, the Company filed a registration statement on Form S-1
for the sale of its common stock.
The Company has received a commitment from a bank for a credit facility of
$50 million. The bank has also committed to use its best efforts to form a
syndicate for an additional $25 million credit facility. The Company intends to
use such facilities for working capital, payoff of indebtedness of the Founding
Companies, and acquisitions. The credit facilities will be subject to customary
drawing conditions and the completion of negotiations with the lender and the
execution of appropriate loan documentation.
In January 1998, the Company has agreed to grant options for 80,000 shares
of Common Stock at the initial public offering price.
In January 1998, MGCV made a restricted stock grant of 65,000 shares to an
employee of the Company and agreed to make restricted stock grants of 20,000
shares in the aggregate to two non-employee directors. The total of 85,000
shares will vest ratably over three years. The Company will recognize
approximately $680,000 of compensation expense ratably over three years, based
on an estimated initial public offering price net of a twenty percent
marketability discount.
F-17
<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-18
<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-19
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................... $ 256,000 $ 733,000 $ --
Receivables, less allowance for
doubtful accounts of $118,000,
$173,000, and $290,536........... 5,304,000 7,892,000 8,607,000
Inventory.......................... 19,615,000 22,951,000 24,803,000
Deferred taxes..................... 1,457,000 1,420,000 1,419,000
------------ ------------- ------------
Total current assets.......... 26,632,000 32,996,000 34,829,000
Property under capital lease, leasehold
improvements and equipment, net....... 1,583,000 1,578,000 1,618,000
Other assets:
Deferred taxes..................... 32,000 65,000 65,000
Security deposits and other........ 272,000 272,000 343,000
------------ ------------- ------------
Total other assets............ 304,000 337,000 408,000
------------ ------------- ------------
Total assets.................. $ 28,519,000 $ 34,911,000 $ 36,855,000
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable
to related party................. $ -- $ 158,000 $ 158,000
Current maturities of long-term
debt............................. 169,000 169,000 127,000
Current maturities of obligation
under capital lease.............. 32,000 37,000 37,000
Accounts payable................... 5,771,000 7,521,000 9,219,000
Income taxes payable............... 2,668,000 3,594,000 3,647,000
Accrued compensation and
commissions...................... 556,000 866,000 687,000
Other accrued expenses............. 306,000 496,000 475,000
------------ ------------- ------------
Total current liabilities..... 9,502,000 12,841,000 14,350,000
Subordinated note payable to related
party, less current maturities........ 776,000 2,529,000 2,528,000
Revolving line of credit................ 8,800,000 9,500,000 9,800,000
Long-term debt, less current
maturities............................ 294,000 168,000 168,000
Obligation under capital lease, less
current maturities.................... 1,517,000 1,489,000 1,480,000
------------ ------------- ------------
Total liabilities............. 20,889,000 26,527,000 28,326,000
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 1,450,000
Treasury stock, 51,290 shares at
cost............................. -- (2,690,000) (2,690,000)
Additional paid-in capital......... 24,000 -- --
Retained earnings.................. 7,605,000 9,624,000 9,769,000
------------ ------------- ------------
Total stockholders' equity.... 7,630,000 8,384,000 8,529,000
------------ ------------- ------------
Total liabilities and
stockholders' equity....... $ 28,519,000 $ 34,911,000 $ 36,855,000
============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 THROUGH THREE MONTHS ENDED DECEMBER 31,
------------------------------ SEPTEMBER 30, ------------------------------
1995 1996 1997 1996 1997
-------------- -------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 41,204,000 $ 44,726,000 $ 42,296,000 $ 11,458,000 $ 14,502,000
Cost of goods sold...................... 26,196,000 26,707,000 25,114,000 6,970,000 8,554,000
-------------- -------------- ------------- -------------- --------------
Gross profit............................ 15,008,000 18,019,000 17,182,000 4,488,000 5,948,000
Selling, general and administrative
expenses.............................. 11,285,000 12,818,000 11,664,000 3,481,000 5,417,000
-------------- -------------- ------------- -------------- --------------
Operating income........................ 3,723,000 5,201,000 5,518,000 1,007,000 531,000
Interest expense........................ (1,235,000) (1,118,000) (1,015,000) (230,000) (295,000)
Interest income......................... 22,000 56,000 26,000 15,000 12,000
Other expense........................... (91,000) -- -- -- --
-------------- -------------- ------------- -------------- --------------
Income before income taxes.............. 2,419,000 4,139,000 4,529,000 792,000 248,000
Provision for income taxes.............. 995,000 1,628,000 1,860,000 317,000 103,000
-------------- -------------- ------------- -------------- --------------
Net income.............................. $ 1,424,000 $ 2,511,000 $ 2,669,000 $ 475,000 $ 145,000
============== ============== ============= ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-21
<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>
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
Net income (unaudited).......... -- -- -- -- -- 145,000
--------- ------------ ---------- --------- -------------- ------------
Balance, December 31, 1997
(unaudited)........................ 145,000 $ 1,450,000 $ -- (51,290) $ (2,690,000) $ 9,769,000
========= ============ ========== ========= ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-22
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1,
1997 THROUGH THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER DECEMBER 31,
-------------------------- 30, --------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................... $ 1,424,000 $ 2,511,000 $2,669,000 $ 475,000 $ 145,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization................. 271,000 180,000 129,000 45,000 45,000
Deferred taxes................. (173,000) (372,000) 4,000 (378,000) 1,000
Loss on disposal of asset...... 14,000 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable........ (612,000) 847,000 (2,588,000) 1,879,000 (715,000)
Inventory.................. (2,502,000) (5,567,000) (3,336,000) (1,671,000) (1,852,000)
Other receivables.......... -- (31,000) -- -- --
Accounts payable and
accrued expenses......... 501,000 2,023,000 3,176,000 (390,000) 1,551,000
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities.............. (1,077,000) (409,000) 54,000 (40,000) (825,000)
INVESTING ACTIVITIES
Collections of note receivable...... -- 42,000 -- -- --
(Investment in) return of security
deposits and other assets......... 6,000 (251,000) -- (239,000) (71,000)
Purchase of leasehold improvements
and equipment..................... (89,000) (114,000) (138,000) (48,000) (85,000)
Proceeds from sale of assets........ 13,000 -- 14,000 -- --
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities........................ (70,000) (323,000) (124,000) (287,000) (156,000)
FINANCING ACTIVITIES
Principal payments on long-term
debt.............................. (128,000) (169,000) (127,000) (42,000) (42,000)
Net advances on revolving line of
credit............................ 1,175,000 1,063,000 700,000 225,000 300,000
Principal payments on obligation
under capital lease............... (20,000) (23,000) (23,000) (8,000) (9,000)
Repayment on stockholder note....... -- -- (3,000) 1,000 (1,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities........................ 1,027,000 871,000 547,000 176,000 248,000
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash..... (120,000) 139,000 477,000 (151,000) (733,000)
Cash at beginning of period......... 237,000 117,000 256,000 407,000 733,000
------------ ------------ ------------ ------------ ------------
Cash at end of period............... $ 117,000 $ 256,000 $ 733,000 $ 256,000 $ --
============ ============ ============ ============ ============
Cash paid during the period for:
Interest....................... $ 899,000 $ 1,029,000 $ 829,000
============ ============ ============
Income taxes................... $ 715,000 $ 404,000 $ 930,000
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-23
<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-24
<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.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
In January 1998, the Company came to a final settlement agreement with the
Internal Revenue Service with regards to all outstanding items under audit
including the issues related to the inventory issues. The amount of the
settlement, which did not include any penalties, was within amounts accrued in
the financial statements at September 30, 1997. (See Note 8)
F-25
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
============= ==============
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.
F-26
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
============
F-27
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Fiscal year ending:
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, 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 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
F-28
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and 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% 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 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 totaling approximately $2,568,000
and $2,225,000 in 1997 and
F-29
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, respectively. No underpayment or late payment penalties have been accrued
in the financial statements based on preliminary discussions with the IRS
indicating that no penalties would be assessed. If assessed, these penalties
could be as much as $850,000. Based on management's discussion with the IRS, it
is their opinion that no significant penalties will be assessed, and 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-30
<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-31
<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-32
<PAGE>
AXS SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 3,487,371 $ 2,777,160 $ 1,748,814
Accounts receivable -- net of
allowance for doubtful accounts
of $91,500, $105,000, and
$90,000.......................... 3,710,420 3,160,537 2,822,241
Inventory.......................... 4,952,648 5,323,516 5,448,850
Prepaid expenses and other current
assets........................... 66,839 27,737 18,644
Receivable from shareholder........ 169,476 169,476 --
------------ ------------- ------------
Total current assets.................... 12,386,754 11,458,426 10,038,549
Property and equipment:
Building and improvements.......... 192,763 212,437 195,997
Machinery and equipment............ 2,162,291 2,220,002 2,241,162
Assets under capital lease......... 1,058,589 1,058,589 1,058,589
------------ ------------- ------------
Total cost.............................. 3,413,643 3,491,028 3,495,748
Less: accumulated depreciation and
amortization..................... (1,719,540) (1,890,382) (1,964,839)
------------ ------------- ------------
1,694,103 1,600,646 1,530,909
Goodwill................................ 3,118,414 3,058,310 3,038,275
Non-compete agreement................... 537,050 457,805 431,390
Cash surrender value of life
insurance............................. 617,196 654,198 660,802
Other................................... 336,832 454,867 450,295
------------ ------------- ------------
Total assets............................ $ 18,690,349 $ 17,684,252 $ 16,150,220
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Demand note payable................ $ 3,300,000 $ 1,939,000 $ 300,000
Accounts payable................... 1,878,235 1,919,913 1,790,449
Accrued expenses and other current
liabilities...................... 713,010 467,432 368,307
Shareholder distribution payable... -- 2,713,162 3,076,152
Current portion of long-term debt
to former shareholder............ 70,199 76,451 88,301
Current portion of capital lease
obligation....................... 53,215 76,420 78,055
------------ ------------- ------------
Total current liabilities............... 6,014,659 7,192,378 5,701,264
Long-term debt to former shareholder,
less current portion.................. 423,715 347,264 324,483
Capital lease obligation, less current
portion............................... 988,375 911,955 891,818
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 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 5,650,187
Retained earnings.................. 5,685,128 3,526,683 3,526,683
------------ ------------- ------------
Total shareholders' equity.............. 11,263,600 9,232,655 9,232,655
------------ ------------- ------------
Total liabilities and shareholders'
equity................................ $ 18,690,349 $ 17,684,252 $ 16,150,220
============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-33
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE-MONTHS THREE MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, --------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 20,227,664 $ 23,176,615 $ 22,002,438 $ 8,566,214 $ 7,412,348
Cost of goods sold...................... 12,993,622 15,052,732 15,275,990 5,606,715 4,986,304
------------ ------------ ------------- ------------ ------------
Gross profit............................ 7,234,042 8,123,883 6,726,448 2,959,499 2,426,044
Selling, general and administrative
expenses.............................. 4,709,974 5,647,019 4,979,848 1,896,068 1,797,575
------------ ------------ ------------- ------------ ------------
Operating income........................ 2,524,068 2,476,864 1,746,600 1,063,431 628,469
Interest expense........................ (289,310) (326,785) (207,766) (70,482) (35,873)
Other income (expense).................. 232,747 19,619 7,513 (109,897) (38,007)
------------ ------------ ------------- ------------ ------------
Net income.............................. $ 2,467,505 $ 2,169,698 $ 1,546,347 $ 883,052 $ 554,589
============ ============ ============= ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-34
<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
Net income.............................. -- -- -- 2,467,505 2,467,505
Shareholder distributions............... -- -- -- (3,294,756) (3,294,756)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1995............ -- -- 378,472 4,522,824 4,901,296
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
Shareholder distributions............... -- -- -- (1,007,394) (1,007,394)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1996............ 55,785 5,522,687 -- 5,685,128 11,263,600
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
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
Net income (unaudited).................. -- -- -- 554,589 554,589
Distributions of cumulative
S-Corporation earnings (unaudited).... -- -- -- (554,589) (554,589)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1997
(unaudited)........................... $55,785 $ 5,650,187 $ -- $ 3,526,683 $ 9,232,655
======= ============ =========== ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-35
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTHS THREE MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, -------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 2,467,505 $ 2,169,698 $ 1,546,347 $ 883,052 $ 554,589
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 250,887 326,550 373,095 124,539 120,907
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) (14,599) (6,604)
Changes in operating assets and
liabilities:
Accounts receivable......... 284,696 (712,179) 549,883 46,347 338,296
Inventory................... 1,237,850 759,041 (370,868) (193,660) (125,334)
Prepaid expenses and other
current assets............ (38,803) (16,531) 39,102 (70,717) 9,093
Receivable from
shareholder............... -- (169,476) -- 78,127 169,476
Other....................... (82,856) 611 6,714 -- 4,572
Accounts payable............ (450,351) 150,587 41,678 45,908 (129,464)
Accrued expenses and other
current liabilities....... (50,335) 1,511 (245,578) (296,930) (99,125)
------------ ------------ ------------- ----------- ------------
Net cash provided by operating
activities......................... 3,376,688 2,457,718 1,903,371 602,067 836,406
INVESTING ACTIVITIES
Purchases of property and
equipment............................ (210,567) (152,223) (137,538) (10,381) (4,720)
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) (10,381) (4,720)
FINANCING ACTIVITIES
Proceeds from demand note payable.... 19,850,000 23,500,000 12,589,000 -- 1,044,000
Payments on demand note payable...... (18,950,000) (23,300,000) (13,950,000) (200,000) (2,683,000)
Payments on long-term debt to former
shareholder........................ (58,487) (84,541) (70,199) (19,231) (10,931)
Payments on capital lease
obligation......................... -- (16,999) (53,215) (11,373) (18,502)
Shareholder distributions............ (3,294,756) (1,007,394) (991,630) -- (191,599)
------------ ------------ ------------- ----------- ------------
Net cash used in financing
activities......................... (2,453,243) (908,934) (2,476,044) (230,604) (1,860,032)
------------ ------------ ------------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents................... 712,878 1,838,604 (710,211) 361,082 (1,028,346)
Cash and cash equivalents at
beginning of period................ 935,889 1,648,767 3,487,371 3,126,289 2,777,160
------------ ------------ ------------- ----------- ------------
Cash and cash equivalents at end of
period............................. $ 1,648,767 $ 3,487,371 $ 2,777,160 $ 3,487,371 $ 1,748,814
============ ============ ============= =========== ============
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
Three Months Ended December 31,
1997 (unaudited):
Accrual of S-Corporation
distribution of $362,990
SEE ACCOMPANYING NOTES.
F-36
<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-37
<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.
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the
F-38
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited interim
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of operations
for the interim periods are not necessarily indicative of the results of
operations for the respective full years.
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. At December 31, 1996, the Company had exceeded its
borrowing limit by $300,000 as a result of making a year end tax payment. The
excess borrowings were repaid in early January 1997.
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
F-39
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-40
<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:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1, 1997
DECEMBER 31, TO SEPTEMBER 30,
---------------------- ----------------
1995 1996 1997
---------- ---------- ----------------
<S> <C> <C> <C>
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)
========== ========== ================
</TABLE>
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-41
<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-42
<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-43
<PAGE>
MAUMEE INDUSTRIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
DECEMBER 31, SEPTEMBER 30, 31,
1996 1997 1997
------------ ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance
of $45,000, $70,000, and
$70,000.......................... $ 3,421,509 $ 5,200,253 $ 4,927,013
Inventories........................ 4,265,628 6,524,717 6,555,095
Prepaid expenses and other
assets........................... 26,562 24,362 42,083
Deferred income taxes.............. 165,000 139,000 137,680
------------ ------------- -----------
Total current assets.................... 7,878,699 11,888,332 11,661,871
Deferred income taxes................... 329,000 284,000 284,000
Property and equipment, at cost:
Machinery and equipment............ 2,367,139 2,781,709 2,888,083
Leasehold improvements............. 399,301 440,516 477,991
------------ ------------- -----------
2,766,440 3,222,225 3,366,074
Less accumulated depreciation and
amortization.......................... 1,994,219 2,247,242 (2,336,394)
------------ ------------- -----------
772,221 974,983 1,029,680
------------ ------------- -----------
Total assets............................ $ 8,979,920 $ 13,147,315 $12,975,551
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft..................... $ 403,811 $ 1,001,999 $ 1,187,087
Accounts payable................... 2,800,950 3,965,264 3,356,178
Income taxes payable............... 513,744 708,744 1,086,768
Accrued expenses................... 505,634 1,141,654 1,064,320
Notes payable...................... 5,605,357 5,855,550 5,419,595
Notes payable to principal
stockholder...................... 997,181 997,181 997,181
Current portion of capital lease
obligations...................... 39,412 154,291 107,765
------------ ------------- -----------
Total current liabilities............... 10,866,089 13,824,683 13,218,894
Long-term portion of capital lease
obligations........................... 146,496 270,984 255,708
------------ ------------- -----------
Total liabilities....................... 11,012,585 14,095,667 13,474,602
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....... 41,000 691,000 691,000
Accumulated deficit..................... (1,503,115) (1,068,802) (619,501)
------------ ------------- -----------
(1,462,115) (377,802) 71,499
Less treasury stock -- 77 shares in 1996
and 218 shares in 1997, at cost....... 570,550 570,550 570,550
------------ ------------- -----------
Total stockholders' deficit............. (2,032,665) (948,352) (499,051)
------------ ------------- -----------
Total liabilities and stockholders'
deficit............................... $ 8,979,920 $ 13,147,315 $12,975,551
============ ============= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-44
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEARS ENDED 1997 THREE MONTHS ENDED
DECEMBER 31, THROUGH DECEMBER 31,
-------------------------- SEPTEMBER 30, -------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 20,582,200 $ 26,234,653 $27,472,902 $ 7,071,763 $ 10,541,994
Cost of sales........................... 16,099,808 19,712,909 19,557,148 5,522,964 7,432,716
------------ ------------ ------------- ----------- ------------
Gross profit............................ 4,482,392 6,521,744 7,915,754 1,548,799 3,109,278
Selling and administrative expenses..... 4,626,153 5,277,107 6,628,643 1,510,586 2,145,830
------------ ------------ ------------- ----------- ------------
Operating income (loss)................. (143,761) 1,244,637 1,287,111 38,213 963,448
Interest expense........................ (572,387) (585,090) (547,274) (201,277) (200,071)
Other income (expense).................. 2,578 (23,680) 10,476 (28,748) 10,814
------------ ------------ ------------- ----------- ------------
Income (loss) before taxes.............. (713,570) 635,867 750,313 (191,812) 774,191
Income tax expense (benefit)............ (250,000) 304,000 316,000 (84,397) 324,890
------------ ------------ ------------- ----------- ------------
Net income (loss)....................... $ (463,570) $ 331,867 $ 434,313 $ (107,415) $ 449,301
============ ============ ============= =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-45
<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............................. -- -- -- -- (463,570) (463,570)
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1995......... 103.5 41,000 (77 ) (570,550) (1,834,982) (2,364,532)
Net income........................... -- -- -- -- 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........................... -- -- -- -- 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)
Net income (unaudited)............... -- -- -- -- 449,301 449,301
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1997
(unaudited)........................ 318 $ 691,000 (218 ) $ (570,550) $ (619,501) $ (499,051)
====== ========== ====== ============ =========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-46
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, THROUGH DECEMBER 31,
------------------------------- SEPTEMBER 30, ----------------------------
1995 1996 1997 1996 1997
-------------- --------------- -------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................. $ (463,570) $ 331,867 $ 434,313 $ (107,415) $ 449,301
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and
amortization............... 358,681 327,945 316,823 20,060 89,152
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 (491,132) 1,320
Changes in operating assets
and liabilities:
Accounts receivable...... (453,257) (725,349) (1,778,744) (159,116) 273,240
Inventories.............. (480,392) (1,328,228) (2,259,089) (1,040,258) (30,378)
Prepaid expenses and
other assets.......... (23,164) 12,912 2,200 41,496 (17,721)
Income tax receivable.... (239,150) 239,150 -- -- --
Accounts payable......... 762,714 866,783 1,164,314 1,436,806 (609,086)
Income taxes payable..... (36,653) 501,700 195,000 367,616 378,024
Accrued expenses......... (27,593) 160,410 636,020 279,845 (77,334)
-------------- --------------- -------------- -------------- ------------
Net cash (used in) provided by
operating activities............. (625,667) (32,520) (577,143) 347,902 456,518
INVESTING ACTIVITIES
Capital expenditures............... (204,581) (133,704) (210,968) (2,327) (143,849)
Proceeds from sale of equipment.... 2,367 1,342 59,200 -- --
-------------- --------------- -------------- -------------- ------------
Net cash used in investing
activities....................... (202,214) (132,362) (151,768) (2,327) (143,849)
FINANCING ACTIVITIES
Bank overdraft..................... (548,755) (100,295) 598,188 (232,696) 185,088
Payments on capital leases......... (26,475) (48,764) (119,472) (12,000) (61,802)
Proceeds from revolving line of
credit........................... 6,000,200 10,042,100 20,464,195 2,510,879 6,821,955
Payments on revolving line of
credit........................... (4,396,709) (10,003,263) (20,504,163) (2,554,008) (7,200,160)
Proceeds from notes payable........ 50,000 467,796 424,000 -- --
Payments on notes payable.......... (250,380) (192,692) (133,837) (57,750) (57,750)
-------------- --------------- -------------- -------------- ------------
Net cash provided by (used in)
financing activities............. 827,881 164,882 728,911 (345,575) (312,669)
Net increase (decrease) in cash.... -- -- -- -- --
Cash at beginning of period........ -- -- -- -- --
-------------- --------------- -------------- -------------- ------------
Cash at end of period.............. $ -- $ -- $ -- $ -- $ --
============== =============== ============== ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-47
<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. For the years ended
December 31, 1995, 1996, and the 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-48
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
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). If demand is not made, the note is payable in
48 monthly installments of $2,583, plus interest. There was $116,250 outstanding
on this note 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 notes payable to the principal
stockholder. The notes payable represent 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.
F-49
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
============ ============ =============
F-50
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-51
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-52
<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-53
<PAGE>
SALES SYSTEMS, LIMITED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................... $ 63,755 $ -- $ 101,749
Trade accounts receivable, less
allowance for doubtful accounts
of $38,000 at December 31, 1996,
September 30, 1997, and December
31, 1997......................... 1,129,433 1,090,628 1,148,344
Inventories........................ 2,723,660 2,255,465 2,346,057
Prepaid expenses and other current
assets........................... -- 6,589 18,632
------------ ------------- ------------
Total current assets.................... 3,916,848 3,352,682 3,614,782
Property, plant, and equipment:
Fixtures and equipment............. 1,030,403 1,123,795 1,151,546
Automotive equipment............... 82,151 82,151 82,151
------------ ------------- ------------
1,112,554 1,205,946 1,233,697
Less accumulated depreciation........... (778,625) (859,976) (901,574)
------------ ------------- ------------
333,929 345,970 332,123
Other assets............................ 8,477 27,109 8,478
------------ ------------- ------------
Total assets............................ $4,259,254 $ 3,725,761 $ 3,955,383
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable....................... $1,250,000 $ 342,347 $ 645,592
Note payable to former
shareholders..................... -- -- 5,000,000
Trade accounts payable and accrued
expenses......................... 943,109 980,922 1,048,561
Accrued salaries, wages, payroll
expenses, and commissions........ 138,804 60,484 39,819
Advances payable................... 40,000 -- --
Current maturities of unsecured
notes to officers................ 22,670 23,890 20,139
Current maturities of long-term
debt............................. 78,823 77,850 75,336
------------ ------------- ------------
Total current liabilities............... 2,473,406 1,485,493 6,829,447
Long-term debt, less current
maturities............................ 257,176 199,967 182,567
Unsecured notes to officers, less
current maturities.................... 194,228 176,154 174,088
------------ ------------- ------------
Total liabilities....................... 2,924,810 1,861,614 7,186,102
Shareholders' equity:
Common stock, $100 par value:
Authorized shares -- 100
Issued and outstanding
shares -- 64............... 6,400 6,400 6,400
Retained earnings.................. 1,375,242 1,904,945 1,810,079
------------ ------------- ------------
1,381,642 1,911,345 1,816,479
Less 14 at September 30, 1997 and 47
shares at
December 31, 1997 shares of treasury
stock at cost......................... (47,198) (47,198) (5,047,198)
------------ ------------- ------------
Total shareholders' equity (deficit).... 1,334,444 1,864,147 (3,230,719)
------------ ------------- ------------
Total liabilities and shareholders'
equity................................ $4,259,254 $ 3,725,761 $ 3,955,383
============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-54
<PAGE>
SALES SYSTEMS, LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 THREE MONTHS ENDED
YEAR ENDED THROUGH DECEMBER 31
DECEMBER 31, SEPTEMBER 30, --------------------------
1996 1997 1996 1997
------------ --------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................... $ 15,663,326 $11,987,479 $ 3,724,591 $ 3,746,387
Cost of goods sales..................... 10,495,123 8,056,780 2,532,158 2,452,853
------------ --------------- ------------ ------------
Gross profit............................ 5,168,203 3,930,699 1,192,433 1,293,534
Selling, general, and administrative
expenses.............................. 4,598,895 3,096,934 1,561,310 1,367,336
------------ --------------- ------------ ------------
Operating income (loss)................. 569,308 833,765 (368,877) (73,802)
Interest expense........................ (106,799) (95,162) (28,167) (21,064)
Other income............................ 17,912 -- 17,912 --
------------ --------------- ------------ ------------
Net income (loss)....................... 480,421 738,603 (379,132) (94,866)
Retained earnings at beginning of
period................................ 1,114,575 1,375,242 1,790,848 1,904,945
Distributions to shareholders........... (219,754) (208,900) (36,474) --
------------ --------------- ------------ ------------
Retained earnings at end of period...... $ 1,375,242 $ 1,904,945 $ 1,375,242 $ 1,810,079
============ =============== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-55
<PAGE>
SALES SYSTEMS, LIMITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 THREE MONTHS ENDED
YEAR ENDED THROUGH DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, --------------------------
1996 1997 1996 1997
------------ --------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $ 480,421 $ 738,603 $ (379,132) $ (94,866)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation....................... 94,668 81,351 48,137 41,598
Loss on sale of equipment.......... 1,052 -- -- --
Change in operating assets and
liabilities:
Trade accounts receivable..... (343,571) 38,805 372,465 (57,716)
Inventories................... (518,271) 468,195 (201,941) (90,592)
Prepaid expenses and other
current assets............. -- (6,589) -- (12,043)
Other assets.................. -- (18,632) (891) 18,631
Trade accounts payable and
accrued expenses........... 28,375 37,813 (456,914) 67,639
Accrued salaries, wages, and
payroll withholdings....... 102,289 (78,320) 105,216 (20,665)
Advances payable.............. 40,000 (40,000) 40,000 --
------------ --------------- ------------ ------------
Net cash provided by (used in) operating
activities............................ (115,037) 1,221,226 (473,060) (148,014)
INVESTING ACTIVITIES
Capital expenditures.................... (216,869) (93,392) (146,502) (27,751)
------------ --------------- ------------ ------------
Net cash used in investing activities... (216,869) (93,392) (146,502) (27,751)
FINANCING ACTIVITIES
Distributions paid to shareholders...... (219,754) (208,900) (36,474) --
Borrowings on term loans................ 61,582 -- 40,328 --
Payments on term loans.................. (91,523) (75,036) (10,537) (25,731)
Net borrowings (repayments) on line of
credit................................ 525,555 (907,653) 690,000 303,245
Other................................... (992) -- -- --
------------ --------------- ------------ ------------
Net cash provided by (used in) financing
activities............................ 274,868 (1,191,589) 683,317 277,514
------------ --------------- ------------ ------------
Increase (decrease) in cash............. (57,038) (63,755) 63,755 101,749
Cash at beginning of period............. 120,793 63,755 -- --
------------ --------------- ------------ ------------
Cash at end of period................... $ 63,755 $ -- $ 63,755 $ 101,749
============ =============== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-56
<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-57
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
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.
F-58
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
============= ==============
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.
F-59
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, the Company entered into an agreement whereby the Company
purchased 30 shares of common stock from two shareholders for two promissory
notes totaling $5.0 million. The purchase price was based on an offer received
by the Company to purchase all of the common stock of the Company for cash.
Payment of the promissory notes are conditioned upon the occurrence of the
above-named acquisition and resulting initial public offering and if not
completed by March 15, 1998 the notes will be void and the shares will revert
back to the original owners.
F-60
<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.
[ALTERNATE COVER FOR SELLING STOCKHOLDERS PROSPECTUS]
3,350,000 SHARES
[LOGO]
PENTACON, INC.
COMMON STOCK
-----------------------
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons (the "Selling Stockholders") who have
received common stock (the "Common Stock"), par value $.01 per share, of
Pentacon, Inc. (the "Company" or "Pentacon") in connection with the acquisition
by the Company of securities or assets held by such persons, or their
transferees, (the "Selling Stockholders") and who wish to offer and sell such
Common Stock in transactions in which they and any broker-dealer through whom
such shares are sold may be deemed to be Underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), as more fully
described herein. The Company will receive none of the proceeds from any such
sale. Any commissions paid or concessions allowed to any broker-dealer, and, if
any broker-dealer purchases such shares as principal, any profits received on
the resale of such shares, may be deemed to be underwriting discounts and
commissions under the Securities Act. Printing, certain legal and accounting,
filing and other similar expenses of this offering will be paid by the Company.
The Selling Stockholders will generally bear all other expenses of this
offering, including brokerage fees and any underwriting discounts or
commissions.
The Registration Statement of which this Prospectus is a part also relates
to the offer and issuance by the Company from time to time of 3,350,000 shares
of Common Stock in connection with its acquisition of the securities and assets
of other businesses.
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under
the symbol "JIT." The Company will apply to have the Common Stock offered hereby
approved for trading on the NYSE. On April 7, 1998, the closing price of the
Common Stock on the NYSE was $12.75 per share. As of March 31, 1998 the Company
had 14,750,000 shares of Common Stock outstanding.
-----------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 8.
-----------------------
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.
THE DATE OF THIS PROSPECTUS IS ____________, 1998.
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
MANNER OF OFFERING
This Prospectus, as appropriately amended or supplemented, may be used
from time to time principally by persons who have received Common Stock in
connection with acquisitions by the Company of securities and assets held by
such persons, or their transferees, and who wish to offer and sell such Common
Stock (such persons are herein referred to as "Selling Stockholders") in
transactions in which they and any broker-dealer through whom such Common Stock
are sold may be deemed to be Underwriters within the meaning of the Securities
Act. The Company will receive none of the proceeds from any such sales. There
presently are no arrangements or understandings, formal or informal, pertaining
to the distribution of the Common Stock described herein. Upon the Company being
notified by a Selling Stockholder that any material arrangement has been entered
into with a broker-dealer for the sale of Common Stock bought through a block
trade, special offering, exchange distribution or secondary distribution, a
supplemented Prospectus will be filed, pursuant to Rule 424(b) under the
Securities Act, setting forth (i) the name of each Selling Stockholder and the
participating broker-dealer(s), (ii) the number of Common Stock involved, (iii)
the price at which the Common Stock were sold, (iv) the commissions paid or the
discounts allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out in this Prospectus and (vi) other facts material to the transaction.
Selling Stockholders may sell the Common Stock being offered hereby
from time to time in transactions (which may involve crosses and block
transactions) on the NYSE, in negotiated transactions or otherwise, at market
prices prevailing at the time of the sale or at negotiated prices. Selling
Stockholders may sell some or all of the Common Stock in transactions involving
broker-dealers, who may act solely as agent and/or may acquire Common Stock as
principal. Broker-dealers participating in such transactions as agent may
receive commissions from Selling Stockholders (and, if they act as agent for the
purchaser of such Common Stock, from such purchaser), such commissions computed
in appropriate cases in accordance with the applicable rules of the NYSE, which
commissions may be at negotiated rates where permissible under such rules.
Participating broker-dealers may agree with Selling Stockholders to sell a
specified number of Common Stock at a stipulated price per share and, to the
extent such broker-dealer is unable to do so acting as an agent for the Selling
Stockholder, to purchase as principal any unsold Common Stock at the price
required to fulfill the broker-dealer's commitment to Selling Stockholders. In
addition or alternatively, Common Stock may be sold by Selling Stockholders
and/or by or through other broker-dealers in special offerings, exchange
distributions or secondary distributions pursuant to and in compliance with the
governing rules of the NYSE, and in connection therewith commissions in excess
of the customary commission prescribed by such governing rules may be paid to
participating broker-dealers, or, in the case of certain secondary
distributions, a discount or concession from the offering price may be allowed
to participating broker-dealers in excess of the customary commission.
Broker-dealers who acquire Common Stock as principal may thereafter resell such
Common Stock from time to time in transactions (which may involve crosses and
block transactions and which may involve sales to or through other
broker-dealers, including transactions of the nature described in the preceding
two sentences) on the NYSE, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive commissions from the purchaser of such
Common Stock.
The Company may agree to indemnify each Selling Stockholder as an
Underwriter under the Securities Act against certain liabilities, including
liabilities arising under the Securities Act. Each Selling Stockholder may
indemnify any broker-dealer that participates in transactions involving sales of
the Common Stock against certain liabilities, including liabilities arising
under the Securities Act.
The Selling Stockholders may resell the Common Stock offered hereby
only if such securities are qualified for sale under applicable state securities
or "blue sky" laws or exemptions from such registration and qualification
requirements are available.
<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................................... 1
Risk Factors......................................... 8
The Company.......................................... 13
Use of Proceeds...................................... 15
Price Range of Common Stock and Dividend Policy...... 15
Selected Financial Data.............................. 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................... 18
Business............................................. 32
Management........................................... 41
Certain Transactions................................. 45
Principal Stockholders............................... 49
Description of Capital Stock......................... 50
Shares Eligible for Future Sale...................... 53
Plan of Distribution................................. 55
Legal Matters........................................ 55
Experts.............................................. 55
Additional Information............................... 55
Index to Financial Statements........................ F-1
- -----------------------------------------------------------
3,350,000 Shares
Pentacon, Inc.
(Logo)
Common Stock
--------------------
PROSPECTUS
--------------------
-------------------------------------------------------------
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
SEC Registration Fee................................................. $ 12,601
Accounting Fees and Expenses......................................... 13,000
Legal Fees and Expenses.............................................. 7,000
Printing Expenses.................................................... 5,000
Transfer Agent's Fees................................................ 1,000
Miscellaneous........................................................ 2,399
----------
Total........................................................ $ 41,000
==========
(1) The amounts set forth above, except for the SEC fee, are in each case
estimated.
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 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.
II-1
<PAGE>
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 Eighth
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 has entered into or intends to enter into indemnification
agreements with each of its executive officers and directors.
In November 1997, Mr. Grossman became an officer of Alatec in order to
assist in, and facilitate and expedite the audit process in connection with the
Offering. Alatec and Mr. List, its sole stockholder, have agreed to indemnify
Mr. Grossman against various claims, damages, costs and expenses which might be
incurred by him as an officer of Alatec, including his execution of
representation letters to Alatec's accountants.
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. The number of shares have been adjusted to
account for a 2,380-for-1 split of the Common Stock effected after November 18,
1997.)
(a) On March 31, 1997, the Company issued 2,380,000 shares of
its Common Stock to MGCV for an aggregate price of $1,000.
(b) On March 31, 1997, the Company issued warrants to purchase
50,000 shares of its Common Stock with an exercise price equal to the
lesser of $8.00 or 60% of the public offering price in the Offering;
the warrants were issued for an aggregate price of $50 to two
consultants providing services to the Company.
(c) On November 18, 1997, the Company issued 450,000 shares of
its Common Stock to certain executive officers for an aggregate price
of $4,500.
(d) See "Certain Transactions" for a discussion of the
issuance of 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>
3.1* -- Second 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, 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* -- Employment Agreement with Mark Baldwin.
10.7* -- Employment Agreement with Bruce Taten.
10.8* -- Employment Agreement with Brian Fontana.
10.9* -- Form of Officer and Director Indemnification Agreement.
10.10* -- Pentacon, Inc. 1998 Stock Plan.
10.11* -- Form of Waiver of Termination Rights and Schedule of Signatories.
10.12* -- Form of Waiver and Schedule of Signatories.
10.13* -- Form of Recontribution Agreement and Schedule of Signatories.
10.14* -- Employment Agreement with James Jackson.
10.15 -- Credit Agreement with NationsBank.
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.
24.1 -- Powers of Attorney (included in signature page set forth on page II-5).
</TABLE>
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-41383).
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 April 9, 1998.
PENTACON, INC.
By: /s/ MARK E. BALDWIN
Mark E. Baldwin, Chairman of
the Board 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 conforming 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ MARK E. BALDWIN Chairman of the Board, Chief Executive April 9, 1998
Mark E. Baldwin Officer and Director (Principal Executive
Officer)
/s/ BRIAN FONTANA Senior Vice President and Chief Financial April 9, 1998
Brian Fontana Officer (Principal Financial and Accounting
Officer)
/s/ GARY M. GROSSMAN Director April 9, 1998
Gary M. Grossman
/s/ DONALD B. LIST Director April 9, 1998
Donald B. List
/s/ JACK L. FATICA Director April 9, 1998
Jack L. Fatica
_____________________________________ Director
Mary E. McClure
II-5
<PAGE>
/s/ MICHAEL W. PETERS Director April 9, 1998
Michael W. Peters
/s/ BENJAMIN E. SPENCE, JR. Director April 9, 1998
Benjamin E. Spence, Jr.
_____________________________________ Director
Robert M. Chiste
/s/ CLAYTON K. TRIER Director April 9, 1998
Clayton K. Trier
</TABLE>
II-6
EXHIBIT 5.1
April 9, 1998
Pentacon, Inc.
9432 Old Katy Road, Suite 222
Houston, Texas 77055
Gentlemen:
We have acted as counsel to Pentacon, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of its Registration
Statement on Form S-1 (Registration No. 333- 41383) (the "Registration
Statement"), filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the offering and sale by the Company of
up to 3,350,000 shares of its common stock, par value $0.01 per share (the
"Common Stock"). This opinion also relates to any registration statement of the
Company relating to the registration of additional shares of Common Stock
pursuant to Rule 462(b) under the Securities Act
We have examined originals or copies of (i) the Amended and Restated
Certificate of Incorporation of the Company; (ii) the Bylaws of the Company, as
amended; (iii) certain resolutions of the Board of Directors and the
stockholders of the Company; and (iv) such other documents and records as we
have deemed necessary and relevant for purposes hereof. We have relied upon
certificates of public officials and officers of the Company as to certain
matters of fact relating to this opinion and have made such investigations of
law as we have deemed necessary and relevant as a basis hereof. We have not
independently verified any factual matter relating to this opinion.
We have assumed the genuineness of all signatures, the authenticity
of all documents, certificates and records submitted to us as copies, and the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies.
Based upon the foregoing, and subject to the limitations and
assumptions set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware.
<PAGE>
Pentacon, Inc.
April 9, 1998
Page 2
2. The issuance of the Common Stock has been duly authorized, and
when issued and delivered by the Company against payment therefor as described
in the Registration Statement, such shares will be validly issued, fully paid
and nonassessable.
The foregoing opinion is based on and is limited to the General
Corporation Law of the State of Delaware and the relevant laws of the United
States of America, and we render no opinion with respect to the laws of any
other jurisdiction.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as Exhibit 5.1 to the Registration Statement and to the
reference to this firm under the caption "Legal Matters" in the prospectus
contained in the Registration Statement. By giving such consent, we do not admit
that we are included within the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations issued
thereunder. This opinion may be incorporated by reference in a registration
statement of the Company relating to the registration of additional shares of
Common Stock pursuant to Rule 462(b) under the Securities Act, in which case the
opinions expressed herein will apply to the additional shares registered
thereunder.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
EXHIBIT 10.15
CREDIT AGREEMENT
Dated as of March 13, 1998
Among
PENTACON, INC.
as Borrower,
NATIONSBANK OF TEXAS, N.A.,
as Agent,
and
THE LENDERS SIGNATORY HERETO
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE......................................1
Section 1.02 CERTAIN DEFINED TERMS....................................1
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS.....................18
ARTICLE II
COMMITMENTS
Section 2.01 LOANS AND LETTERS OF CREDIT.............................18
Section 2.02 BORROWINGS, CONTINUATIONS AND CONVERSIONS, LETTERS OF
CREDIT..................................................20
Section 2.03 CHANGES OF COMMITMENTS..................................22
Section 2.04 FEES....................................................23
Section 2.05 SEVERAL OBLIGATIONS.....................................24
Section 2.06 NOTES...................................................24
Section 2.07 PREPAYMENTS.............................................25
Section 2.08 ASSUMPTION OF RISKS.....................................25
Section 2.09 OBLIGATION TO REIMBURSE AND TO PREPAY...................26
Section 2.10 LENDING OFFICES.........................................28
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS......................................28
Section 3.02 INTEREST................................................28
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS................................................29
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<PAGE>
Section 4.02 PRO RATA TREATMENT......................................29
Section 4.03 COMPUTATIONS............................................30
Section 4.04 NON-RECEIPT OF FUNDS BY THE AGENT.......................30
Section 4.05 SET-OFF, SHARING OF PAYMENTS, ETC.......................30
Section 4.06 TAXES...................................................31
ARTICLE V
CHANGE IN CIRCUMSTANCES
Section 5.01 INCREASED COST AND REDUCED RETURN.......................33
Section 5.02 LIMITATION ON TYPES OF LOANS............................34
Section 5.03 ILLEGALITY..............................................35
Section 5.04 TREATMENT OF AFFECTED LOANS.............................35
Section 5.05 COMPENSATION............................................36
Section 5.06 REPLACEMENT LENDERS.....................................36
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING.........................................37
Section 6.02 INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT......39
Section 6.03 CONDITIONS RELATING TO LETTERS OF CREDIT................39
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 CORPORATE EXISTENCE.....................................40
Section 7.02 FINANCIAL CONDITION.....................................40
Section 7.03 LITIGATION..............................................41
Section 7.04 NO BREACH...............................................41
Section 7.05 AUTHORITY...............................................41
Section 7.06 APPROVALS...............................................41
Section 7.07 USE OF LOANS............................................42
Section 7.08 ERISA...................................................42
Section 7.09 TAXES...................................................43
Section 7.10 TITLES, ETC.............................................43
Section 7.11 NO MATERIAL MISSTATEMENTS...............................44
-ii-
<PAGE>
Section 7.12 INVESTMENT COMPANY ACT..................................44
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT......................44
Section 7.14 SUBSIDIARIES............................................44
Section 7.15 LOCATION OF BUSINESS AND OFFICES........................44
Section 7.16 DEFAULTS................................................44
Section 7.17 ENVIRONMENTAL MATTERS...................................44
Section 7.18 COMPLIANCE WITH THE LAW.................................46
Section 7.19 INSURANCE...............................................46
Section 7.20 HEDGING AGREEMENTS......................................46
Section 7.21 RESTRICTION ON LIENS....................................46
Section 7.22 MATERIAL AGREEMENTS.....................................46
Section 7.23 REGISTRATION STATEMENT..................................47
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 FINANCIAL STATEMENTS....................................47
Section 8.02 LITIGATION..............................................49
Section 8.03 MAINTENANCE, ETC........................................49
Section 8.04 ENVIRONMENTAL MATTERS...................................50
Section 8.05 FURTHER ASSURANCES......................................50
Section 8.06 PERFORMANCE OF OBLIGATIONS..............................50
Section 8.07 ERISA INFORMATION AND COMPLIANCE........................51
Section 8.08 SUBSIDIARY SECURITY.....................................51
Section 8.09 INSPECTION..............................................51
Section 8.10 INSURANCE CERTIFICATE...................................52
Section 8.11 RELEASE OF LIENS; SEARCH CERTIFICATES...................52
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 DEBT....................................................52
Section 9.02 LIENS...................................................53
Section 9.03 INVESTMENTS, LOANS AND ADVANCES.........................53
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS................55
Section 9.05 SALES AND LEASEBACKS....................................55
Section 9.06 NATURE OF BUSINESS......................................55
Section 9.07 INTENTIONALLY OMITTED...................................55
Section 9.08 MERGERS, ETC............................................55
-iii-
<PAGE>
Section 9.09 PROCEEDS OF NOTES.......................................55
Section 9.10 ERISA COMPLIANCE........................................55
Section 9.11 SALE OR DISCOUNT OF RECEIVABLES.........................56
Section 9.12 CAPITAL EXPENDITURES....................................57
Section 9.13 NET WORTH...............................................57
Section 9.14 RATIO OF FUNDED DEBT TO ADJUSTED EBITDA.................57
Section 9.15 FIXED CHARGE COVERAGE RATIO.............................57
Section 9.16 SALE OF PROPERTIES......................................57
Section 9.17 ENVIRONMENTAL MATTERS...................................57
Section 9.18 TRANSACTIONS WITH AFFILIATES............................58
Section 9.19 SUBSIDIARIES............................................58
Section 9.20 NEGATIVE PLEDGE AGREEMENTS..............................58
Section 9.21 FISCAL YEAR.............................................58
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT......................................58
Section 10.02 REMEDIES...............................................60
ARTICLE XI
THE AGENT
Section 11.01 APPOINTMENT, POWERS AND IMMUNITIES.....................61
Section 11.02 RELIANCE BY AGENT......................................61
Section 11.03 DEFAULTS...............................................62
Section 11.04 RIGHTS AS A LENDER.....................................62
Section 11.05 INDEMNIFICATION........................................62
Section 11.06 NON-RELIANCE ON AGENT AND OTHER LENDERS................63
Section 11.07 RESIGNATION OR REMOVAL OF AGENT........................63
ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER.................................................64
Section 12.02 NOTICES................................................64
-iv-
<PAGE>
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC..................64
Section 12.04 AMENDMENTS, ETC........................................65
Section 12.05 SUCCESSORS AND ASSIGNS.................................66
Section 12.06 ASSIGNMENTS AND PARTICIPATIONS.........................66
Section 12.07 INVALIDITY.............................................67
Section 12.08 COUNTERPARTS...........................................67
Section 12.09 REFERENCES.............................................67
Section 12.10 SURVIVAL...............................................68
Section 12.11 CAPTIONS...............................................68
Section 12.12 NO ORAL AGREEMENTS.....................................68
SECTION 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION..............68
Section 12.14 INTEREST...............................................69
Section 12.15 CONFIDENTIALITY........................................70
Section 12.16 EXCULPATION PROVISIONS.................................70
-v-
<PAGE>
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Maximum Credit Amounts
Exhibit A-1 - Form of Note
Exhibit A-2 - Form of Swing Note
Exhibit B - Form of Borrowing, Continuation and Conversion Request
Exhibit C - Form of Compliance Certificate
Exhibit D - List of Security Instruments
Exhibit E - Form of Assignment and Acceptance
Exhibit F - Form of Borrowing Base Certificate
Exhibit G - Form of Acquisition Certificate
Schedule 1.01(a) - Eligible Accounts
Schedule 1.01(b) - Eligible Inventory
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.09 - Taxes
Schedule 7.10 - Titles, etc.
Schedule 7.14 - Subsidiaries and Partnerships
Schedule 7.17 - Environmental Matters
Schedule 7.20 - Hedging Agreements
Schedule 7.22 - Material Agreements
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
-vi-
<PAGE>
THIS CREDIT AGREEMENT dated as of March 13, 1998 is among:
PENTACON, INC., a corporation formed under the laws of the State of Delaware
(the "BORROWER"); each of the lenders that is a signatory hereto or which
becomes a signatory hereto as provided in Section 12.06 (individually, together
with its successors and assigns, a "LENDER" and, collectively, the "LENDERS");
and NATIONSBANK OF TEXAS, N.A., a national banking association (in its
individual capacity, "NATIONSBANK"), as agent for the Lenders (in such capacity,
together with its successors in such capacity, the "AGENT").
R E C I T A L S
A. The Borrower has requested that the Lenders provide certain loans to
and extensions of credit on behalf of the Borrower; and
B. The Lenders have agreed to make such loans and extensions of credit
subject to the terms and conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans, extensions of credit and commitments hereinafter
referred to, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 TERMS DEFINED ABOVE. As used in this Agreement, the
terms "AGENT," "BORROWER," "LENDER," "LENDERS" and "NATIONSBANK" shall have the
meanings indicated above.
Section 1.02 CERTAIN DEFINED TERMS. As used herein, the following
terms shall have the following meanings (all terms defined in this Article I or
in other provisions of this Agreement in the singular to have the same meanings
when used in the plural and VICE VERSA):
"ACQUISITION" shall mean the acquisition of (i) a controlling equity
interest in another Person (including the purchase of an option, warrant or
convertible or similar type security to acquire such a controlling interest at
the time it becomes exercisable by the holder thereof), whether by purchase of
such equity interest or upon exercise of an option or warrant for, or conversion
of securities into, such equity interest, or (ii) assets of another Person which
constitute all or substantially all of the assets of such Person or of a line or
lines of business conducted by such Person.
"ADDITIONAL COSTS" shall have the meaning assigned such term in Section
5.01(a).
"ADJUSTED EURODOLLAR RATE" means, for any Eurodollar Loan for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) determined by the Agent to be equal to the quotient
obtained by dividing (a) the Eurodollar Rate for such Eurodollar
-1-
<PAGE>
Loan for such Interest Period by (b) 1 minus the Reserve Requirement for such
Eurodollar Loan for such Interest Period.
"AFFECTED LOANS" shall have the meaning assigned such term in Section
5.04.
"AFFILIATE" of any Person shall mean (i) any Person directly or indirectly
controlled by, controlling or under common control with such first Person, (ii)
any director or officer of such first Person or of any Person referred to in
clause (i) above and (iii) if any Person in clause (i) above is an individual,
any member of the immediate family (including parents, spouse and children) of
such individual and any trust whose principal beneficiary is such individual or
one or more members of such immediate family and any Person who is controlled by
any such member or trust. For purposes of this definition, any Person which owns
directly or indirectly 5% or more of the securities having ordinary voting power
for the election of directors or other governing body of a corporation or 5% or
more of the partnership or other ownership interests of any other Person (other
than as a limited partner of such other Person) will be deemed to "CONTROL"
(including, with its correlative meanings, "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH") such corporation or other Person.
"AGREEMENT" shall mean this Credit Agreement, as the same may from time to
time be amended or supplemented.
"AGGREGATE COMMITMENTS" at any time shall equal the amount calculated in
accordance with Section 2.03 hereof.
"AGGREGATE MAXIMUM CREDIT AMOUNTS" at any time shall equal the sum of the
Maximum Credit Amounts of the Lenders ($50,000,000), as the same may be reduced
pursuant to Section 2.03(b).
"APPLICABLE LENDING OFFICE" shall mean, for each Lender and for each Type
of Loan, the lending office of such Lender (or an Affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
offices of such Lender (or of an Affiliate of such Lender) as such Lender may
from time to time specify to the Agent and the Borrower by written notice in
accordance with the terms hereof as the office by which its Loans of such Type
are to be made and maintained.
"APPLICABLE MARGIN" shall mean for each period identified below the
applicable per annum percentage set forth at the appropriate intersection in the
table shown below, based on the ratio of Funded Debt to Adjusted EBITDA as
defined in Section 9.14, for the four quarterly periods ending on and determined
as of the immediately preceding Quarterly Date:
FUNDED DEBT TO ADJUSTED APPLICABLE MARGIN FOR APPLICABLE MARGIN
EBITDA EURODOLLAR LOANS FOR BASE RATE LOANS
Less than 1.5 1.00% 0%
-2-
<PAGE>
Less than 1.75 but greater 1.25% 0%
than or equal to 1.5
Less than 2.0 but greater 1.50% 0%
than or equal to 1.75
Greater than or equal to 2.0 1.75% .25%
The Applicable Margin shall be established following each Quarterly Date (each,
a "Determination Date"). Any change in the Applicable Margin following each
Determination Date shall be determined based upon the computations set forth in
the Compliance Certificate furnished to the Agent pursuant to Section 8.01(i),
subject to review and approval of such computations by the Agent. each change in
the Applicable Margin shall be effective commencing as of the next Business Day
following the date such certificate is received (including, without limitation,
in respect of Eurodollar Loans then outstanding notwithstanding that such change
occurs during an Interest Period), and shall remain in effect until the date
that is the next Business Day following the first to occur of the date on which
(i) a new certificate is delivered for which a change in the Applicable Margin
occurs or (ii) is required to be delivered; PROVIDED, HOWEVER; if the Borrower
shall fail to deliver any such certificate within the time period required by
Section 8.01(i), then the Applicable Margin shall be .25% for Base Rate Loans
and 1.75% for Eurodollar Rate Loans until the appropriate certificate is so
delivered. From the Closing Date to the first Determination Date, the Applicable
Margin shall be determined based upon the Compliance Certificate delivered at
Closing.
"ASSIGNMENT AND ACCEPTANCE" shall have the meaning assigned such term in
Section 12.06(b).
"BASE RATE" shall mean, with respect to any Base Rate Loan, for any day,
the rate per annum equal to the higher of (i) the Federal Funds Rate for any
such day plus 1/2 of 1% or (ii) the Prime Rate for such day. Any change in the
Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be
effective on the effective date of such change in the Prime Rate or Federal
Funds Rate.
"BASE RATE LOANS" shall mean Loans that bear interest at rates based upon
the Base Rate.
"BORROWING BASE" shall mean at any time the sum of (i) 85% of Eligible
Accounts plus (ii) the lesser of (A) 50% of Eligible Inventory and (B) the
amount determined under (i).
"BORROWING BASE CERTIFICATE" shall mean a certificate of a Responsible
Officer in the form of EXHIBIT F hereto.
"BUSINESS DAY" shall mean any day other than a day on which commercial
banks are authorized or required to close in Houston, Texas and, where such term
is used in the definition of "Quarterly Date" or if such day relates to a
borrowing or continuation of, a payment or prepayment of principal of or
interest on, or a conversion of or into, or the Interest Period for, a
Eurodollar Loan
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or a notice by the Borrower with respect to any such borrowing or continuation,
payment, prepayment, conversion or Interest Period, any day which is also a day
on which dealings in Dollar deposits are carried out in the London interbank
market.
"CAPITAL EXPENDITURES" shall mean, with respect to the Borrower and its
Subsidiaries, for any period the sum of (without duplication) (a) all
expenditures (whether paid in cash or accrued as liabilities) by the Borrower or
any Subsidiary during such period for items that would be classified as
"property, plant or equipment" or comparable items on the consolidated balance
sheet of the Borrower and its Subsidiaries, including without limitation all
transactional costs incurred in connection with such expenditures provided the
same have been capitalized, excluding, however, the amount of any Capital
Expenditures paid for with proceeds of casualty insurance as evidenced in
writing and submitted to the Agent together with any Compliance Certificate
delivered pursuant to Section 8.01(i), and (b) with respect to any Capital Lease
entered into by the Borrower or its Subsidiaries during such period, the present
value of the lease payments due under such Capital Lease over the term of such
Capital Lease applying a discount rate equal to the interest rate provided in
such lease (or in the absence of a stated interest rate, that rate used in the
preparation of the financial statements described in Section 8.01(a) and (b)),
all of the foregoing in accordance with GAAP applied on a Consistent Basis;
PROVIDED, HOWEVER, it shall not include (x) Capital Expenditures required by the
Agreement and Plan of Organization dated December 1, 1997 between Alatec
Products, Inc. and the Borrower and (y) Capital Expenditures incurred in
conjunction with Acquisitions permitted pursuant to Section 9.03(i).
"CAPITAL LEASES" shall mean all leases which have been or should be
capitalized in accordance with GAAP as in effect from time to time including
Statement No. 13 of the Financial Accounting Standards Board and any successor
thereof.
"CHANGE OF CONTROL" shall mean, at any time:
(A) With respect to the Borrower,
(i) any "person" or "group" (each as used in Sections 13(d)(3) and
14(d)(2) of the Exchange Act) other than the group consisting of one or
more stockholders of the Borrower who collectively owned 30% or more of
one or more of the Founding Companies immediately prior to the Acquisition
thereof by the Borrower, voting as a single unit, (each an "Existing
Control Group") either (A) becomes the "beneficial owner" (as defined in
Rule 13d-3 of the Exchange Act), directly or indirectly, of voting stock
of the Borrower (or securities convertible into or exchangeable for such
voting stock) representing 30% or more of the combined voting power of all
voting stock of the Borrower (on a fully diluted basis) or (B) otherwise
has the ability, directly or indirectly, to elect a majority of the board
of directors of the Borrower (PROVIDED that if an event described in this
clause (i) shall occur solely by reason of the death of one or more
members of the Existing Control Group, then a "Change of Control" shall
not be deemed to have occurred so long as the voting stock of the decedent
is owned of record by the estate or immediately family of such decedent);
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(ii) during any period of up to 24 consecutive months, commencing on
the Closing Date, individuals who at the beginning of such 24-month period
were directors of the Borrower shall cease for any reason (other than the
death, disability or retirement of a director or of an officer of the
Borrower that is serving as a directory at such time so long as another
officer of the Borrower replaces such Person as a director) to constitute
a majority of the board of directors of the Borrower; or
(iii) any Person or two or more Persons acting in concert other than
the Existing Control Group shall have acquired by contract or otherwise,
or shall have consummated a contract or arrangement that results in its or
their acquisition of the power to exercise, directly or indirectly, a
controlling influence on the management or policies of the Borrower; or
(B) with respect to any Subsidiary,
(i) the Borrower shall cease to own, directly or indirectly, 100% of
the voting stock of each currently existing Subsidiary; or
(ii) any Person or two or more Persons acting in concert other than
the Borrower shall have acquired by contract or otherwise, or shall have
consummated a contract or arrangement that results in its or their
acquisition of the power to exercise, directly or indirectly, a
controlling influence on the management or policies of such Subsidiary.
"CLOSING DATE" shall mean March 13, 1998.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time and any successor statute.
"COMMITMENT" shall mean, for any Lender, its obligation to make Loans up
to the lesser of such Lender's Maximum Credit Amount or the Lender's Percentage
Share of the amount equal to the then effective Borrowing Base and to
participate in the Letters of Credit as provided in Section 2.01(b).
"COMPLIANCE CERTIFICATE" shall mean a certificate in the form of EXHIBIT C
hereto executed by a Responsible Officer.
"CONSISTENT BASIS" in reference to the applicable GAAP shall mean the
accounting principles observed in the period referred to are comparable in all
material respects to those applied in the preparation of the audited financial
statements of the Borrower referred to in Section 7.02.
"CONSOLIDATED NET INCOME" shall mean with respect to the Borrower and its
Consolidated Subsidiaries, for any period, the aggregate of the net income (or
loss) of the Borrower and its Consolidated Subsidiaries after allowances for
taxes for such period, determined on a consolidated
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basis in accordance with GAAP; PROVIDED that there shall be excluded from such
net income (to the extent otherwise included therein) the following: (i) the net
income of any Person in which the Borrower or any Consolidated Subsidiary has an
interest (which interest does not cause the net income of such other Person to
be consolidated with the net income of the Borrower and its Consolidated
Subsidiaries in accordance with GAAP), except to the extent of the amount of
dividends or distributions actually paid in cash in such period by such other
Person to the Borrower or to a Consolidated Subsidiary, as the case may be; (ii)
the net income (but not loss) of any Consolidated Subsidiary to the extent that
the declaration or payment of dividends or similar distributions or transfers or
loans by that Consolidated Subsidiary to the Borrower is not at the time
permitted by operation of the terms of its charter or any agreement, instrument
or Governmental Requirement applicable to such Consolidated Subsidiary, or is
otherwise restricted or prohibited in each case determined in accordance with
GAAP; (iii) any extraordinary gains including gains attributable to Property
sales not in the ordinary course of business; and (iv) the cumulative effect of
a change in accounting principles and any gains attributable to writeups of
assets.
"CONSOLIDATED SUBSIDIARIES" shall mean each Subsidiary of the Borrower
(whether now existing or hereafter created or acquired) the financial statements
of which shall be (or should have been) consolidated with the financial
statements of the Borrower in accordance with GAAP.
"CONTINUE", "CONTINUATION", and "CONTINUED" shall refer to the
continuation pursuant to Section 5.01 hereof of a Eurodollar Loan from one
Interest Period to the next Interest Period.
"CONVERT", "CONVERSION", and "CONVERTED" shall refer to a conversion
pursuant to Section 5.01 of one Type of Loan into another Type of Loan.
"DEBT" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments (including principal,
interest, fees and charges); (ii) all obligations of such Person (whether
contingent or otherwise) in respect of bankers' acceptances, letters of credit,
surety or other bonds and similar instruments; (iii) all obligations of such
Person to pay the deferred purchase price of Property or services (other than
for borrowed money); (iv) all obligations under leases which shall have been, or
should have been, in accordance with GAAP, recorded as capital leases in respect
of which such Person is liable (whether contingent or otherwise); (v) all
obligations under leases which require such Person or its Affiliate to make
payments over the term of such lease, including payments at termination, which
are substantially equal to at least eighty percent (80%) of the purchase price
of the Property subject to such lease plus interest at an imputed rate of
interest; (vi) all Debt (as described in the other clauses of this definition)
and other obligations of others secured by a Lien on any asset of such Person,
whether or not such Debt is assumed by such Person; (vii) all Debt (as described
in the other clauses of this definition) and other obligations of others
guaranteed by such Person or in which such Person otherwise assures a creditor
against loss of the debtor or obligations of others; (viii) all obligations or
undertakings of such Person to maintain or cause to be maintained the financial
position or covenants of others or to purchase the Debt (as described in the
other clauses of this definition) or Property of others; (ix) obligations to
deliver goods or services
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in consideration of advance payments ; (x) obligations to pay for goods or
services whether or not such goods or services are actually received or utilized
by such Person; (xi) any capital stock of such Person in which such Person has a
mandatory obligation to redeem such stock; (xii) any Debt (as described in the
other clause of this definition) of a Special Entity for which such Person is
liable either by agreement or because of a Governmental Requirement; and (xiii)
all obligations of such Person under Hedging Agreements.
"DEFAULT" shall mean an Event of Default or an event which with notice or
lapse of time or both would become an Event of Default.
"DOLLARS" and "$" shall mean lawful money of the United States of America.
"EBITDA" shall mean, for any period, the sum of Consolidated Net Income
for such period plus the following expenses or charges to the extent deducted
from Consolidated Net Income in such period: interest, taxes, depreciation,
depletion and amortization, minus all non cash other income added to
Consolidated Net Income in such period.
"ELIGIBLE ACCOUNTS" shall mean at any time an amount equal to the
aggregate net invoice or ledger amount due on all trade accounts receivable of
the Borrower and the Guarantors for goods sold or leased or services rendered
upon which Borrower's and Guarantors' rights to receive payment are absolute and
not contingent upon the fulfillment of any condition whatsoever, and shall not
include (i) any account which is more than 60 days past due, (ii) any account
which is unpaid more than 120 days from the invoice date thereof, (iii) any
account which is past due more than twice Borrower's standard selling terms,
except with respect to any account for which Borrower has provided extended
payment terms, (iv) any account upon which there exists any Lien or other
encumbrance or for which there exists a right of setoff, defense or discount,
except regular discounts allowed in the ordinary course of business to promote
prompt payment and for which no defense or counterclaim has been asserted, (v)
any account which represents an obligation of any local, state or United States
federal governmental agency or entity, (vi) any account which arises out of a
contract or order which, by its terms, forbids or makes void or unenforceable
any assignment by Borrower to the Agent of the account receivable arising with
respect thereto, (vii) any account arising from a "sale on approval," "sale or
return," "consignment" or subject to any other repurchase or return agreement,
(viii) any account which represents an obligation of a customer which is not a
resident of the United States unless such account is supported by a letter of
credit or insurance in form and substance acceptable to the Agent, or such
customer is listed on SCHEDULE 1.01(A) OR otherwise approved by the Majority
Lenders (ix) any account which arises from the sale or lease to or performance
of services for, or represents an obligation of, an employee, affiliate,
partner, parent or subsidiary of Borrower, (x) any account which represents an
obligation of a customer of Borrower when 50% or more of Borrower's accounts
from such customer are not eligible pursuant to the foregoing formula, (xi) that
portion of any account from a customer of Borrower which represents the amount
by which Borrower's total accounts from such customer exceeds 25% of Borrower's
total accounts, (xii) any accounts arising from sales of goods or services in
which the performance of the Borrower has been bonded, (xiii)any account from a
customer which takes, suffers or permits to
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exist any of the events or conditions referred to in paragraphs (e), (f) or (g)
of Section 10.01 hereof, and (xiv) any account in which the Majority Lenders are
not or do not continue to be, in the reasonable determination of the Majority
Lenders, satisfied with the credit worthiness of the customer of Borrower in
relation to the amount of credit extended.
"ELIGIBLE ASSIGNEE" shall mean (i) a Lender, (ii) an Affiliate of a Lender
and (iii) any other Person approved by the Agent and, unless an Event of Default
has occurred and is continuing at the time any assignment is effected in
accordance with Section 12.06, the Borrower, such approval not to be
unreasonably withheld or delayed by the Borrower and such approval to be deemed
given by the Borrower if no objection is received by the assigning Lender and
the Agent from the Borrower within two Business Days after notice of such
proposed assignment has been provided by the assigning Lender to the Borrower;
PROVIDED, HOWEVER, that neither the Borrower nor an Affiliate of the Borrower
shall qualify as an Eligible Assignee.
"ELIGIBLE INVENTORY" shall mean at any time all inventory of raw materials
and finished goods then owned by the Borrower and the Guarantors and held for
sale or disposition in the ordinary course of business, which is valued at the
lower of cost or market, other than (i) work in process and supplies, (ii) in
the event that the Agent has taken a security interest in the inventory, all
inventory in which the Agent does not have a first priority perfected security
interest, (iii) inventory which is not located at locations listed on SCHEDULE
1.01(B) in an amount not to exceed ten percent (10%) of the cost value of
inventory at such time, (iv) inventory on consignment, (v) repossessed
inventory, (vi) obsolete inventory, (vii) inventory that is not in good
condition or that fails to meet government standards, and (viii) inventory upon
which there exists any Lien or other encumbrance other than an Excepted Lien.
"ENVIRONMENTAL LAWS" shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all jurisdictions
in which the Borrower or any Subsidiary is conducting or at any time has
conducted business, or where any Property of the Borrower or any Subsidiary is
located, including without limitation, the Oil Pollution Act of 1990 ("OPA"),
the Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health Act
of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and Reauthorization
Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended,
and other environmental conservation or protection laws. The term "oil" shall
have the meaning specified in OPA, the terms "hazardous substance" and "release"
(or "threatened release") have the meanings specified in CERCLA, and the terms
"solid waste" and "disposal" (or "disposed") have the meanings specified in
RCRA; provided, however, that (i) in the event either OPA, CERCLA or RCRA is
amended so as to broaden the meaning of any term defined thereby, such broader
meaning shall apply subsequent to the effective date of such amendment and (ii)
to the extent the laws of the state in which any Property of the Borrower or any
Subsidiary is located establish a meaning for
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"oil," "hazardous substance," "release," "solid waste" or "disposal" which is
broader than that specified in either OPA, CERCLA or RCRA, such broader meaning
shall apply.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time and any successor statute.
"ERISA AFFILIATE" shall mean each trade or business (whether or not
incorporated) which together with the Borrower or any Subsidiary would be deemed
to be a "single employer" within the meaning of section 4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of section 414 of the Code.
"ERISA EVENT" shall mean (i) a "Reportable Event" described in Section
4043 of ERISA and the regulations issued thereunder, (other than such an event
with respect to which the requirement to give notice has been waived) (ii) the
withdrawal of the Borrower, any Subsidiary or any ERISA Affiliate from a Plan
during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA, (iii) the filing of a notice of intent to terminate
a Plan or the treatment of a Plan amendment as a termination under Section
4041(c) of ERISA, (iv) the institution of proceedings to terminate a Plan by the
PBGC or (v) any other event or condition which could reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan.
"EURODOLLAR LOANS" shall mean Loans the interest rates on which are
determined on the basis of rates referred to in the definition of "Adjusted
Eurodollar Rate".
"EURODOLLAR RATE" shall mean, for any Eurodollar Loan for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar
Loan for any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; PROVIDED, HOWEVER, if more
than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates (rounded upwards, if necessary,
to the nearest 1/100 of 1%).
"EVENT OF DEFAULT" shall have the meaning assigned such term in Section
10.01.
"EXCEPTED LIENS" shall mean: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due or which are being contested in good
faith by appropriate action and for which adequate reserves have been
maintained; (ii) Liens in connection with workmen's compensation, unemployment
insurance or other social security, old age pension or public liability
obligations not
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yet due or which are being contested in good faith by appropriate action and for
which adequate reserves have been maintained in accordance with GAAP; (iii)
operators', vendors', carriers', warehousemen's, repairmen's, mechanics',
workmen's, materialmen's, construction or other like Liens arising by operation
of law in the ordinary course of business or statutory landlord's liens, each of
which is in respect of obligations that have not been outstanding more than 90
days or which are being contested in good faith by appropriate proceedings and
for which adequate reserves have been maintained in accordance with GAAP; (iv)
encumbrances (other than to secure the payment of borrowed money or the deferred
purchase price of Property or services), easements, restrictions, servitudes,
permits, conditions, covenants, exceptions or reservations in any rights of way
or other Property of the Borrower or any Subsidiary for the purpose of roads,
pipelines, transmission lines, transportation lines, distribution lines for the
removal of gas, oil, coal or other minerals or timber, and other like purposes,
or for the joint or common use of real estate, rights of way, facilities and
equipment, and defects, irregularities, zoning restrictions and deficiencies in
title of any rights of way or other Property which in the aggregate do not
materially impair the use of such rights of way or other Property for the
purposes of which such rights of way and other Property are held by the Borrower
or any Subsidiary or materially impair the value of such Property subject
thereto; (v) deposits of cash or securities to secure the performance of bids,
trade contracts, leases, statutory obligations and other obligations of a like
nature incurred in the ordinary course of business; and (vi) Liens permitted or
created by the Security Instruments.
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight federal funds transactions with a member of the
Federal Reserve System arranged by federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (i) if the date for which such rate is to be
determined is not a Business Day, the Federal Funds Rate for such day shall be
such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to NationsBank on such day on such transactions as determined by
the Agent.
"FEE LETTER" shall mean that certain letter agreement from the Agent to
the Borrower dated of even date with this Agreement concerning certain fees in
connection with this Agreement and any agreements or instruments executed in
connection therewith, as the same may be amended or replaced from time to time.
"FINANCIAL STATEMENTS" shall mean the financial statement or statements of
the Borrower and its Consolidated Subsidiaries described or referred to in
Section 7.02.
"FOUNDING COMPANIES" shall mean Alatec Products, Inc., AXS Solutions,
Inc., Capitol Bolt & Supply, Inc., Maumee Industries, Inc. and Sales Systems,
Limited.
"FRONTING BANK" shall mean NationsBank or any other Lender agreed to
between the Borrower and the Agent to issue Letters of Credit.
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"FUNDED DEBT" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or evidenced
by bonds, debentures, notes or other similar instruments (including principal,
interest, fees and charges); (ii) all obligations of such Person (whether
contingent or otherwise) in respect of bankers' acceptances, letters of credit,
surety or other bonds and similar instruments; (iii) all obligations of such
Person to pay the deferred purchase price of Property or services (other than
for borrowed money) excluding accounts payable (for the deferred purchase price
of Property or services) from time to time incurred in the ordinary course of
business which, if greater than 90 days past the invoice or billing date, are
being contested in good faith by appropriate proceedings if reserves adequate
under GAAP shall have been established therefor; (iv) all obligations under
leases which shall have been, or should have been, in accordance with GAAP,
recorded as capital leases in respect of which such Person is liable (whether
contingent or otherwise); (v) all obligations under leases which require such
Person or its Affiliate to make payments over the term of such lease, including
payments at termination, which are substantially equal to at least eighty
percent (80%) of the purchase price of the Property subject to such lease plus
interest at an imputed rate of interest; (vi) all Debt and other obligations of
others guaranteed by such Person or in which such Person otherwise assures a
creditor against loss of the debtor or obligations of others; (vii) any capital
stock of such Person in which such Person has a mandatory obligation to redeem
such stock; (viii) any Debt of a Special Entity for which such Person is liable
either by agreement or because of a Governmental Requirement; and (ix) all
obligations of such Person under Hedging Agreements.
"GAAP" shall mean generally accepted accounting principles in the United
States of America in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's Property is
located or which exercises valid jurisdiction over any such Person or such
Person's Property, and any court, agency, department, commission, board, bureau
or instrumentality of any of them including monetary authorities which exercises
valid jurisdiction over any such Person or such Person's Property. Unless
otherwise specified, all references to Governmental Authority herein shall mean
a Governmental Authority having jurisdiction over, where applicable, the
Borrower, the Subsidiaries or any of their Property or the Agent, any Lender or
any Applicable Lending Office.
"GOVERNMENTAL REQUIREMENT" shall mean any law, statute, code, ordinance,
order, determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other directive or requirement
(whether or not having the force of law), including, without limitation,
Environmental Laws, energy regulations and occupational, safety and health
standards or controls, of any Governmental Authority.
"GUARANTORS" shall mean each Subsidiary and any other Person who becomes
party to a Guaranty Agreement pursuant to the terms of Section 8.08.
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"GUARANTY AGREEMENT" shall mean an agreement executed by the Guarantors in
form and substance satisfactory to the Agent guarantying, unconditionally,
payment of the Indebtedness, as the same may be amended, modified or
supplemented from time to time.
"HEDGING AGREEMENTS" shall mean any commodity, interest rate or currency
swap, cap, floor, collar, forward agreement or other exchange or protection
agreements or any option with respect to any such transaction.
"HIGHEST LAWFUL RATE" shall mean, with respect to each Lender, the maximum
nonusurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Notes or on other
Indebtedness under laws applicable to such Lender which are presently in effect
or, to the extent allowed by law, under such applicable laws which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
"INDEBTEDNESS" shall mean any and all amounts owing or to be owing by the
Borrower to the Agent, the Fronting Bank and/or Lenders in connection with the
Loan Documents, the Letter of Credit Agreements, and any Hedging Agreements now
or hereafter arising between the Borrower and any Lender and permitted by the
terms of this Agreement and all renewals, extensions and/or rearrangements of
any of the above.
"INDEMNIFIED PARTIES" shall have the meaning assigned such term in Section
12.03(b).
"INDEMNITY MATTERS" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands and
causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (including, without limitation,
consequential damages) or reasonable costs and expenses of any kind or nature
whatsoever incurred by such Person whether caused by the sole or concurrent
negligence of such Person seeking indemnification.
"INITIAL FUNDING" shall mean the funding of the initial Loans or issuance
of the initial Letters of Credit pursuant to Section 6.01 hereof.
"INTEREST PERIOD" shall mean, with respect to any Eurodollar Loan, the
period commencing on the date such Eurodollar Loan is made and ending on the
numerically corresponding day in the first, second, third or sixth calendar
month thereafter, as the Borrower may select as provided in Section 2.02 (or
such longer period as may be requested by the Borrower and agreed to by the
Majority Lenders), except that each Interest Period which commences on the last
Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.
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Notwithstanding the foregoing: (i) no Interest Period may commence before
and end after the Revolving Credit Termination Date; (ii) no Interest Period for
any Eurodollar Loan may end after the due date of any installment, if any,
provided for in Section 3.01 hereof to the extent that such Eurodollar Loan
would need to be prepaid prior to the end of such Interest Period in order for
such installment to be paid when due; (iii) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next succeeding calendar month, on the next preceding Business Day); and (iv) no
Interest Period shall have a duration of less than one month and, if the
Interest Period for any Eurodollar Loans would otherwise be for a shorter
period, such Loans shall not be available hereunder.
"LC COMMITMENT" at any time shall mean $5,000,000.
"LC EXPOSURE" at any time shall mean the aggregate face amount of all
undrawn and uncancelled Letters of Credit and the aggregate of all amounts drawn
under all Letters of Credit and not yet reimbursed.
"LETTER OF CREDIT AGREEMENTS" shall mean the written agreements with the
Fronting Bank, executed or hereafter executed in connection with the issuance by
the Fronting Bank of the Letters of Credit, such agreements to be on the
Fronting Bank's customary form for letters of credit of comparable amount and
purpose as from time to time in effect or as otherwise agreed to by the Borrower
and the Fronting Bank.
"LETTERS OF CREDIT" shall mean the letters of credit issued pursuant to
Section 2.01(b) and all reimbursement obligations pertaining to any such letters
of credit, and "Letter of Credit" shall mean any one of the Letters of Credit
and the reimbursement obligations pertaining thereto.
"LIEN" shall mean any interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and whether such
obligation or claim is fixed or contingent, and including but not limited to (i)
the lien or security interest arising from a mortgage, encumbrance, pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security purposes. The term "LIEN" shall include reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purposes of this Agreement, the Borrower or any Subsidiary
shall be deemed to be the owner of any Property which it has acquired or holds
subject to a conditional sale agreement, or leases under a financing lease or
other arrangement pursuant to which title to the Property has been retained by
or vested in some other Person in a transaction intended to create a financing.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes and the Security
Instruments.
"LOANS" shall mean the loans as provided for by Sections 2.01(a) and (c).
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"MAJORITY LENDERS" shall mean, as of any date, Lenders on such date having
Credit Exposures (as defined below) aggregating at least 66-2/3% of the
aggregate Credit Exposures of all the Lenders on such date. For purposes of the
preceding sentence, the amount of the "Credit Exposure" of each Lender shall be
equal to the aggregate principal amount of the Loans owing to such Lender plus
the aggregate unutilized amounts of such Lender's Revolving Credit Commitment
(without regard to any Swing Line Outstandings) plus the amount of such Lender's
Percentage Share of LC Exposure, provided that, (i) if any Lender shall have
failed to honor its obligation to make any Loan or other advance hereunder, it
shall not be deemed to have any Credit Exposure, (ii) if any Lender shall have
failed to pay to the Fronting Bank its Percentage Share of any drawing under any
Letter of Credit, such Lender's Credit Exposure attributable to LC Exposure
shall be deemed to be held by the Fronting Bank for purposes of this definition
and (iii) if any Lender shall have failed to pay to NationsBank its Percentage
Share of any Swing Line Loan, such Lender's Credit Exposure attributable to all
Swing Line Outstandings shall be deemed to be held by NationsBank for purposes
of this definition.
"MATERIAL ADVERSE EFFECT" shall mean any material and adverse effect on
(i) the assets, liabilities, financial condition, business, operations or
affairs of the Borrower and the Subsidiaries taken as a whole or from the facts
represented or warranted in any Loan Document, or (ii) the ability of the
Borrower and the Subsidiaries taken as a whole to carry out their business as at
the Closing Date or as proposed as of the Closing Date to be conducted or meet
their obligations under the Loan Documents on a timely basis.
"MAXIMUM CREDIT AMOUNT" shall mean, as to each Lender, the amount set
forth opposite such Lender's name on Annex I under the caption "Maximum Credit
Amounts" (as the same may be reduced pursuant to Section 2.03(b) hereof pro rata
to each Lender based on its Percentage Share) as modified from time to time to
reflect any assignments permitted by Section 12.06(b).
"MORTGAGED PROPERTY" shall mean the Property owned by the Borrower and
which is subject to the Liens existing and to exist under the terms of the
Security Instruments.
"MULTIEMPLOYER PLAN" shall mean a Plan defined as such in Section 3(37) or
4001(a)(3) of ERISA.
"NET WORTH" shall mean, as at any date, the sum of the following for the
Borrower and its Consolidated Subsidiaries determined (without duplication) in
accordance with GAAP:
(i) the amount of preferred stock and common stock at par plus the
amount of surplus of the Borrower, PLUS
(ii) the retained earnings (or, in the case of retained earnings
deficit, MINUS the amount of such deficit), MINUS
(iii) the sum of the following: cost of treasury shares.
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"NOTES" shall mean the Notes provided for by Section 2.06, together with
any and all renewals, extensions for any period, increases, rearrangements,
substitutions or modifications thereof. The Notes shall include the Swing Line
Note.
"OTHER TAXES" shall have the meaning assigned such term in Section
4.06(b).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
"PERCENTAGE SHARE" shall mean the percentage of the Aggregate Commitments
to be provided by a Lender under this Agreement as indicated on Annex I hereto,
as modified from time to time to reflect any assignments permitted by Section
12.06(b).
"PERSON" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
"PLAN" shall mean any employee pension benefit plan, as defined in Section
3(2) of ERISA, which (i) is currently or hereafter sponsored, maintained or
contributed to by the Borrower, any Subsidiary or an ERISA Affiliate or (ii) was
at any time during the preceding six calendar years sponsored, maintained or
contributed to, by the Borrower, any Subsidiary or an ERISA Affiliate.
"POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan or
any other amount payable by the Borrower under this Agreement or any Note, a
rate per annum during the period commencing on the date of an Event of Default
until such amount is paid in full or all Events of Default are cured or waived
equal to 2% per annum above the Base Rate as in effect from time to time plus
the Applicable Margin (if any), but in no event to exceed the Highest Lawful
Rate provided that, for a Eurodollar Loan, the "Post-Default Rate" for such
principal shall be, for the period commencing on the date of the Event of
Default and ending on the earlier to occur of the last day of the Interest
Period therefor or the date all Events of Default are cured or waived, 2% per
annum above the interest rate for such Loan as provided in Section 3.02(ii), but
in no event to exceed the Highest Lawful Rate.
"PRIME RATE" shall mean the per annum rate of interest established from
time to time by NationsBank as its prime rate, which rate may not be the lowest
rate of interest charged by NationsBank to its customers.
"PRINCIPAL OFFICE" shall mean the principal office of the Agent, presently
located at 700 Louisiana, Houston, Texas 77252-2518 or such other location as
designated by the Agent from time to time.
"PROPERTY" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
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"QUARTERLY DATES" shall mean the last day of each March, June, September,
and December, in each year, the first of which shall be March 31, 1998;
provided, however, that if any such day is not a Business Day, such Quarterly
Date shall be the next succeeding Business Day.
"REGULATION D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
"REGISTRATION STATEMENT" shall mean that certain Registration Statement of
the Borrower on Form S-1 filed with the SEC on December 3, 1997, as amended by
each of the first amendment through sixth amendment, which sixth amendment is
dated March 9, 1998.
"REGULATORY CHANGE" shall mean, with respect to any Lender, any change
after the Closing Date in any Governmental Requirement (including Regulation D)
or the adoption or making after such date of any interpretations, directives or
requests applying to a class of lenders (including such Lender or its Applicable
Lending Office) of or under any Governmental Requirement (whether or not having
the force of law) by any Governmental Authority charged with the interpretation
or administration thereof.
"REQUIRED PAYMENT" shall have the meaning assigned such term in Section
4.04.
"RESERVE REQUIREMENT" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against Eurodollar
Loans, "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
reflect any other reserves required to be maintained by such member banks with
respect to (i) any category of liabilities which includes deposits by reference
to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category
of extensions of credit or other assets which include Eurodollar Loans. The
Adjusted Eurodollar Rate shall be adjusted automatically on and as of the
effective date of any change in the Reserve Requirement.
"RESPONSIBLE OFFICER" shall mean, as to any Person, the Chief Executive
Officer, the President or any Vice President of such Person and, with respect to
financial matters, the term "Responsible Officer" shall include the Chief
Financial Officer of such Person. Unless otherwise specified, all references to
a Responsible Officer herein shall mean a Responsible Officer of the Borrower.
"RESTRICTED PAYMENT" shall mean (a) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of Borrower
or any of its Subsidiaries (other than those payable or distributable solely to
the Borrower) now or hereafter outstanding, except a dividend payable solely in
shares of a class of stock to the holders of that class; (b) any redemption,
conversion, exchange, retirement or similar payment, purchase or other
acquisition for value, direct
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or indirect, of any shares of any class of stock of Borrower or any of its
Subsidiaries (other than those payable or distributable solely to the Borrower)
now or hereafter outstanding; (c) any payment made to retire, or to obtain the
surrender of, any outstanding warrants, options or other rights to acquire
shares of any class of stock of Borrower or any of its Subsidiaries now or
hereafter outstanding; and (d) any issuance and sale of capital stock of any
Subsidiary of the Borrower (or any option, warrant or right to acquire such
stock) other than to the Borrower.
"REVOLVING CREDIT TERMINATION DATE" shall mean, unless the Commitments are
sooner terminated pursuant to Sections 2.03(b) or 10.02 hereof, March 13, 2001.
"SEC" shall mean the Securities and Exchange Commission or any successor
Governmental Authority.
"SECURITY INSTRUMENTS" shall mean the Letters of Credit, the Letter of
Credit Agreements, the Fee Letter, the agreements or instruments described or
referred to in EXHIBIT D, and any and all other agreements or instruments now or
hereafter executed and delivered by the Borrower or any other Person (other than
participation or similar agreements between any Lender and any other lender or
creditor with respect to any Indebtedness pursuant to this Agreement) in
connection with, or as security for the payment or performance of the Notes,
this Agreement or reimbursement obligations under the Letters of Credit, as such
agreements may be amended, supplemented or restated from time to time.
"SPECIAL ENTITY" shall mean any joint venture, limited liability company
or partnership, general or limited partnership or any other type of partnership
or company other than a corporation in which the Borrower or one or more of its
other Subsidiaries is a member, owner, partner or joint venturer and owns,
directly or indirectly, at least a majority of the equity of such entity or
controls such entity, but excluding any tax partnerships that are not classified
as partnerships under state law. For purposes of this definition, any Person
which owns directly or indirectly an equity investment in another Person which
allows the first Person to manage or elect managers who manage the normal
activities of such second Person will be deemed to "control" such second Person
(E.G. a sole general partner controls a limited partnership).
"SUBORDINATED DEBT" shall mean any Debt of the Borrower expressly
subordinated to the Indebtedness pursuant to agreements in form and substance
satisfactory to the Lenders.
"SUBSIDIARY" shall mean (i) any corporation of which at least a majority
of the outstanding shares of stock having by the terms thereof ordinary voting
power to elect a majority of the board of directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned or
controlled by the Borrower or one or more of its Subsidiaries or by the Borrower
and one or more of its Subsidiaries, (ii) any Special Entity and (iii) each
Founding Company prior to the date it becomes a Subsidiary. Unless otherwise
indicated herein, each reference to the term "Subsidiary" shall mean a
Subsidiary of the Borrower.
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"SWING LINE COMMITMENT" shall mean, for the Swing Line Lender, its
obligation to make Swing Line Loans up to $5,000,000.
"SWING LINE FACILITY" shall mean the facility pursuant to Section 2.01(c).
"SWING LINE LENDER" shall mean NationsBank or such other Lender as Agent,
Borrower and such Lender shall agree.
"SWING LINE LOANS" shall mean the Loans made pursuant to Section 2.01(c).
"SWING LINE NOTE" shall mean the promissory note or notes (whether one or
more) of the Borrower described in Section 2.01(c) and being in the form of
EXHIBIT A-2.
"TAXES" shall have the meaning assigned such term in Section 4.06(a).
"TYPE" shall mean, with respect to any Loan, a Base Rate Loan or a
Eurodollar Loan.
"WHOLLY-OWNED SUBSIDIARY" shall mean, as to the Borrower, any Subsidiary
of which all of the outstanding shares of stock having by the terms thereof
ordinary voting power to elect the board of directors of such corporation, other
than directors' qualifying shares, are owned or controlled by the Borrower or
one or more of the Wholly-Owned Subsidiaries or by the Borrower and one or more
of the Wholly-Owned Subsidiaries.
Section 1.03 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Agent or the Lenders hereunder shall be
prepared, in accordance with GAAP, applied on a basis consistent with the
audited financial statements of the Borrower referred to in Section 7.02 (except
for changes concurred with by the Borrower's independent public accountants).
ARTICLE II
COMMITMENTS
Section 2.01 LOANS AND LETTERS OF CREDIT.
(a) LOANS. Each Lender severally agrees, on the terms of this Agreement,
to make Loans to the Borrower during the period from and including (i) the
Closing Date or (ii) such later date that such Lender becomes a party to this
Agreement as provided in Section 12.06(a), to but excluding, the Revolving
Credit Termination Date in an aggregate principal amount at any one time
outstanding up to but not exceeding the amount of such Lender's Commitment as
then in effect; PROVIDED, HOWEVER, that the aggregate principal amount of all
such Loans by all Lenders hereunder at any one
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time outstanding together with the LC Exposure and the amount outstanding under
the Swing Line Facility shall not exceed the Aggregate Commitments. Subject to
the terms of this Agreement, during the period from the Closing Date to but
excluding, the Revolving Credit Termination Date, the Borrower may borrow, repay
and reborrow the amount described in this Section 2.01(a).
(b) LETTERS OF CREDIT. During the period from and including the Closing
Date to but excluding the Revolving Credit Termination Date, the Fronting Bank,
as issuing bank for the Lenders, agrees to extend credit for the account of the
Borrower at any time and from time to time by issuing renewing, extending or
reissuing Letters of Credit; provided however, the LC Exposure at any one time
outstanding shall not exceed the lesser of (i) the LC Commitment or (ii) the
Aggregate Commitments, as then in effect, minus the aggregate principal amount
of all Loans then outstanding. The Lenders shall participate in such Letters of
Credit according to their respective Percentage Shares.
(c) SWING LINE. Notwithstanding any other provision of this
Agreement to the contrary, in order to administer the revolving facility under
Section 2.01(a) above in an efficient manner and to minimize the transfer of
funds between the Agent and the Lenders, the Swing Line Lender shall make
available Swing Line Loans to the Borrower at the election of Borrower prior to
the Revolving Credit Termination Date. The Swing Line Lender shall not make any
Swing Line Loan pursuant hereto (i) if the Borrower is not in compliance with
all the conditions to the making of Loans set forth in this Agreement, (ii) if
after giving effect to such Swing Line Loan, the outstanding Swing Line Loans
exceed the Swing Line Commitment, or (iii) if after giving effect to such Swing
Line Loan, the sum of all Loans then outstanding and the LC Exposure exceeds the
Aggregate Commitments. Loans made pursuant to this Section 2.01(c) shall be
limited to Loans bearing interest at the Base Rate or such other rate of
interest as agreed upon by the Borrower and the Swing Line Lender. The
indebtedness of the Borrower to the Swing Line Lender resulting from the
advances under this Section 2.01(c) shall be evidenced by the Swing Line Note
made by the Borrower, which Swing Line Note shall be in a principal amount equal
to the Swing Line Commitment.
(i) Subject to the terms of this Agreement, during the period from
the Closing Date to but excluding, the Revolving Credit Termination Date,
the Borrower may borrow, repay and reborrow Swing Line Loans under this
Section 2.01(c). Each repayment of a Swing Line Loan shall be in integral
multiples of $100,000 or the unpaid amount of the Swing Line Loans
outstanding. The minimum outstanding amount of Swing Line Loans shall be
$100,000.
(ii) If the Borrower instructs the Swing Line Lender to debit its
demand deposit account in an amount of any payment with respect to a Swing
Line Loan, or the Swing Line Lender otherwise receives repayment after
2:00 P.M. Houston, Texas time, on a Business Day, such payment shall be
deemed received on the next Business Day.
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(iii) The Borrower and each Lender which is or may become a party
hereto acknowledge that all Swing Line Loans are to be made solely by the
Swing Line Lender to the Borrower, but that such Lender shall share the
risk of loss with respect to such Loans in an amount equal to such
Lender's Percentage Share of such Swing Line Loan. Upon demand made by the
Swing Line Lender, each Lender (including the Swing Line Lender) shall,
according to its Percentage Share of such Swing Line Loan, promptly
provide to the Swing Line Lender its purchase price therefor in an amount
equal to its Percentage Share therein, in which case such Swing Line Loan
shall be deemed from and after such date a Loan made under Section
2.01(a). The obligation of each Lender to so provide its purchase price to
the Swing Line Lender shall be absolute and unconditional and shall not be
affected by the occurrence of an Event of Default or any other occurrence
or event.
(iv) The Borrower at its option (and, if the Swing Line Loan is a
Eurodollar Loan, subject to Section 5.05 hereof) may request a Loan
pursuant to Section 2.01(a) in an amount sufficient to repay any or all
Swing Line Loans on any date (subject to three (3) Business Days prior
notice in the case of Eurodollar Loans), and the Agent shall upon the
receipt of such Loan provide to the Swing Line Lender the amount necessary
to repay such Swing Line Loan or Loans (which the Swing Line Lender shall
then apply to such repayment) and credit any balance of the Loan in
immediately available funds to the Borrower's account. The proceeds of
such Loans shall be paid to the Swing Line Lender for application to the
outstanding Swing Line Loans and the Lenders shall then be deemed to have
made Loans pursuant to Section 2.01(a) in the amount of such advances. The
obligation of the Swing Line Lender to fund the Swing Line Loans shall
cease upon the earlier of (i) the occurrence of a Default, or (ii) the
Revolving Credit Termination Date; provided that when a Default is no
longer continuing, the Swing Line Lender shall be obligated to provide
Swing Line Loans provided all other conditions to making Loans are
satisfied.
(d ) LIMITATION ON TYPES OF LOANS. Subject to the other terms and
provisions of this Agreement, at the option of the Borrower, the Loans (other
than Swing Line Loans) may be Base Rate Loans or Eurodollar Loans; provided
that, without the prior written consent of the Majority Lenders, no more than
seven (7) Eurodollar Loans may be outstanding at any time to any Lender.
All Swing Line Loans shall be Base Rate Loans.
Section 2.02 BORROWINGS, CONTINUATIONS AND CONVERSIONS, LETTERS OF
CREDIT.
(a) BORROWINGS. The Borrower shall give the Agent (which shall promptly
notify the Lenders) advance notice as hereinafter provided of each borrowing
hereunder, which shall specify the aggregate amount of such borrowing, the Type
and the date (which shall be a Business Day) of the Loans to be borrowed and (in
the case of Eurodollar Loans) the duration of the Interest Period therefor.
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(b) MINIMUM AMOUNTS. All borrowings other than Swing Line Loans shall be
in amounts of at least $1,000,000 or any whole multiple of $100,000 in excess
thereof. All Swing Line Loans shall be in amounts of at least $100,000 or any
whole multiple of $100,000 in excess thereof.
(c) NOTICES. The initial borrowing and all continuations and conversions
shall require advance written notice to the Agent (which shall promptly notify
the Lenders) in the form of EXHIBIT B hereto (or telephonic notice promptly
confirmed by such a written notice), which in each case shall be irrevocable,
from the Borrower to be received by the Agent not later than 11:00 a.m. Houston,
Texas time at least one Business Day prior to the date of each Base Rate Loan
borrowing and three Business Days prior to the date of each Eurodollar Loan
borrowing, continuation or conversion. Without in any way limiting the
Borrower's obligation to confirm in writing any telephonic notice, the Agent may
act without liability upon the basis of telephonic notice believed by the Agent
in good faith to be from the Borrower prior to receipt of written confirmation.
In each such case, the Borrower hereby waives the right to dispute the Agent's
record of the terms of such telephonic notice except in the case of gross
negligence or willful misconduct by the Agent.
(d) CONTINUATION OPTIONS. Subject to the provisions made in this Section
2.02(d), the Borrower may elect to continue all or any part of any Eurodollar
Loan beyond the expiration of the then current Interest Period relating thereto
by giving advance notice as provided in Section 2.02(c) to the Agent (which
shall promptly notify the Lenders) of such election, specifying the amount of
such Loan to be continued and the Interest Period therefor. In the absence of
such a timely and proper election, the Borrower shall be deemed to have elected
to convert such Eurodollar Loan to a Base Rate Loan pursuant to Section 2.02(e).
All or any part of any Eurodollar Loan may be continued as provided herein,
provided that (i) any continuation of any such Loan shall be (as to each Loan as
continued for an applicable Interest Period) in amounts of at least $1,000,000
or any whole multiple of $100,000 in excess thereof and (ii) no Default shall
have occurred and be continuing. If a Default shall have occurred and be
continuing, each Eurodollar Loan shall be converted to a Base Rate Loan on the
last day of the Interest Period applicable thereto.
(e) CONVERSION OPTIONS. The Borrower may elect to convert all or any part
of any Eurodollar Loan on the last day of the then current Interest Period
relating thereto to a Base Rate Loan by giving advance notice to the Agent
(which shall promptly notify the Lenders) of such election. Subject to the
provisions made in this Section 2.02(e), the Borrower may elect to convert all
or any part of any Base Rate Loan (other than a Swing Line Loan) at any time and
from time to time to a Eurodollar Loan by giving advance notice as provided in
Section 2.02(c) to the Agent (which shall promptly notify the Lenders) of such
election. All or any part of any outstanding Loan may be converted as provided
herein, provided that (i) any conversion of any Base Rate Loan into a Eurodollar
Loan shall be (as to each such Loan into which there is a conversion for an
applicable Interest Period) in amounts of at least $1,000,000 or any whole
multiple of $100,000 in excess thereof and (ii) no Default shall have occurred
and be continuing. If a Default shall have occurred and be continuing, no Base
Rate Loan may be converted into a Eurodollar Loan.
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(f) ADVANCES. Not later than 11:00 a.m. Houston, Texas time on the date
specified for each borrowing hereunder, each Lender shall make available the
amount of the Loan to be made by it on such date to the Agent, to an account
which the Agent shall specify, in immediately available funds, for the account
of the Borrower. The amounts so received by the Agent shall, subject to the
terms and conditions of this Agreement, be made available to the Borrower by
depositing the same, in immediately available funds, in an account of the
Borrower, designated by the Borrower and maintained at the Principal Office.
(g) LETTERS OF CREDIT. The Borrower shall give the Fronting Bank (which
shall promptly notify the Lenders of such request) advance notice to be received
by the Fronting Bank not later than 11:00 a.m. Houston, Texas time not less than
three (3) Business Days prior thereto of each request for the issuance and at
least ten (10) Business Days prior to the date of the renewal or extension of a
Letter of Credit hereunder which request shall specify the amount of such Letter
of Credit, the date (which shall be a Business Day) such Letter of Credit is to
be issued, renewed or extended, the duration thereof, the name and address of
the beneficiary thereof, the form of the Letter of Credit and such other
information as the Fronting Bank may reasonably request all of which shall be
reasonably satisfactory to the Fronting Bank. Subject to the terms and
conditions of this Agreement, on the date specified for the issuance, renewal or
extension of a Letter of Credit, the Fronting Bank shall issue such Letter of
Credit to the beneficiary thereof.
In conjunction with the issuance of each Letter of Credit, the Borrower
shall execute a Letter of Credit Agreement. In the event of any conflict between
any provision of a Letter of Credit Agreement and this Agreement, the Borrower,
the Fronting Bank, the Agent and the Lenders hereby agree that the provisions of
this Agreement shall govern.
The Fronting Bank will send to the Borrower and each Lender, upon issuance
of any Letter of Credit, or an amendment thereto, a true and complete copy of
such Letter of Credit, or such amendment thereto.
Section 2.03 CHANGES OF COMMITMENTS.
(a) The Aggregate Commitments shall at all times be equal to the lesser of
(i) the Aggregate Maximum Credit Amounts after adjustments resulting from
reductions pursuant to Section 2.03(b) hereof or (ii) the Borrowing Base as
determined from time to time.
(b) The Borrower shall have the right to terminate or to reduce the amount
of the Aggregate Maximum Credit Amounts at any time or from time to time upon
not less than three (3) Business Days' prior notice to the Agent (which shall
promptly notify the Lenders) of each such termination or reduction, which notice
shall specify the effective date thereof and the amount of any such reduction
(which shall not be less than $5,000,000 or any whole multiple of $1,000,000 in
excess thereof) and shall be irrevocable and effective only upon receipt by the
Agent.
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(c) The Aggregate Maximum Credit Amounts once terminated or reduced may
not be reinstated.
Section 2.04 FEES.
(a) COMMITMENT FEE. The Borrower shall pay to the Agent for the account of
each Lender a commitment fee on the daily average unused amount (not to include
Swing Line Loans) of the Aggregate Commitments for each period identified below
from and including the Closing Date up to but excluding the earlier of the date
the Aggregate Commitments are terminated or the Revolving Credit Termination
Date at a rate per annum equal to the applicable per annum percentage set forth
at the appropriate intersection in the table shown below, based on the ratio of
Funded Debt to Adjusted EBITDA defined in Section 9.14 for the four quarterly
periods ending and determined as of the immediately preceding Quarterly Date:
FUNDED DEBT TO ADJUSTED COMMITMENT FEE
EBITDA PERCENTAGE
Less than 1.5 .20%
Less than 1.75 but greater .25%
than or equal to 1.5
Less than 2.0 but greater than .30%
or equal to 1.75
Greater than or equal to 2.0 .375%
The applicable Commitment Fee Percentage shall be established at the end of each
Quarterly Date (the "Determination Date"). Any change in the applicable
Commitment Fee Percentage following each Determination Date shall be determined
based upon the computations set forth in the Compliance Certificate furnished to
the Agent pursuant to Section 8.01(i), subject to review and approval of such
computations by the Agent and each change in the Applicable Margin shall be
effective commencing as of the next Business Date following the date such
certificate is received and remain in effect (or, if earlier, the date such
certificate was required to be delivered) until the date that is the next
Business Day following the first to occur of the date on which (i) a new
certificate is delivered for which a change in the Applicable Margin occurs or
(ii) is required to be delivered; PROVIDED, HOWEVER; if the Borrower shall fail
to deliver any such certificate within the time period required by Section
8.01(i), then the applicable Commitment Fee shall be .375% until the appropriate
certificate is so delivered. From the Closing Date to the first Determination
Date, the Commitment Fee Percentage shall be determined based upon the
Compliance Certificate delivered at Closing.
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Accrued commitment fees shall be payable quarterly in arrears on each Quarterly
Date and on the earlier of the date the Aggregate Commitments are terminated or
the Revolving Credit Termination Date.
(b) LETTER OF CREDIT FEES.
(i) The Borrower agrees to pay the Agent, for the account of each
Lender, commissions for issuing the Letters of Credit on the daily average
outstanding of the maximum liability of the Fronting Bank existing from
time to time under such Letter of Credit (calculated separately for each
Letter of Credit) at the rate per annum equal to the Applicable Margin
then in effect for Eurodollar Loans, provided that each Letter of Credit
shall bear a minimum commission of $350. Until the termination date
provided therein, each Letter of Credit shall be deemed to be outstanding
up to the full face amount of the Letter of Credit until the Fronting Bank
has received the canceled Letter of Credit or a written cancellation of
the Letter of Credit from the beneficiary of such Letter of Credit in form
and substance acceptable to the Fronting Bank, or for any reductions in
the amount of the Letter of Credit (other than from a drawing), written
notification from the beneficiary of such Letter of Credit. Such
commissions are payable quarterly in arrears on each Quarterly Date.
(ii) The Borrower agrees to pay the Fronting Bank, for its own
account, an issuing fee for issuing Letters of Credit on the daily average
outstanding of the maximum liability of the Fronting Bank existing from
time to time under such Letter of Credit (calculated separately for each
Letter of Credit) at the rate of one-eighth of one percent (.125%) per
annum, payable quarterly in arrears on each Quarterly Date and upon
cancellation or expiration of each such Letter of Credit.
(c) The Borrower shall pay to the Agent for its account such other fees as
are set forth in the Fee Letter on the dates specified therein to the extent not
paid prior to the Closing Date.
Section 2.05 SEVERAL OBLIGATIONS. The failure of any Lender to make
any Loan to be made by it or to provide funds for disbursements or
reimbursements under Letters of Credit on the date specified therefor shall not
relieve any other Lender of its obligation to make its Loan or provide funds on
such date, but no Lender shall be responsible for the failure of any other
Lender to make a Loan to be made by such other Lender or to provide funds to be
provided by such other Lender.
Section 2.06 NOTES. Each of the Loans (other than Swing Line Loans)
made by each Lender shall be evidenced by a single promissory note of the
Borrower in substantially the form of EXHIBIT A hereto, dated (i) the Closing
Date or (ii) the effective date of an Assignment and Acceptance pursuant to
Section 12.06(a), payable to the order of such Lender in a principal amount
equal to its Maximum Credit Amount as in effect and otherwise duly completed and
such substitute Notes as required by Section 12.06(a). The date, amount, Type,
interest rate and Interest Period of each Loan made by each Lender, and all
payments made on account of the principal thereof, shall be recorded by such
Lender on its books for its Note, and, prior to any transfer, may be endorsed by
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such Lender on a schedule attached to such Note or any continuation thereof or
on any separate record maintained by such Lender. Failure to make any such
notation or to attach a schedule shall not affect any Lender's or the Borrower's
rights or obligations in respect of such Loans or affect the validity of such
transfer by any Lender of its Note.
Section 2.07 PREPAYMENTS.
(a) The Borrower may prepay the Base Rate Loans upon not less than one (1)
Business Day's prior notice to the Agent (which shall promptly notify the
Lenders), which notice shall specify the prepayment date (which shall be a
Business Day) and the amount of the prepayment (which shall be at least
$1,000,000 for all Loans other than Swing Line Loans and at least $100,000 for
Swing Line Loans or the remaining aggregate principal balance outstanding on the
Notes) and shall be irrevocable and effective only upon receipt by the Agent,
provided that interest on the principal prepaid, accrued to the prepayment date,
shall be paid on the prepayment date. The Borrower may prepay Eurodollar Loans
on the same condition as for Base Rate Loans and in addition such prepayments of
Eurodollar Loans shall be subject to the terms of Section 5.05 and shall be in
an amount equal to all of the Eurodollar Loans for the Interest Period prepaid.
(b) If, after giving effect to any termination or reduction of the
Aggregate Maximum Credit Amounts pursuant to Section 2.03(b), the outstanding
aggregate principal amount of the Loans plus the LC Exposure exceeds the
Aggregate Maximum Credit Amounts, the Borrower shall (i) prepay the Loans on the
date of such termination or reduction in an aggregate principal amount equal to
the excess, together with interest on the principal amount paid accrued to the
date of such prepayment and (ii) if any excess remains after prepaying all of
the Loans, pay to the Agent on behalf of the Lenders an amount equal to the
excess to be held as cash collateral as provided in Section 2.09(b) hereof.
(c) Upon any redetermination of the amount of the Borrowing Base, if the
redetermined Borrowing Base is less than the aggregate outstanding principal
amount of the Loans plus the LC Exposure, then the Borrower shall within thirty
(30) days after delivery of the Borrowing Base Certificate required under
Section 8.01(h): (i) prepay the Loans in an aggregate principal amount equal to
such excess, together with interest on the principal amount paid accrued to the
date of such prepayment and (ii) if a Borrowing Base deficiency remains after
prepaying all of the Loans because of LC Exposure, the Borrower shall pay to the
Agent on behalf of the Lenders an amount equal to such Borrowing Base deficiency
to be held as cash collateral as provided in Section 2.09(b) hereof.
(d) Prepayments permitted or required under this Section 2.07 shall be
without premium or penalty, except as required under Section 5.05 for prepayment
of Eurodollar Loans. Any prepayments on the Loans may be reborrowed subject to
the then effective Aggregate Commitments.
Section 2.08 ASSUMPTION OF RISKS. The Borrower assumes all risks of
the acts or omissions of any beneficiary of any Letter of Credit or any
transferee thereof with respect to its use of such Letter of Credit. Neither the
Fronting Bank (except in the case of willful misconduct or bad
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faith on the part of the Fronting Bank or any of its employees), its
correspondents nor any Lender shall be responsible for the validity or
genuineness of certificates or other documents or any endorsements thereon, even
if such certificates or other documents should in fact prove to be invalid,
fraudulent or forged; for errors, omissions, interruptions or delays in
transmissions or delivery of any messages by mail, telex, or otherwise, whether
or not they be in code; for errors in translation or for errors in
interpretation of technical terms; the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason; the failure
of any beneficiary or any transferee of any Letter of Credit to comply fully
with conditions required in order to draw upon any Letter of Credit; or for any
other consequences arising from causes beyond the Fronting Bank's control or the
control of the Fronting Bank's correspondents. In addition, neither the Fronting
Bank nor any Lender shall be responsible for any error, neglect, or default of
any of the Fronting Bank's correspondents; and none of the above shall affect,
impair or prevent the vesting of any of the Fronting Bank's, the Agent's or any
Lender's rights or powers hereunder or under the Letter of Credit Agreements,
all of which rights shall be cumulative. The Fronting Bank and its
correspondents may accept certificates or other documents that appear on their
face to be in order, without responsibility for further investigation of any
matter contained therein regardless of any notice or information to the
contrary. In furtherance and not in limitation of the foregoing provisions, the
Borrower agrees that any action, inaction or omission taken or not taken by the
Fronting Bank or by any correspondent for the Fronting Bank in good faith in
connection with any Letter of Credit, or any related drafts, certificates,
documents or instruments, shall be binding on the Borrower and shall not put the
Fronting Bank or its correspondents under any resulting liability to the
Borrower.
Section 2.09 OBLIGATION TO REIMBURSE AND TO PREPAY.
(a) If a disbursement by the Fronting Bank is made under any Letter of
Credit, the Borrower shall pay to the Agent within two (2) Business Days after
notice of any such disbursement is received by the Borrower, the amount of each
such disbursement made by the Fronting Bank under the Letter of Credit (if such
payment is not sooner effected as may be required under this Section 2.09 or
under other provisions of the Letter of Credit), together with interest on the
amount disbursed from and including the date of disbursement until payment in
full of such disbursed amount at a varying rate per annum equal to (i) the then
applicable interest rate for Base Rate Loans through the second Business Day
after notice of such disbursement is received by the Borrower and (ii)
thereafter, the Post-Default Rate for Base Rate Loans (but in no event to exceed
the Highest Lawful Rate) for the period from and including the third Business
Day following the date of such disbursement to and including the date of
repayment in full of such disbursed amount. The obligations of the Borrower
under this Agreement with respect to each Letter of Credit shall be absolute,
unconditional and irrevocable and shall be paid or performed strictly in
accordance with the terms of this Agreement under all circumstances whatsoever,
including, without limitation, but only to the fullest extent permitted by
applicable law, the following circumstances: (i) any lack of validity or
enforceability of this Agreement, any Letter of Credit or any of the Security
Instruments; (ii) any amendment or waiver of (including any default), or any
consent to departure from this
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Agreement (except to the extent permitted by any amendment or waiver), any
Letter of Credit or any of the Security Instruments; (iii) the existence of any
claim, set-off, defense or other rights which the Borrower may have at any time
against the beneficiary of any Letter of Credit or any transferee of any Letter
of Credit (or any Persons for whom any such beneficiary or any such transferee
may be acting), the Agent, any Lender or any other Person, whether in connection
with this Agreement, any Letter of Credit, the Security Instruments, the
transactions contemplated hereby or any unrelated transaction; (iv) any
statement, certificate, draft, notice or any other document presented under any
Letter of Credit proves to have been forged, fraudulent or invalid in any
respect or any statement therein proves to have been untrue or inaccurate in any
respect whatsoever; and (v) payment by the Fronting Bank under any Letter of
Credit against presentation of a draft or certificate which appears on its face
to comply, but does not comply, with the terms of such Letter of Credit.
Notwithstanding anything in this Agreement to the contrary, the Borrower will
not be liable for payment or performance that results from the gross negligence
or willful misconduct of the Fronting Bank, except (i) where the Borrower
actually recovers the proceeds for itself or the Fronting Bank of any payment
made by the Fronting Bank in connection with such gross negligence or willful
misconduct or (ii) in cases where the Fronting Bank makes payment to the named
beneficiary of a Letter of Credit.
(b) In the event of the occurrence of any Event of Default, a payment or
prepayment pursuant to Sections 2.07(b) and (c) hereof or the maturity of the
Notes, whether by acceleration or otherwise, an amount equal to the LC Exposure
(or the excess in the case of Sections 2.07(b) and (c)) shall be deemed to be
forthwith due and owing by the Borrower to the Fronting Bank, the Agent and the
Lenders as of the date of any such occurrence; and the Borrower's obligation to
pay such amount shall be absolute and unconditional, without regard to whether
any beneficiary of any such Letter of Credit has attempted to draw down all or a
portion of such amount under the terms of a Letter of Credit, and, to the
fullest extent permitted by applicable law, shall not be subject to any defense
or be affected by a right of set-off, counterclaim or recoupment which the
Borrower may now or hereafter have against any such beneficiary, the Fronting
Bank, the Agent, the Lenders or any other Person for any reason whatsoever. Such
payments shall be held by the Agent as cash collateral securing the LC Exposure
in an interest bearing account or accounts at the Principal Office; and the
Borrower hereby grants to and by its deposit with the Agent grants to the Agent
for the benefit of the Lenders a security interest in such cash collateral (and
the accrued interest thereon which shall be a part of the cash collateral). In
the event of any such payment by the Borrower of amounts contingently owing
under outstanding Letters of Credit and in the event that thereafter drafts or
other demands for payment complying with the terms of such Letters of Credit are
not made prior to the respective expiration dates thereof, the Agent agrees, if
no Event of Default has occurred and is continuing or if no other amounts are
outstanding under this Agreement, the Notes or the Security Instruments, to
remit to the Borrower amounts for which the contingent obligations evidenced by
the Letters of Credit have ceased plus any interest accrued thereon.
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(c) Each Lender severally and unconditionally agrees that it shall
promptly reimburse the Fronting Bank an amount equal to such Lender's Percentage
Share of any disbursement made by the Fronting Bank under any Letter of Credit
that is not reimbursed according to this Section 2.09.
Section 2.10 LENDING OFFICES. The Loans of each Type made by each
Lender shall be made and maintained at such Lender's Applicable Lending Office
for Loans of such Type.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 REPAYMENT OF LOANS. The Borrower will pay to the Agent,
for the account of each Lender, the principal payments required by this Section
3.01. On the Revolving Credit Termination Date the Borrower shall repay the
outstanding aggregate principal and accrued and unpaid interest under the Notes.
Section 3.02 INTEREST. The Borrower will pay to the Agent, for the
account of each Lender or the Swing Line Lender, as appropriate, interest on the
unpaid principal amount of each Loan made by such Lender for the period
commencing on the date such Loan is made to but excluding the date such Loan
shall be paid in full, at the following rates per annum:
(i) if such a Loan is a Base Rate Loan, the Base Rate (as in effect
from time to time) plus the Applicable Margin (as in effect from time to
time), but in no event to exceed the Highest Lawful Rate; and
(ii) if such a Loan is a Eurodollar Loan, for each Interest Period
relating thereto, the Eurodollar Rate for such Loan plus the Applicable
Margin (as in effect from time to time), but in no event to exceed the
Highest Lawful Rate.
Notwithstanding the foregoing, the Borrower will pay to the Agent, for the
account of each Lender interest at the applicable Post-Default Rate on any
principal of any Loan made by such Lender, and (to the fullest extent permitted
by law) on any other amount payable by the Borrower hereunder, under any Loan
Document or under any Note held by such Lender to or for account of such Lender,
for the period commencing on the date of an Event of Default until the same is
paid in full or all Events of Default are cured or waived.
Accrued interest on Base Rate Loans shall be payable on each Quarterly
Date commencing on March 31, 1998, and accrued interest on each Eurodollar Loan
shall be payable on the last day of the Interest Period therefor and, if such
Interest Period is longer than three months at three-month intervals following
the first day of such Interest Period, except that interest payable at the
Post-Default Rate shall be payable from time to time on demand and interest on
any Eurodollar Loan that
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is converted into a Base Rate Loan (pursuant to Section 5.04) shall be payable
on the date of conversion (but only to the extent so converted).
Promptly after the determination of any interest rate provided for herein
or any change therein, the Agent shall notify the Lenders to which such interest
is payable and the Borrower thereof. Each determination by the Agent of an
interest rate or fee hereunder shall, except in cases of manifest error, be
final, conclusive and binding on the parties.
ARTICLE IV
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.01 PAYMENTS. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by the
Borrower under the Loan Documents shall be made in Dollars, in immediately
available funds, to the Agent at such account as the Agent shall specify by
notice to the Borrower from time to time, not later than 11:00 a.m. Houston,
Texas time on the date on which such payments shall become due (each such
payment made after such time on such due date to be deemed to have been made on
the next succeeding Business Day). Such payments shall be made without (to the
fullest extent permitted by applicable law) defense, set-off or counterclaim.
Each payment received by the Agent under this Agreement or any Note for account
of a Lender shall be paid promptly to such Lender in immediately available
funds. Except as provided in clause (iii) of the definition of "Interest
Period", if the due date of any payment under this Agreement or any Note would
otherwise fall on a day which is not a Business Day such date shall be extended
to the next succeeding Business Day and interest shall be payable for any
principal so extended for the period of such extension. At the time of each
payment to the Agent of any principal of or interest on any borrowing, the
Borrower shall notify the Agent of the Loans to which such payment shall apply.
In the absence of such notice the Agent may specify the Loans to which such
payment shall apply, but to the extent possible such payment or prepayment will
be applied first to the Loans comprised of Base Rate Loans.
Section 4.02 PRO RATA TREATMENT. Except for Swing Line Loans and as
otherwise provided herein each Lender agrees that: (i) each borrowing from the
Lenders under Section 2.01 and each continuation and conversion under Section
2.02 shall be made from the Lenders pro rata in accordance with their Percentage
Share, each payment of commitment fee or other fees under Sections 2.04(a) and
(b) shall be made for account of the Lenders pro rata in accordance with their
Percentage Share, and each termination or reduction of the amount of the
Aggregate Maximum Credit Amounts under Section 2.03(b) shall be applied to the
Commitment of each Lender, pro rata according to the amounts of its respective
Commitment; (ii) each payment of principal of Loans by the Borrower shall be
made for account of the Lenders pro rata in accordance with the respective
unpaid principal amount of the Loans held by the Lenders; and (iii) each payment
of interest on Loans by the Borrower shall be made for account of the Lenders
pro rata in accordance with the amounts of interest due and payable to the
respective Lenders; and (iv) each reimbursement by the
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Borrower of disbursements under Letters of Credit shall be made for account of
the Fronting Bank or, if funded by the Lenders, pro rata for the account of the
Lenders, in accordance with the amounts of reimbursement obligations due and
payable to each respective Lender.
Section 4.03 COMPUTATIONS. Interest on Eurodollar Loans and fees
shall be computed on the basis of a year of 360 days and actual days elapsed
(including the first day but excluding the last day) occurring in the period for
which such interest is payable, unless such calculation would exceed the Highest
Lawful Rate, in which case interest shall be calculated on the per annum basis
of a year of 365 or 366 days, as the case may be. Interest on Base Rate Loans
shall be computed on the basis of a year of 365 or 366 days, as the case may be,
and actual days elapsed (including the first day but excluding the last day)
occurring in the period for which such interest is payable.
Section 4.04 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent
shall have been notified by a Lender or the Borrower prior to the date on which
such notifying party is scheduled to make payment to the Agent (in the case of a
Lender) of the proceeds of a Loan or a payment under a Letter of Credit to be
made by it hereunder or (in the case of the Borrower) a payment to the Agent for
account of one or more of the Lenders hereunder (such payment being herein
called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt,
that it does not intend to make the Required Payment to the Agent, the Agent may
assume that the Required Payment has been made and may, in reliance upon such
assumption (but shall not be required to), make the amount thereof available to
the intended recipient(s) on such date and, if such Lender or the Borrower (as
the case may be) has not in fact made the Required Payment to the Agent, the
recipient(s) of such payment shall, on demand, repay to the Agent the amount so
made available together with interest thereon in respect of each day during the
period commencing on the date such amount was so made available by the Agent
until but excluding the date the Agent recovers such amount at a rate per annum
which, for any Lender as recipient, will be equal to the Federal Funds Rate, and
for the Borrower as recipient, will be equal to the Base Rate plus the
Applicable Margin.
Section 4.05 SET-OFF, SHARING OF PAYMENTS, ETC.
(a) Upon the occurrence and during the continuance of any Event of
Default, each Lender (and each of its Affiliates) is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such
Lender (or any of its Affiliates) to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or hereafter
existing under this Agreement and the Note or Notes held by such Lender,
irrespective of whether such Lender shall have made any demand under this
Agreement or such Note and although such obligations may be unmatured. Each
Lender agrees promptly to notify the Borrower after any such set-off and
application made by such Lender; PROVIDED, HOWEVER, that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of each Lender under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) that such
Lender may have.
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(b) If any Lender (a "BENEFITTED LENDER") shall at any time receive any
payment of all or part of the Loans owing to it or interest thereon (or
reimbursement as to any Letter of Credit), or receive any collateral in respect
thereof (whether voluntarily or involuntarily, by set-off, or otherwise), in a
greater proportion than any such payment to or collateral received by any other
Lender, if any, in respect of such other Lender's Loans owing to it or interest
thereon (or reimbursement as to any Letter of Credit), such benefitted Lender
shall purchase for cash from the other Lenders a participating interest in such
portion of each such other Lender's Loans owing to it (or participations in
Letters of Credit), or shall provide such other Lenders with the benefits of any
such collateral, or the proceeds thereof, as shall be necessary to cause such
benefitted Lender to share the excess payment or benefits of such collateral or
proceeds ratably with each of the Lenders; PROVIDED, HOWEVER, that if all or any
portion of such excess payment or benefits is thereafter recovered from such
benefitted Lender, such purchase shall be rescinded, and the purchase price and
benefits returned, to the extent of such recovery, but without interest. The
Borrower agrees that any Lender so purchasing a participation from a Lender
pursuant to this Section 4.05 may, to the fullest extent permitted by law,
exercise all of its rights of payment (including the right of set-off) with
respect to such participation as fully as if such Person were the direct
creditor of the Borrower in the amount of such participation.
Section 4.06 TAXES.
(a) Any and all payments by the Borrower to or for the account of any
Lender or the Agent hereunder or under any other Loan Document shall be made
free and clear of and without deduction for any and all present or future taxes,
duties, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, EXCLUDING, in the case of each Lender and the
Agent, taxes imposed on its income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Lender (or its Applicable Lending
Office) or the Agent (as the case may be) is organized or any political
subdivision thereof (all such non-excluded taxes, duties, levies, imposts,
deductions, charges, withholdings, and liabilities being hereinafter referred to
as "TAXES"). Assuming compliance with Section 4.06(d) hereof to the extent
applicable, if the Borrower shall be required by law to deduct any Taxes from or
in respect of any sum payable under this Agreement or any other Loan Document to
any Lender or the Agent, (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section 4.06) such Lender or the Agent
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law, and (iv) the Borrower
shall furnish to the Agent, at its address set forth on the signature pages
hereof an original or a certified copy of a receipt evidencing payment thereof,
provided, Borrower shall not be required to take said action in respect of any
foreign Lender that has not complied with Section 4.06(d).
(b) In addition, the Borrower agrees to pay any and all present or future
stamp or documentary taxes and any other excise or property taxes or charges or
similar levies which arise from any payment made under this Agreement or any
other Loan Document or from the execution
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or delivery of, or otherwise with respect to, this Agreement or any other Loan
Document (hereinafter referred to as "OTHER TAXES").
(c) THE BORROWER AGREES TO INDEMNIFY EACH LENDER AND THE AGENT FOR THE
FULL AMOUNT OF TAXES AND OTHER TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES
OR OTHER TAXES IMPOSED OR ASSERTED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER
THIS SECTION 4.06) PAID BY SUCH LENDER OR THE AGENT (AS THE CASE MAY BE) AND ANY
LIABILITY (INCLUDING PENALTIES, INTEREST, AND EXPENSES) ARISING THEREFROM OR
WITH RESPECT THERETO.
(d) Each Lender organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Lender listed on the signature pages hereof and on
or prior to the date on which it becomes a Lender in the case of each other
Lender, and from time to time thereafter if requested in writing by the Borrower
or the Agent (but only so long as such Lender remains lawfully able to do so),
shall provide the Borrower and the Agent with (i) Internal Revenue Service Form
1001 or 4224, as appropriate, or any successor form prescribed by the Internal
Revenue Service, certifying that such Lender is entitled to benefits under an
income tax treaty to which the United States is a party which reduces the rate
of withholding tax on payments of interest or certifying that the income
receivable pursuant to this Agreement is effectively connected with the conduct
of a trade or business in the United States, (ii) Internal Revenue Service Form
W-8 or W-9, as appropriate, or any successor form prescribed by the Internal
Revenue Service, and (iii) any other form or certificate required by any taxing
authority (including any certificate required by Sections 871(h) and 881(c) of
the Internal Revenue Code), certifying that such Lender is entitled to an
exemption from or a reduced rate of tax on payments pursuant to this Agreement
or any of the other Loan Documents.
(e) For any period with respect to which a Lender has failed to provide
the Borrower and the Agent with the appropriate form pursuant to Section 4.06(d)
(unless such failure is due to a change in treaty, law, or regulation occurring
subsequent to the date on which a form originally was required to be provided),
such Lender shall not be entitled to indemnification under Section 4.06(a) or
4.06(b) with respect to Taxes imposed by the United States; PROVIDED, HOWEVER,
that should a Lender, which is otherwise exempt from or subject to a reduced
rate of withholding tax, become subject to Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as such
Lender shall reasonably request to assist such Lender to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Lender pursuant to this Section 4.06, then such Lender will agree
to use reasonable efforts to change the jurisdiction of its Applicable Lending
Office so as to eliminate or reduce any such additional payment which may
thereafter accrue if such change, in the judgment of such Lender, is not
otherwise disadvantageous to such Lender and, in the event of the refund of any
such payments, shall promptly pay same to Borrower along with any interest (if
any) received with such refund.
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(g) Within thirty (30) days after the date of any payment of Taxes, the
Borrower shall furnish to the Agent the original or a certified copy of a
receipt evidencing such payment.
(h) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 4.06 shall survive the termination of the Commitments and the
payment in full of the Notes.
ARTICLE V
CHANGE IN CIRCUMSTANCES
Section 5.01 INCREASED COST AND REDUCED RETURN.
(a) If, after the date hereof, the adoption of any applicable law, rule,
or regulation, or any change in any applicable law, rule, or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by any Lender (or its Applicable Lending
Office) with any request or directive (whether or not having the force of law)
of any such governmental authority, central bank, or comparable agency:
(i) shall subject such Lender (or its Applicable Lending Office) to
any tax, duty, or other charge with respect to any Eurodollar Loans, its
Note, or its obligation to make Eurodollar Loans, or change the basis of
taxation of any amounts payable to such Lender (or its Applicable Lending
Office) under this Agreement or its Note in respect of any Eurodollar
Loans (other than taxes imposed on the overall net income of such Lender
by the jurisdiction in which such Lender has its principal office or such
Applicable Lending Office);
(ii) shall impose, modify, or deem applicable any reserve, special
deposit, assessment or similar requirement (other than the Reserve
Requirement utilized in the determination of the Adjusted Eurodollar Rate)
relating to any extensions of credit or other assets of, or any deposits
with or other liabilities or commitments of, such Lender (or its
Applicable Lending Office), including the Commitment of such Lender
hereunder; or
(iii) shall impose on such Lender (or its Applicable Lending Office)
or on the United States market for certificates of deposit or the London
interbank market any other condition affecting this Agreement or its Note
or any of such extensions of credit or liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such Lender
(or its Applicable Lending Office) of making, Converting into, Continuing, or
maintaining any Eurodollar Loans or to reduce any sum received or receivable by
such Lender (or its Applicable Lending Office) under this Agreement or its Note
with respect to any Eurodollar Loans, then the Borrower shall pay to such
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Lender on demand such amount or amounts as will compensate such Lender for such
increased cost or reduction. If any Lender requests compensation by the Borrower
under this Section 5.01(a), the Borrower may, by notice to such Lender (with a
copy to the Agent), suspend the obligation of such Lender to make or Continue
Loans of the Type with respect to which such compensation is requested, or to
Convert Loans of any other Type into Loans of such Type, until the event or
condition giving rise to such request ceases to be in effect (in which case the
provisions of Section 5.04 shall be applicable); PROVIDED that such suspension
shall not affect the right of such Lender to receive the compensation so
requested.
(b) If, after the date hereof, any Lender shall have determined that the
adoption of any applicable law, rule, or regulation regarding capital adequacy
or any change therein or in the interpretation or administration thereof by any
governmental authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or any request or directive regarding
capital adequacy (whether or not having the force of law) of any such
governmental authority, central bank, or comparable agency, has or would have
the effect of reducing the rate of return on the capital of such Lender or any
corporation controlling such Lender as a consequence of such Lender's
obligations hereunder to a level below that which such Lender or such
corporation could have achieved but for such adoption, change, request, or
directive (taking into consideration its policies with respect to capital
adequacy), then from time to time upon demand the Borrower shall pay to such
Lender such additional amount or amounts as will compensate such Lender for such
reduction.
(c) Each Lender shall promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Lender to compensation pursuant to this Section and will designate
a different Applicable Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the judgment of
such Lender, be otherwise disadvantageous to it. Any Lender claiming
compensation under this Section shall furnish to the Borrower and the Agent a
statement setting forth the additional amount or amounts to be paid to it
hereunder which shall be conclusive in the absence of manifest error. In
determining such amount, such Lender may use any reasonable averaging and
attribution methods.
Section 5.02 LIMITATION ON TYPES OF LOANS. If on or prior to the
first day of any Interest Period for any Eurodollar Loan:
(a) the Agent determines (which determination shall be conclusive)
that by reason of circumstances affecting the relevant market, adequate
and reasonable means do not exist for ascertaining the Eurodollar Rate for
such Interest Period; or
(b) the Majority Lenders determine (which determination shall be
conclusive) and notify the Agent that the Adjusted Eurodollar Rate will
not adequately and fairly reflect the cost to the Lenders of funding
Eurodollar Loans for such Interest Period;
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then the Agent shall give the Borrower prompt notice thereof specifying the
relevant Type of Loans and the relevant amounts or periods, and so long as such
condition remains in effect, the Lenders shall be under no obligation to make
additional Loans of such Type, Continue Loans of such Type, or to Convert Loans
of any other Type into Loans of such Type and the Borrower shall, on the last
day(s) of the then current Interest Period(s) for the outstanding Loans of the
affected Type, either prepay such Loans or Convert such Loans into another Type
of Loan in accordance with the terms of this Agreement.
Section 5.03 ILLEGALITY. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder,
then such Lender shall promptly notify the Borrower thereof and such Lender's
obligation to make or Continue Eurodollar Loans and to Convert other Types of
Loans into Eurodollar Loans shall be suspended until such time as such Lender
may again make, maintain, and fund Eurodollar Loans (in which case the
provisions of Section 5.04 shall be applicable).
Section 5.04 TREATMENT OF AFFECTED LOANS. If the obligation of any
Lender to make a Eurodollar Loan or to Continue, or to Convert Loans of any
other Type into, Loans of a particular Type shall be suspended pursuant to
Section 5.01 or 5.03 hereof (Loans of such Type being herein called "AFFECTED
LOANS" and such Type being herein called the "AFFECTED TYPE"), such Lender's
Affected Loans shall be automatically Converted into Base Rate Loans on the last
day(s) of the then current Interest Period(s) for Affected Loans (or, in the
case of a Conversion required by Section 5.03 hereof, on such earlier date as
such Lender may specify to the Borrower with a copy to the Agent) and, unless
and until such Lender gives notice as provided below that the circumstances
specified in Section 5.01 or 5.03 hereof that gave rise to such Conversion no
longer exist:
(a) to the extent that such Lender's Affected Loans have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Lender's Affected Loans shall be applied instead to its
Base Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such
Lender as Loans of the Affected Type shall be made or Continued instead as
Base Rate Loans, and all Loans of such Lender that would otherwise be
Converted into Loans of the Affected Type shall be Converted instead into
(or shall remain as) Base Rate Loans.
If such Lender gives notice to the Borrower (with a copy to the Agent) that the
circumstances specified in Section 5.01 or 5.03 hereof that gave rise to the
Conversion of such Lender's Affected Loans pursuant to this Section 5.04 no
longer exist (which such Lender agrees to do promptly upon such circumstances
ceasing to exist) at a time when Loans of the Affected Type made by other
Lenders are outstanding, such Lender's Base Rate Loans shall be automatically
Converted, on the first day(s) of the next succeeding Interest Period(s) for
such outstanding Loans of the Affected Type, to the extent necessary so that,
after giving effect thereto, all Loans held by the Lenders holding
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Loans of the Affected Type and by such Lender are held pro rata (as to principal
amounts, Types, and Interest Periods) in accordance with their respective
Commitments.
Section 5.05 COMPENSATION. Upon the request of any Lender, the
Borrower shall pay to such Lender such amount or amounts as shall be sufficient
(in the reasonable opinion of such Lender) to compensate it for any loss, cost,
or expense (including loss of anticipated profits) incurred by it as a result
of:
(a) any payment, prepayment, or Conversion of a Eurodollar Loan for
any reason (including, without limitation, the acceleration of the Loans
pursuant to Section 10.02) on a date other than the last day of the
Interest Period for such Loan; or
(b) any failure by the Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in Article 6
to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Loan
on the date for such borrowing, Conversion, Continuation, or prepayment
specified in the relevant notice of borrowing, prepayment, Continuation,
or Conversion under this Agreement.
Section 5.06 REPLACEMENT LENDERS.
(a) If any Lender has notified the Borrower and the Agent of its incurring
additional costs under Section 5.01 hereof or has required the Borrower to make
payments for Taxes under Section 4.06 hereof, then the Borrower may, unless such
Lender has notified the Borrower and the Agent that the circumstances giving
rise to such notice no longer apply, terminate, in whole but not in part, the
Commitment of any Lender (other than the Agent) (the "TERMINATED LENDER") at any
time upon five (5) Business Days' prior written notice to the Terminated Lender
and the Agent (such notice referred to herein as a "NOTICE OF TERMINATION").
(b) In connection with the termination of the Commitment of the Terminated
Lender, the Borrower shall either: (i) obtain an agreement with one or more
Lenders to increase their Commitment or Commitments, (ii) request any one or
more other banking institutions to become parties to this Agreement in place and
instead of such Terminated Lender and agree to accept a Commitment or
Commitments or reduce the total of the Aggregate Maximum Credit Amounts by the
amount held by the Terminated Lender; PROVIDED, HOWEVER, that such one or more
other substitute banking institutions are reasonably acceptable to the Agent and
become parties by executing an Assignment and Acceptance (the Lenders or other
banking institutions that agree to accept in whole or in part the Commitment of
the Terminated Lender being referred to herein as the "REPLACEMENT LENDERS"),
such that the aggregate increased and/or accepted Commitments of the Replacement
Lenders under clauses (i) and (ii) above equal the Commitment of the Terminated
Lender.
(c) The Notice of Termination shall include the name of the Terminated
Lender, the date the termination will occur (the "TERMINATION DATE"), and the
Replacement Lender or Replacement
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Lenders to which the Terminated Lender will assign its Commitment and, if there
will be more than one Replacement Lender, the portion of the Terminated Lender's
Commitment to be assigned to each Replacement Lender.
(d) On the Termination Date, (i) the Terminated Lender shall by execution
and delivery of an Assignment and Acceptance assign its Commitment to the
Replacement Lender or Replacement Lenders (pro rata, if there is more than one
Replacement Lender, in proportion to the portion of the Terminated Lender's
Commitment to be assigned to each Replacement Lender) indicated in the Notice of
Termination and shall assign to the Replacement Lender or Replacement Lenders
each of its Loans (if any) then outstanding and participation interests in
Letters of Credit (if any) then outstanding pro rata as aforesaid), (ii) the
Terminated Lender shall endorse its Note, payable without recourse,
representation or warranty to the order of the Replacement Lender or Replacement
Lenders (pro rata as aforesaid), (iii) the Replacement Lender or Replacement
Lenders shall purchase the Note held by the Terminated Lender (pro rata as
aforesaid) at a price equal to the unpaid principal amount thereof plus interest
and facility and other fees accrued and unpaid to the Termination Date, and (iv)
the Replacement Lender or Replacement Lenders will thereupon (pro rata as
aforesaid) succeed to and be substituted in all respects for the Terminated
Lender with like effect as if becoming a Lender pursuant to the terms of Section
12.06(a), and the Terminated Lender will have the rights and benefits of an
assignor under Section 12.06(a). To the extent not in conflict, the terms of
Section 12.06(a) shall supplement the provisions of this Section 5.06(d). For
each assignment made under this Section 5.06, the Replacement Lender shall pay
to the Agent the processing fee provided for in Section 12.06(a). The Borrower
will be responsible for the payment of any breakage costs associated with
termination of the Terminated Lender, as set forth in Section 5.05.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 INITIAL FUNDING.
The obligation of the Lenders to make the Initial Funding is subject
to the receipt by the Agent and the Lenders of all fees payable pursuant to
Section 2.04 on or before the Closing Date and the receipt by the Agent of the
following documents and satisfaction of the other conditions provided in this
Section 6.01, each of which shall be satisfactory to the Agent in form and
substance:
(a) A certificate of the Secretary or an Assistant Secretary of the
Borrower setting forth (i) resolutions of its board of directors with respect to
the authorization of the Borrower to execute and deliver the Loan Documents to
which it is a party and to enter into the transactions contemplated in those
documents, (ii) the officers of the Borrower (y) who are authorized to sign the
Loan Documents to which Borrower is a party and (z) who will, until replaced by
another officer or officers duly authorized for that purpose, act as its
representative for the purposes of signing
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documents and giving notices and other communications in connection with this
Agreement and the transactions contemplated hereby, (iii) specimen signatures of
the authorized officers, and (iv) the articles or certificate of incorporation
and bylaws of the Borrower, certified as being true and complete. The Agent and
the Lenders may conclusively rely on such certificate until the Agent receives
notice in writing from the Borrower to the contrary.
(b) A certificate of the Secretary or an Assistant Secretary of each
Subsidiary setting forth (i) resolutions of its board of directors with respect
to the authorization of such Subsidiary to execute and deliver the Loan
Documents to which it is a party and to enter into the transactions contemplated
in those documents, (ii) the officers of such Subsidiary (y) who are authorized
to sign the Loan Documents to which such Subsidiary is a party and (z) who will,
until replaced by another officer or officers duly authorized for that purpose,
act as its representative for the purposes of signing documents and giving
notices and other communications in connection with this Agreement and the
transactions contemplated hereby, (iii) specimen signatures of the authorized
officers, and (iv) the articles or certificate of incorporation and bylaws of
such Subsidiary, certified as being true and complete. The Agent and the Lenders
may conclusively rely on such certificate until they receive notice in writing
from the Borrower to the contrary.
(c) Certificates of the appropriate state agencies with respect to the
existence, qualification and good standing of the Borrower and Subsidiaries.
(d) A Compliance Certificate dated as of the date of the Initial Funding
substantially in the form of EXHIBIT C hereto.
(e) A Borrowing Base Certificate dated as of the date of the Initial
Funding.
(f) The Notes, duly completed and executed.
(g) The Security Instruments, including those described on EXHIBIT D, duly
completed and executed in sufficient number of counterparts for recording, if
necessary.
(h) An opinion of Andrews & Kurth L.L.P., special counsel to the Borrower
and the Subsidiaries, in form and substance satisfactory to the Agent, as to
such matters incident to the transactions herein contemplated as the Agent may
reasonably request.
(i) Completion of an initial public offering by the Borrower of its common
stock pursuant to the Registration Statement which results in no less than
$35,000,000 cash proceeds (cash proceeds shall be net of underwriter's discounts
and offering expenses including, without limitation, legal, accounting, printing
and listing fees) to the Borrower.
(j) The Agreements and Plans of Organization and other merger and/or
acquisition documents pursuant to which the Borrower will acquire the Founding
Companies shall have been received and found satisfactory to the Agent such
approval not to be unreasonably withheld.
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(k) Completion of the Borrower's acquisition of the Founding Companies as
contemplated by the Registration Statement prior to or contemporaneously with
the Initial Funding.
(l) Consolidated financial statements of the Founding Companies comprising
the Borrower and the other Subsidiaries for the year ending December 31, 1996,
and the nine (9) month period ending September 30, 1997, including balance
sheets, statements of income and cash flow audited (except Capitol Bolt &
Supply, Inc.) by independent public accountants of recognized national standing
and prepared in accordance with GAAP.
(m) Evidence satisfactory to the Agent that the Borrower and each
Subsidiary are carrying insurance in accordance with Section 7.19 hereof.
(n) The Borrower shall deliver or cause to be delivered to the Agent
releases of all Liens (other than Permitted Liens) encumbering the Property of
the Founding Companies or otherwise deliver commitments from the secured parties
or mortgagors of such Liens to release such Liens upon satisfaction of the
obligations thereby secured.
(o) Such other documents as the Agent or any Lender or special counsel to
the Agent may reasonably request.
Section 6.02 INITIAL AND SUBSEQUENT LOANS AND LETTERS OF CREDIT. The
obligation of the Lenders to make Loans to the Borrower upon the occasion of
each borrowing hereunder and to issue, renew, extend or reissue Letters of
Credit for the account of the Borrower (including the Initial Funding) is
subject to the further conditions precedent that, as of the date of such Loans
and after giving effect thereto: (i) no Default shall have occurred and be
continuing; (ii) no Material Adverse Effect shall have occurred; and (iii) the
representations and warranties made by the Borrower in Article VII and in the
Security Instruments shall be true on and as of the date of the making of such
Loans or issuance, renewal, extension or reissuance of a Letter of Credit with
the same force and effect as if made on and as of such date and following such
new borrowing, except to the extent such representations and warranties are
expressly limited to an earlier date, or are untrue because of an event not
prohibited hereby, or the Majority Lenders may expressly consent in writing to
the contrary. Each request for a borrowing or issuance, renewal, extension or
reissuance of a Letter of Credit by the Borrower hereunder shall constitute a
certification by the Borrower to the effect set forth in the preceding sentence
(both as of the date of such notice and, unless the Borrower otherwise notifies
the Agent prior to the date of and immediately following such borrowing or
issuance, renewal, extension or reissuance of a Letter of Credit as of the date
thereof).
Section 6.03 CONDITIONS RELATING TO LETTERS OF CREDIT. In addition
to the satisfaction of all other conditions precedent set forth in this Article
VI, the issuance, renewal, extension or reissuance of the Letters of Credit
referred to in Section 2.01(b) hereof is subject to the following conditions
precedent:
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(a) At least three (3) Business Days prior to the date of the issuance and
at least ten (10) Business Days (or such lesser time period as may be provided
therein) prior to the date of the renewal, extension or reissuance of each
Letter of Credit, the Agent shall have received a written request for a Letter
of Credit.
(b) Each of the Letters of Credit shall (i) be issued by the Fronting
Bank, (ii) contain such terms and provisions as are reasonably required by the
Agent, (iii) be for the account of the Borrower and (iv) expire not later than
the earlier of one (1) year from the date of issuance, renewal, extension or
reissuance or two (2) days before the Revolving Credit Termination Date.
(c) The Borrower shall have duly and validly executed and delivered to the
Fronting Bank a Letter of Credit Agreement pertaining to the Letter of Credit.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Agent and the Lenders that
(each representation and warranty herein is given as of the Closing Date and
shall be deemed repeated and reaffirmed on the dates of each borrowing and
issuance, renewal, extension or reissuance of a Letter of Credit as provided in
Section 6.02):
Section 7.01 CORPORATE EXISTENCE. Each of the Borrower and each
Subsidiary: (i) is a corporation or entity duly organized, legally existing and
in good standing under the laws of the jurisdiction of its incorporation or
formation; (ii) has all requisite power, and has all material governmental
licenses, authorizations, consents and approvals necessary to own its assets and
carry on its business as now being or as proposed to be conducted; and (iii) is
qualified to do business in all jurisdictions in which the nature of the
business conducted by it makes such qualification necessary and where failure so
to qualify would have a Material Adverse Effect.
Section 7.02 FINANCIAL CONDITION. The audited consolidated balance
sheet of each of the Founding Companies as at December 31, 1996 and the related
consolidated statement of income, stockholders' equity and cash flow of each of
the Founding Companies for the fiscal year ended on said date, (except unaudited
statements for Capital Bolt & Supply, Inc.) with the opinion thereon of Ernst &
Young L.L.P. heretofore furnished to the Agent and the audited consolidated
balance sheet of each of the Founding Companies (except unaudited statements for
Capital Bolt & Supply, Inc.) as at September 30, 1997 and their related
consolidated statements of income, stockholders' equity and cash flow of each of
the Founding Companies for the nine-month period ended on such date heretofore
furnished to the Agent, are complete and correct in all material respects and
fairly present the consolidated financial condition of each of the Founding
Companies as at said dates and the results of its operations for the nine-month
period ending on said date, all in accordance with GAAP, as applied on a
consistent basis (subject, in the case of the interim financial
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statements, to normal year-end adjustments). The pro forma combined balance
sheets of the Borrower and the Subsidiaries heretofore furnished to the Agent
are complete and correct in all material respects and fairly present the
financial condition of the Borrower and the Subsidiaries as of the acquisition
thereof by the Borrower based upon the aforesaid financial statements of the
Founding Companies, all in accordance with GAAP, applied on a consistent basis.
None of the Borrower or any Subsidiary has on the Closing Date any material
Debt, contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in the Financial
Statements or in SCHEDULE 7.02. Since September 30, 1997, there has been no
change or event having a Material Adverse Effect. Since the date of the
Financial Statements, neither the business nor the Properties of the Borrower or
any Subsidiary have been materially and adversely affected as a result of any
fire, explosion, earthquake, flood, drought, windstorm, accident, strike or
other labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any Governmental Authority,
riot, activities of armed forces or acts of God or of any public enemy.
Section 7.03 LITIGATION. Except as disclosed to the Lenders in
SCHEDULE 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Borrower threatened against or
affecting the Borrower or any Subsidiary which involves the possibility of any
judgment or liability against the Borrower or any Subsidiary not fully covered
by insurance (except for normal deductibles), and which would have a Material
Adverse Effect.
Section 7.04 NO BREACH. Neither the execution and delivery of the
Loan Documents, nor compliance with the terms and provisions hereof will
conflict with or result in a breach of, or require any consent which has not
been obtained as of the Closing Date under, the respective formation and
governance documents (e.g. charter, partnership or limited liability agreement,
and by-laws) of the Borrower or any Subsidiary, or any Governmental Requirement
or any agreement or instrument to which the Borrower or any Subsidiary is a
party or by which it is bound or to which it or its Properties are subject, or
constitute a default under any such agreement or instrument, or result in the
creation or imposition of any Lien upon any of the revenues or assets of the
Borrower or any Subsidiary pursuant to the terms of any such agreement or
instrument other than the Liens created by the Loan Documents.
Section 7.05 AUTHORITY. The Borrower and each Subsidiary have all
necessary power and authority to execute, deliver and perform its obligations
under the Loan Documents to which it is a party; and the execution, delivery and
performance by the Borrower and each Subsidiary of the Loan Documents to which
it is a party, have been duly authorized by all necessary action on its part;
and the Loan Documents constitute the legal, valid and binding obligations of
the Borrower and each Subsidiary, enforceable in accordance with their terms.
Section 7.06 APPROVALS. No authorizations, approvals or consents
of, and no filings or registrations with, any Governmental Authority are
necessary for the execution, delivery or
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performance by the Borrower or any Subsidiary of the Loan Documents or for the
validity or enforceability thereof, except for the recording and filing of the
Security Instruments as required by this Agreement.
Section 7.07 USE OF LOANS. The proceeds of the Loans shall be used
to finance (to the extent not covered by the net proceeds from the initial
public offering of Borrower's common stock referred to in Section 6.01(h)
above), in part, Borrower's acquisition of the Founding Companies, to refinance
the Borrower's and the Founding Companies' existing indebtedness, for working
capital, capital expenditures, acquisitions and other corporate purposes,
including intercompany loans from time to time to the Guarantors. The Borrower
is not engaged principally, or as one of its important activities, in the
business of extending credit for the purpose, whether immediate, incidental or
ultimate, of buying or carrying margin stock (within the meaning of Regula tion
G, U or X of the Board of Governors of the Federal Reserve System) and no part
of the proceeds of any Loan hereunder will be used to buy or carry any margin
stock.
Section 7.08 ERISA. Except (i) as provided in Schedule 7.08 or (ii)
as would not have a Material Adverse Effect:
(a) The Borrower, each Subsidiary and each ERISA Affiliate have complied
with ERISA and, where applicable, the Code regarding each Plan.
(b) Each Plan is, and has been, maintained in compliance with ERISA and,
where applicable, the Code (this representation being made to the knowledge of
Borrower with respect to any Plan which is a Multiemployer Plan).
(c) No act, omission or transaction has occurred which could result in
imposition on the Borrower, any Subsidiary or any ERISA Affiliate (whether
directly or indirectly) of (i) either a civil penalty assessed pursuant to
section 502(c), (i) or (l) of ERISA or a tax imposed pursuant to Chapter 43 of
Subtitle D of the Code or (ii) breach of fiduciary duty liability damages under
section 409 of ERISA.
(d) No liability to the PBGC (other than for the payment of current
premiums which are not past due) by the Borrower, any Subsidiary or any ERISA
Affiliate has been or is expected by the Borrower, any Subsidiary or any ERISA
Affiliate to be incurred with respect to any Plan. No ERISA Event with respect
to any Plan has occurred.
(e) To Borrower's knowledge, full payment when due has been made of all
amounts which the Borrower, any Subsidiary or any ERISA Affiliate is required
under the terms of each Plan or applicable law to have paid as contributions to
such Plan, and no accumulated funding deficiency (as defined in section 302 of
ERISA and section 412 of the Code), whether or not waived, exists with respect
to any Plan.
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(f) Except as required by a collective bargaining agreement, none of the
Borrower, any Subsidiary or any ERISA Affiliate sponsors, maintains, or
contributes to an employee welfare benefit plan, as defined in section 3(1) of
ERISA, including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by the
Borrower, a Subsidiary or any ERISA Affiliate in its sole discretion at any time
without any material liability.
(g) None of the Borrower, any Subsidiary or any ERISA Affiliate owes or
potentially owes any liability to any Multiemployer Plan.
(h) None of the Borrower, any Subsidiary or any ERISA Affiliate is
required to provide security under section 401(a)(29) of the Code due to a Plan
amendment that results in an increase in current liability for the Plan.
Section 7.09 TAXES. Except as set out in SCHEDULE 7.09, each of the
Borrower and the Subsidiaries has filed all United States Federal income tax
returns and all other tax returns which are required to be filed by them and
have paid all material taxes due pursuant to such returns or pursuant to any
assessment received by the Borrower or any Subsidiary. The charges, accruals and
reserves on the books of the Borrower and the Subsidiaries in respect of taxes
and other governmental charges are, in the opinion of the Borrower, adequate. No
tax lien has been filed and, to the knowledge of the Borrower, no claim is being
asserted with respect to any such tax, fee or other charge.
Section 7.10 TITLES, ETC.
(a) Except as set out in SCHEDULE 7.10, each of the Borrower and the
Subsidiaries has good and defensible title to its material (individually or in
the aggregate) Properties, free and clear of all Liens except Liens permitted by
Section 9.02.
(b) All leases and agreements necessary for the conduct of the business of
the Borrower and the Subsidiaries are valid and subsisting, in full force and
effect and there exists no default or event or circumstance which with the
giving of notice or the passage of time or both would give rise to a default
under any such lease or leases, which would affect in any material respect the
conduct of the business of the Borrower and the Subsidiaries.
(c) The rights, Properties and other assets presently owned, leased or
licensed by the Borrower and the Subsidiaries including, without limitation, all
easements and rights of way, include all rights, Properties and other assets
necessary to permit the Borrower and the Subsidiaries to conduct their business
in all material respects in the same manner as its business has been conducted
prior to the Closing Date.
(d) All of the assets and Properties of the Borrower and the Subsidiaries
which are reasonably necessary for the operation of its business are in good
working condition and are maintained in accordance with prudent business
standards.
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Section 7.11 NO MATERIAL MISSTATEMENTS. No written information,
statement, exhibit, certificate, document or report furnished to the Agent and
the Lenders (or any of them) by the Borrower or any Subsidiary in connection
with the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make the
statement contained therein not materially misleading in the light of the
circumstances in which made and with respect to the Borrower and the
Subsidiaries taken as a whole. There is no fact peculiar to the Borrower or any
Subsidiary which has a Material Adverse Effect or in the future is reasonably
likely to have (so far as the Borrower can now foresee) a Material Adverse
Effect and which has not been set forth in this Agreement or the other
documents, certificates and statements furnished to the Agent by or on behalf of
the Borrower or any Subsidiary prior to, or on, the Closing Date in connection
with the transactions contemplated hereby.
Section 7.12 INVESTMENT COMPANY ACT. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the
Borrower nor any Subsidiary is a "holding company," or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," or a "public utility" within the
meaning of the Public Utility Holding Company Act of 1935, as amended.
Section 7.14 SUBSIDIARIES. Except as set forth on SCHEDULE 7.14 or
as permitted pursuant to Section 9.19, the Borrower has no Subsidiaries.
Section 7.15 LOCATION OF BUSINESS AND OFFICES. The Borrower's
principal place of business and chief executive offices are located at the
address stated on the signature page of this Agreement. On the Closing Date the
principal place of business and chief executive office of each Subsidiary are
located at the addresses stated on SCHEDULE 7.14. Each jurisdiction in which
each Subsidiary operates, maintains assets, or otherwise is doing business is
stated on SCHEDULE 7.14.
Section 7.16 DEFAULTS. Neither the Borrower nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the expiration
of any applicable grace period or the giving of notice, or both, would
constitute a default under any material agreement or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary
is bound which default would have a Material Adverse Effect. No Default
hereunder has occurred and is continuing.
Section 7.17 ENVIRONMENTAL MATTERS. Except (i) as provided in
SCHEDULE 7.17 or (ii) as would not have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such actions would
not have a Material Adverse Effect):
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(a) Neither any Property of the Borrower or any Subsidiary nor the
operations conducted thereon violate any order or requirement of any court or
Governmental Authority or any Environmental Laws;
(b) Without limitation of clause (a) above, no Property of the Borrower or
any Subsidiary nor the operations currently conducted thereon or, to the best
knowledge of the Borrower, by any prior owner or operator of such Property or
operation, are in violation of or subject to any existing, pending or threatened
action, suit, investigation, inquiry or proceeding by or before any court or
Governmental Authority or to any remedial obligations under Environmental Laws;
(c) All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of any
and all Property of the Borrower and each Subsidiary, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly obtained
or filed, and the Borrower and each Subsidiary are in compliance with the terms
and conditions of all such notices, permits, licenses and similar
authorizations;
(d) All hazardous substances, solid waste, and oil and gas exploration and
production wastes, if any, generated at any and all Property of the Borrower or
any Subsidiary have in the past been transported, treated and disposed of in
accordance with Environmental Laws and so as not to pose an imminent and
substantial endangerment to public health or welfare or the environment, and, to
the best knowledge of the Borrower, all such transport carriers and treatment
and disposal facilities have been and are operating in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment, and are not the
subject of any existing, pending or threatened action, investigation or inquiry
by any Governmental Authority in connection with any Environmental Laws;
(e) The Borrower has taken all steps reasonably necessary to determine and
has determined that no hazardous substances, solid waste, or oil and gas
exploration and production wastes, have been disposed of or otherwise released
and there has been no threatened release of any hazardous substances on or to
any Property of the Borrower or any Subsidiary except in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment;
(f) To the extent applicable, all Property of the Borrower and each
Subsidiary currently satisfies all design, operation, and equipment requirements
imposed by the OPA or scheduled as of the Closing Date to be imposed by OPA
during the term of this Agreement, and the Borrower does not have any reason to
believe that such Property, to the extent subject to OPA, will not be able to
maintain compliance with the OPA requirements during the term of this Agreement;
and
(g) Neither the Borrower nor any Subsidiary has any known contingent
liability in connection with any release or threatened release of any oil,
hazardous substance or solid waste into the environment.
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Section 7.18 COMPLIANCE WITH THE LAW. Neither the Borrower nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of any of its Properties or the conduct of its business, which
violation or failure would have (in the event such violation or failure were
asserted by any Person through appropriate action) a Material Adverse Effect.
Section 7.19 INSURANCE. The Borrower and each Subsidiary maintain
all material policies of fire, liability, workmen's compensation and other forms
of insurance necessary for the operation of its business. All such policies are
in full force and effect, all premiums with respect thereto covering all periods
up to and including the date of the closing have been paid, and no notice of
cancellation or termination has been received with respect to any such policy.
Such policies are sufficient for compliance with all requirements of law and of
all agreements to which the Borrower or any Subsidiary is a party; are valid,
outstanding and enforceable policies; provide adequate insurance coverage in at
least such amounts and against at least such risks (but including in any event
public liability) as are usually insured against in the same general area by
companies engaged in the same or a similar business for the assets and
operations of the Borrower and each Subsidiary; will remain in full force and
effect through the term hereof; and will not in any way be affected by, or
terminate or lapse by reason of, the transactions contemplated by this
Agreement. Neither the Borrower nor any of the Subsidiaries self insure any
material risks. Neither the Borrower nor any Subsidiary has been refused any
insurance with respect to its assets or operations, nor has its coverage been
limited below usual and customary policy limits, by an insurance carrier to
which it has applied for any such insurance or with which it has carried
insurance during the last three years.
Section 7.20 HEDGING AGREEMENTS. SCHEDULE 7.20 sets forth, as of the
Closing Date, a true and complete list of all Hedging Agreements (including
commodity price swap agreements, forward agreements or contracts of sale which
provide for prepayment for deferred shipment or delivery of oil, gas or other
commodities) of the Borrower and each Subsidiary, the material terms thereof
(including the type, term, effective date, termination date and notional amounts
or volumes), the net mark to market value thereof, all credit support agreements
relating thereto (including any margin required or supplied), and the
counterparty to each such agreement.
Section 7.21 RESTRICTION ON LIENS. Neither the Borrower nor any of
the Subsidiaries is a party to any agreement or arrangement (other than this
Agreement and the Security Instruments), or subject to any order, judgment, writ
or decree, which either restricts or purports to restrict its ability to grant
Liens to other Persons on or in respect of their respective assets of
Properties.
Section 7.22 MATERIAL AGREEMENTS. Set forth on SCHEDULE 7.22 hereto
is a complete and correct list of all material agreements, leases, indentures,
purchase agreements, obligations in respect of letters of credit, guarantees,
joint venture agreements, and other instruments in effect or to be in effect as
of the Closing Date (other than Hedging Agreements) providing for, evidencing,
securing or otherwise relating to any Debt of the Borrower or any of the
Subsidiaries, and all obligations of the Borrower or any of the Subsidiaries to
issuers of surety or appeal bonds issued for account of the Borrower or any such
Subsidiary, and such list correctly sets forth the names of the
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debtor or lessee and creditor or lessor with respect to the Debt or lease
obligations outstanding or to be outstanding and the property subject to any
Lien securing such Debt or lease obligation.
Section 7.23 REGISTRATION STATEMENT. The Registration Statement
contains no material misstatement of fact or omitted to state a material fact or
any fact necessary to make the statement contained therein not materially
misleading in the light of the circumstances in which made and with respect to
the Borrower and the Founding Companies taken as a whole.
ARTICLE VIII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, so long as any of the Commitments
are in effect and until payment in full of all Indebtedness hereunder, all
interest thereon and all other amounts payable by the Borrower hereunder:
Section 8.01 FINANCIAL STATEMENTS. The Borrower shall deliver, or
shall cause to be delivered, to the Agent with sufficient copies of each for the
Lenders:
(a) As soon as available and in any event within 90 days after the end of
each fiscal year of the Borrower, the audited consolidated and unaudited
consolidating statements of income, stockholders' equity, changes in financial
position and cash flow of the Borrower and its Consolidated Subsidiaries for
such fiscal year, and the related consolidated and consolidating balance sheets
of the Borrower and its Consolidated Subsidiaries as at the end of such fiscal
year, and setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, and accompanied by the related opinion of
independent public accountants of recognized national standing acceptable to the
Agent which opinion shall state that said financial statements fairly present
the consolidated financial condition and results of operations of the Borrower
and its Consolidated Subsidiaries as at the end of, and for, such fiscal year
and that such financial statements have been prepared in accordance with GAAP on
a Consistent Basis except for such changes in such principles with which the
independent public accountants shall have concurred and such opinion shall not
contain a "going concern" or like qualification or exception, and a certificate
of such accountants stating that, in making the examination necessary for their
opinion, they obtained no knowledge, except as specifically stated, of any
Default.
(b) As soon as available and in any event within 45 days after the end of
each of the first three fiscal quarterly periods of each fiscal year of the
Borrower, unaudited consolidated statements of income, stockholders' equity,
changes in financial position and cash flow of the Borrower and its Consolidated
Subsidiaries for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related consolidated
balance sheets as at the end of such period, and setting forth in each case in
comparative form the corresponding figures for the
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corresponding period in the preceding fiscal year, accompanied by the
certificate of a Responsible Officer, which certificate shall state that said
financial statements fairly present the consolidated financial condition and
results of operations of the Borrower and its Consolidated Subsidiaries in
accordance with GAAP on a Consistent Basis, as at the end of, and for, such
period (subject to normal year-end audit adjustments).
(c) Promptly after the Borrower knows that any Default or any Material
Adverse Effect has occurred, a notice of such Default or Material Adverse
Effect, describing the same in reasonable detail and the action the Borrower
proposes to take with respect thereto.
(d) Promptly upon receipt thereof, a copy of each other report (excluding
routine correspondence) submitted to the Borrower or any Subsidiary by
independent accountants in connection with any annual, interim or special audit
made by them of the books of the Borrower and the Subsidiaries, and a copy of
any response by the Borrower or any Subsidiary of the Borrower, or the Board of
Directors of the Borrower or any Subsidiary of the Borrower, to such letter or
report.
(e) Promptly upon its becoming available, each financial statement,
report, notice or proxy statement sent by the Borrower to stockholders generally
and each regular or periodic report and any registration statement, prospectus
or written communication (other than transmittal letters) in respect thereof
filed by the Borrower with or received by the Borrower in connection therewith
from any securities exchange or the SEC or any successor agency.
(f) Promptly after the furnishing thereof, copies of any statement, report
or notice furnished to or any Person pursuant to the terms of any indenture,
loan or credit or other similar agreement, other than this Agreement and not
otherwise required to be furnished to the Lenders pursuant to any other
provision of this Section 8.01.
(g) From time to time such other information regarding the business,
affairs or financial condition of the Borrower or any Subsidiary (including,
without limitation, any Plan or Multi employer Plan and any reports or other
information required to be filed under ERISA) as any Lender or the Agent may
reasonably request.
(h) (i) not later than 30 days after and as of the end of each month, a
summary or, on request, a listing of accounts receivable aged from
date of invoice;
(ii) not later than 30 days after and as of the end of each calendar
year or on the request from the Agent, a list of the names and
addresses of all of Borrower's account debtors;
(iii) not later than 30 days after and as of the end of each month,
or on the request of the Agent, an inventory summary of balances at
the lower of cost or market for the Borrower and each Subsidiary;
and
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(iv) not later than 30 days after and as of the end of each month, a
Borrowing Base certificate in the form of EXHIBIT F hereto.
(i) The Borrower will furnish to the Agent, at the time it furnishes each
set of financial statements pursuant to paragraph (a) or (b) above, a Compliance
Certificate (i) certifying as to the matters set forth therein and stating that
no Default has occurred and is continuing (or, if any Default has occurred and
is continuing, describing the same in reasonable detail), (ii) setting forth in
reasonable detail the computations necessary to determine whether the Borrower
is in compliance with Sections 9.13, 9.14 and 9.15 as of the end of the
respective fiscal quarter or fiscal year and (iii) setting forth in reasonable
detail the computations necessary to determine the Applicable Margin and the
Commitment Fee..
Section 8.02 LITIGATION. The Borrower shall promptly give to the
Agent notice of all legal or arbitral proceedings, and of all proceedings before
any Governmental Authority affecting the Borrower or any Subsidiary, except
proceedings which, if adversely determined, would not have a Material Adverse
Effect. The Borrower will, and will cause each of the Subsidiaries to, promptly
notify the Agent and each of the Lenders of any claim, judgment, Lien or other
encumbrance affecting any Property of the Borrower or any Subsidiary if the
value of the claim, judgment, Lien, or other encumbrance affecting such Property
shall exceed $500,000.
Section 8.03 MAINTENANCE, ETC.
(a) The Borrower shall and shall cause each Subsidiary to: preserve and
maintain its corporate existence and all of its material rights, privileges and
franchises; keep books of record and account in which full, true and correct
entries will be made of all dealings or transactions in relation to its business
and activities; comply with all Governmental Requirements if failure to comply
with such requirements will have a Material Adverse Effect; pay and discharge
all taxes, assessments and governmental charges or levies imposed on it or on
its income or profits or on any of its Property prior to the date on which
penalties attach thereto, except for any such tax, assessment, charge or levy
the payment of which is being contested in good faith and by proper proceedings
and against which adequate reserves are being maintained; upon reasonable
notice, permit representatives of the Agent or any Lender, during normal
business hours, to examine, copy and make extracts from its books and records,
to inspect its Properties, and to discuss its business and affairs with its
officers, all to the extent reasonably requested by such Lender or the Agent (as
the case may be); and keep, or cause to be kept, insured by financially sound
and reputable insurers all Property of a character usually insured by Persons
engaged in the same or similar business similarly situated against loss or
damage of the kinds and in the amounts customarily insured against by such
Persons and carry such other insurance as is usually carried by such Persons
including, without limitation, environmental risk insurance to the extent
reasonably available.
(b) Contemporaneously with the delivery of the financial statements
required by Section 8.01(a) to be delivered for each year, the Borrower will
furnish or cause to be furnished to the Agent and the Lenders a certificate of
insurance coverage from the insurer in form and substance
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satisfactory to the Agent and, if requested, will furnish the Agent and the
Lenders copies of the applicable policies.
(c) The Borrower will and will cause each Subsidiary to operate its
Properties or cause such Properties to be operated in a careful and efficient
manner in accordance with the practices of the industry and in compliance with
all applicable contracts and agreements and in compliance in all material
respects with all Governmental Requirements.
Section 8.04 ENVIRONMENTAL MATTERS.
(a) The Borrower will and will cause each Subsidiary to establish and
implement such procedures as may be reasonably necessary to continuously
determine and assure that any failure of the following does not have a Material
Adverse Effect: (i) all Property of the Borrower and the Subsidiaries and the
operations conducted thereon and other activities of the Borrower and the
Subsidiaries are in compliance with and do not violate the requirements of any
Environmental Laws, (ii) no oil, hazardous substances or solid wastes are
disposed of or otherwise released on or to any Property owned by any such party
except in compliance with Environmental Laws, (iii) no hazardous substance will
be released on or to any such Property in a quantity equal to or exceeding that
quantity which requires reporting pursuant to Section 103 of CERCLA, and (iv) no
oil, oil and gas exploration and production wastes or hazardous substance is
released on or to any such Property so as to pose an imminent and substantial
endangerment to public health or welfare or the environment.
(b) The Borrower will promptly notify the Agent and the Lenders in writing
of any threatened action, investigation or inquiry by any Governmental Authority
of which the Borrower has knowledge in connection with any Environmental Laws,
excluding routine testing and corrective action.
Section 8.05 FURTHER ASSURANCES. The Borrower will and will cause
each Subsidiary to cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments and this
Agreement. The Borrower at its expense will and will cause each Subsidiary to
promptly execute and deliver to the Agent upon request all such other documents,
agreements and instruments to comply with or accomplish the covenants and
agreements of the Borrower or any Subsidiary, as the case may be, in the
Security Instruments and this Agreement, or to further evidence and more fully
describe the collateral intended as security for the Notes, or to correct any
omissions in the Security Instruments, or to state more fully the security
obligations set out herein or in any of the Security Instruments, or to perfect,
protect or preserve any Liens created pursuant to any of the Security
Instruments, or to make any recordings, to file any notices or obtain any
consents, all as may be necessary or appropriate in connection therewith.
Section 8.06 PERFORMANCE OF OBLIGATIONS. The Borrower will pay the
Notes according to the reading, tenor and effect thereof; and the Borrower will
and will cause each Subsidiary to do and perform every act and discharge all of
the obligations to be performed and
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discharged by them under the Security Instruments and this Agreement, at the
time or times and in the manner specified.
Section 8.07 ERISA INFORMATION AND COMPLIANCE. The Borrower will
promptly furnish and will cause the Subsidiaries and any ERISA Affiliate to
promptly furnish to the Agent with sufficient copies to the Lenders (i) promptly
after the filing thereof with the United States Secretary of Labor, the Internal
Revenue Service or the PBGC, copies of each annual and other report with respect
to each Plan that is subject to Title IV of ERISA (other than a Multiemployer
Plan) and has unfunded vested benefits as reflected on such report or any trust
created thereunder, (ii) immediately upon becoming aware of the occurrence of
any ERISA Event or of any "prohibited transaction," as described in section 406
of ERISA or in section 4975 of the Code, in connection with any Plan or any
trust created thereunder, a written notice signed by a Responsible Officer
specifying the nature thereof, what action the Borrower, the Subsidiary or the
ERISA Affiliate is taking or proposes to take with respect thereto, and, when
known, any action taken or proposed by the Internal Revenue Service, the
Department of Labor or the PBGC with respect thereto, and (iii) immediately upon
receipt thereof, copies of any notice of the PBGC's intention to terminate or to
have a trustee appointed to administer any Plan. With respect to each Plan
(other than a Multiemployer Plan) but except for failures which would not result
in a Material Adverse Effect, the Borrower will, and will cause each Subsidiary
and ERISA Affiliate to, (i) satisfy in full and in a timely manner, without
incurring any late payment or underpayment charge or penalty and without giving
rise to any lien, all of the contribution and funding requirements of section
412 of the Code (determined without regard to subsections (d), (e), (f) and (k)
thereof) and of section 302 of ERISA (determined without regard to sections 303,
304 and 306 of ERISA), and (ii) pay, or cause to be paid, to the PBGC in a
timely manner, without incurring any late payment or underpayment charge or
penalty, all premiums required pursuant to sections 4006 and 4007 of ERISA.
Section 8.08 SUBSIDIARY SECURITY. Should the Borrower create or
acquire any Subsidiary pursuant to Section 9.19 hereof it will promptly grant to
the Agent for the benefit of the Lenders a security interest and pledge of all
the capital stock of such Subsidiary in form and substance satisfactory to the
Agent, and the Borrower will cause such Subsidiary to enter into a guaranty of
the Indebtedness in form and substance satisfactory to the Agent; provided,
however, with respect to any such Subsidiary that is not a U.S. based entity,
the security interest and/or guaranty shall be limited to the extent necessary
to prevent any adverse tax consequence resulting therefrom. The delivery of such
security and guaranty shall be accompanied by such back up corporate authority
and opinions of counsel as the Agent may reasonably request.
Section 8.09 INSPECTION. The Borrower shall and shall cause each
Subsidiary to permit the Agent and the Lenders to visit and inspect any of their
respective Properties, to examine all of such Person's books of account records,
reports, and other papers, to make copies and extracts therefrom, and to discuss
their respective affairs, finances, and accounts with their respective officers,
employees, and independent public accountants all at such reasonable times and
as often as may be reasonably requested, provided that the Borrower is given at
least three (3) Business Days advance notice thereof and reasonable opportunity
to be present when independent public
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accountants or other third parties are contacted, and provided further that so
long as no Default or Event of Default exists, the Agent and the Lenders shall
not exercise the foregoing inspection right more often than once in any calendar
year.
Section 8.10 INSURANCE CERTIFICATE. Within 90 days after the Closing
Date, the Borrower shall furnish to the Agent insurance certificates for the
Borrower and the Subsidiaries evidencing the insurance required pursuant to
Section 8.03. During such 90 day period, promptly upon request, the Borrower
will make available for review by the Agent or any Lender the insurance policies
and any related information of the Borrower and the Subsidiaries.
Section 8.11 RELEASE OF LIENS; SEARCH CERTIFICATES. Not later than
45 days after the Closing Date, the Borrower shall deliver to the Agent Lien
search certificates for the Borrower and each of the Guarantors for each of the
jurisdictions set forth on Schedule 7.14 reflecting that the financing statement
relating to the Lien granted by the Borrower in favor of the Agent under the
Security Agreement (Stock and Other Securities) of even date herewith has been
properly filed and that all other Liens (excluding Permitted Liens) against the
Borrower, the Guarantors or their Properties have been released to the
satisfaction of the Agent.
ARTICLE IX
NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as any of the Commitments
are in effect and until payment in full of Loans hereunder, all interest thereon
and all other amounts payable by the Borrower hereunder, without the prior
written consent of the Majority Lenders:
Section 9.01 DEBT. Neither the Borrower nor any Subsidiary will
incur, create, assume or suffer to exist any Debt, except:
(a) the Notes or other Indebtedness arising under the Loan Documents or
any guaranty of or suretyship arrangement for the Notes or other Indebtedness
arising under the Loan Documents;
(b) Debt of the Borrower and/or the Founding Companies existing on the
Closing Date which is reflected in the Financial Statements or is disclosed in
SCHEDULE 9.01, and any renewals or extensions (but not increases) thereof;
(c) accounts payable (for the deferred purchase price of Property or
services) from time to time incurred in the ordinary course of business which,
if greater than 90 days past the invoice or billing date, are being contested in
good faith by appropriate proceedings if reserves adequate under GAAP shall have
been established therefor;
(d) Debt (i) under Capital Leases and (ii) purchase money Debt which in
each purchase money Debt case shall not exceed 100% of the lesser of the total
purchase price and the fair market
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value of the Property acquired as determined at the time of acquisition,
provided all Debt incurred pursuant to this clause (d) shall not at any time
exceed $3,000,000.
(e) Subordinated Debt not to exceed $5,000,000 at any one time outstanding
which matures on a date subsequent to the Revolving Credit Termination Date.
(f) Hedging Agreements entered into by the Borrower, not for speculative
purposes, to hedge the interest cost with respect to the Loans and being for a
notional amount not to exceed the outstanding balance of principal and interest
on the Notes.
(g) Debt as a result of Section 9.03(g).
Section 9.02 LIENS. Neither the Borrower nor any Subsidiary will
create, incur, assume or permit to exist any Lien on any of its Properties (now
owned or hereafter acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens securing Capital Leases or purchase money debt allowed under
Section 9.01(d) but only on the Property under lease or acquired with such debt;
and
(d) Liens disclosed on SCHEDULE 9.02.
Section 9.03 INVESTMENTS, LOANS AND ADVANCES. Neither the Borrower
nor any Subsidiary will make or permit to remain outstanding any loans or
advances to or investments in any Person, except that the foregoing restriction
shall not apply to:
(a) investments, loans or advances reflected in the Financial Statements
or which are disclosed to the Lenders in SCHEDULE 9.03;
(b) accounts receivable arising in the ordinary course of business;
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each case
maturing within one year from the date of creation thereof;
(d) commercial paper maturing within one year from the date of creation
thereof rated in the highest grade by Standard & Poors Corporation or Moody's
Investors Service, Inc.;
(e) deposits maturing within one year from the date of creation thereof
with, including certificates of deposit issued by, any Lender or any office
located in the United States of any other
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bank or trust company which is organized under the laws of the United States or
any state thereof, has capital, surplus and undivided profits aggregating at
least $100,000,000.00 (as of the date of such Lender's or bank or trust
company's most recent financial reports) and has a short term deposit rating of
no lower than A2 or P2, as such rating is set forth from time to time, by
Standard & Poors Corporation or Moody's Investors Service, Inc., respectively;
(f) deposits in money market funds investing exclusively in investments
described in Section 9.03(c), 9.03(d) or 9.03(e);
(g) investments, loans or advances made by the Borrower in or to the
Subsidiaries;
(h) other investments, loans or advances not to exceed $1,000,000 in the
aggregate at any time; and
(i) investments and/or loans for Acquisitions; provided, however,
Acquisitions involving non-equity consideration of more than $10,000,000 for any
individual Acquisition or $40,000,000 in the aggregate for all such Acquisitions
during the previous four fiscal quarters shall be made only upon the written
consent of the Majority Lenders, such consent to be in the sole and absolute
discretion of each such Lender. At least ten (10) Business Days prior to the
closing of any Acquisition requiring consent of the Majority Lenders, and on or
prior to the closing of any Acquisition not requiring such consent and for which
the non-equity consideration exceeds $5,000,000, the Borrower shall have
provided to the Agent a completed certificate substantially in the form of
EXHIBIT G together with all required exhibits, duly certified by a Responsible
Officer, which the Agent shall forward to the Lenders for any Acquisition
requiring consent of the Lenders. Prior to the closing of any Acquisition, the
Borrower shall, upon request by the Agent, make available to the Agent and the
Lenders at the Borrower's offices in Houston, Texas, any information regarding
the Acquisition as the Agent or any Lender may reasonably request, including
without limitation:
(a) descriptions in reasonable detail of the Property to be acquired
together with title or other pertinent information with respect to the
Property to be acquired;
(b) purchase agreements relating to the Acquisition, and all other
documents relating thereto or to the Properties to be acquired, including
without limitation, operations of the entity to be acquired, compliance
with Environmental Laws, and any available reports related thereto; and
(c) all financial statements of the entity to be acquired (such
financial statements for at least the most recent fiscal year to be
audited with respect to all target entities with an aggregate purchase
price in an amount in excess of fifteen percent (15%) of Net Worth as made
available to the Borrower, but in any event covering the then most recent
two (2) fiscal years together with current internally prepared interim
financial statements prepared by such target entity in accordance with
GAAP; and
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(d) financial projections of the acquired entity, in form and
substance satisfactory to the Agent.
Section 9.04 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. The Borrower
will not and will not permit any Subsidiary to make any Restricted Payment.
Section 9.05 SALES AND LEASEBACKS. Neither the Borrower nor any
Subsidiary will enter into any arrangement, directly or indirectly, with any
Person whereby the Borrower or any Subsidiary shall sell or transfer any of its
Property, whether now owned or hereafter acquired, and whereby the Borrower or
any Subsidiary shall then or thereafter rent or lease as lessee such Property or
any part thereof or other Property which the Borrower or any Subsidiary intends
to use for substantially the same purpose or purposes as the Property sold or
transferred.
Section 9.06 NATURE OF BUSINESS. Neither the Borrower nor any
Subsidiary will allow any material change to be made in the character of its
business.
Section 9.07 INTENTIONALLY OMITTED.
Section 9.08 MERGERS, ETC. Neither the Borrower nor any Subsidiary
will merge into or with or consolidate with any other Person, unless the
Borrower or a Subsidiary is the surviving entity and no Default exists or will
be created thereby, or sell, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
Property or assets to any other Person.
Section 9.09 PROCEEDS OF NOTES. The Borrower will not permit the
proceeds of the Notes to be used for any purpose other than those permitted by
Section 7.07. Neither the Borrower nor any Person acting on behalf of the
Borrower has taken or will take any action which might cause any of the Loan
Documents to violate Regulation G, U or X or any other regulation of the Board
of Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in each
case as now in effect or as the same may hereinafter be in effect.
Section 9.10 ERISA COMPLIANCE. Except as would not have or result in
a Material Adverse Effect, the Borrower will not at any time:
(a) Engage in, or permit any Subsidiary or ERISA Affiliate to engage in,
any transaction in connection with which the Borrower, any Subsidiary or any
ERISA Affiliate could be subjected to either a civil penalty assessed pursuant
to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter 43 of
Subtitle D of the Code;
(b) Terminate, or permit any Subsidiary or ERISA Affiliate to terminate,
any Plan in a manner, or take any other action with respect to any Plan, which
could result in any liability of the Borrower, any Subsidiary or any ERISA
Affiliate to the PBGC;
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(c) Fail to make, or permit any Subsidiary or ERISA Affiliate to fail to
make, full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, the Borrower, a Subsidiary
or any ERISA Affiliate is required to pay as contributions thereto;
(d) Permit to exist, or allow any Subsidiary or ERISA Affiliate to permit
to exist, any accumulated funding deficiency within the meaning of Section 302
of ERISA or section 412 of the Code, whether or not waived, with respect to any
Plan other than a Multiemployer Plan;
(e) Permit the funding status of any plan which is regulated under Title
IV of ERISA (other than a Multiemployer Plan) to be in a condition that could
reasonably be expected to result in liability of the Borrower, any Subsidiary or
any ERISA Affiliate to the PBGC.;
(f) Contribute to or assume an obligation to contribute to, or permit any
Subsidiary or ERISA Affiliate to contribute to or assume an obligation to
contribute to, any Multiemployer Plan if such contributions could reasonably be
expected to result in the assessment of a withdrawal liability;
(g) Engage in an acquisition transaction a result of which would be that
Borrower would be in violation of any of the covenants of Paragraphs (d), (e) or
(f) of this Section 9.10;
(h) Incur, or permit any Subsidiary or ERISA Affiliate to incur, a
liability to or on account of a Plan under sections 515, 4062, 4063, 4064, 4201
or 4204 of ERISA;
(i) Except as required by a collective bargaining agreement contribute to
or assume an obligation to contribute to, or permit any Subsidiary or ERISA
Affiliate to contribute to or assume an obligation to contribute to, any
employee welfare benefit plan, as defined in section 3(1) of ERISA, including,
without limitation, any such plan maintained to provide benefits to former
employees of such entities, that may not be terminated by such entities in their
sole discretion at any time without any material liability; or
(j) Amend or permit any Subsidiary or ERISA Affiliate to amend, a Plan
resulting in an increase in current liability such that the Borrower, any
Subsidiary or any ERISA Affiliate is required to provide security to such Plan
under section 401(a)(29) of the Code.
Section 9.11 SALE OR DISCOUNT OF RECEIVABLES. Neither the Borrower
nor any Subsidiary will discount or sell (with or without recourse) any of its
notes receivable or accounts receivable, provided, such parties may, in good
faith, take such actions as are reasonably likely to maximize the value of
invoices more than 120 days past due and otherwise doubtful of collection,
provided, the aggregate original face amount of all receivables so discounted
and sold does not exceed $2,000,000.
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Section 9.12 CAPITAL EXPENDITURES. The Borrower will not make or
permit any Subsidiary to make any Capital Expenditures, if, after giving effect
thereto, the aggregate of all such expenditures would exceed $8,000,000 during
any fiscal year.
Section 9.13 NET WORTH. The Borrower will not at any time permit its
Net Worth to be less than the greater of (i) $75,000,000 or (ii) 90% of actual
Net Worth calculated as of March 31, 1998, PLUS 50% of the sum of the Borrower's
after tax consolidated net income for each fiscal quarter for which consolidated
net income is greater than $0 beginning with the fiscal quarter ending June 30,
1998 PLUS 100% of the net proceeds received from equity offerings after the
Closing Date.
Section 9.14 RATIO OF FUNDED DEBT TO ADJUSTED EBITDA. The Borrower
will not permit its ratio of Funded Debt as of the end of any fiscal quarter to
Adjusted EBITDA for the four fiscal quarters ending on such date to be greater
than 3.00 to 1.00. For the purposes of Section 9.14 only, "Adjusted EBITDA"
shall mean the EBITDA of the Borrower and the Subsidiaries calculated on a
pro-forma basis to include the EBITDA for the most recent four fiscal quarters
of acquired Persons (including, without limitation the Founding Companies) to
the extent that such EBITDA is not included in the EBITDA of the Borrower.
Section 9.15 FIXED CHARGE COVERAGE RATIO. The Borrower will not
permit its Fixed Charge Coverage Ratio as of the end of any fiscal quarter of
the Borrower (calculated quarterly at the end of each fiscal quarter) to be less
than 2.00 to 1.00. For the purposes of this Section 9.15, "FIXED CHARGE COVERAGE
RATIO" shall mean the ratio of (i) Adjusted EBITDA minus cash taxes (other than
cash taxes paid by Alatec Products, Inc. for tax years prior to 1997) and
Capital Expenditures for the four fiscal quarters ending on such date to (ii)
cash interest payments plus current maturities of Debt paid for such four fiscal
quarters of the Borrower and its Consolidated Subsidiaries. For the purposes of
Section 9.15 only, "Adjusted EBITDA" shall mean the EBITDA of the Borrower and
the Subsidiaries calculated on a pro-forma basis to include the EBITDA for the
most recent four fiscal quarters of the Founding Companies (and no other
acquired Persons) to the extent that such EBITDA is not included in the EBITDA
of the Borrower.
Section 9.16 SALE OF PROPERTIES. The Borrower will not, and will not
permit any Subsidiary to, sell, assign, convey or otherwise transfer any of its
Property or any interest therein except for Properties which are obsolete or no
longer useful in the Borrower's or Subsidiaries' business and Properties for
which the Borrower has given the Agent at least ten (10) Business Days prior
written notice of the proposed transfer and which shall not exceed $1,000,000 in
the aggregate in any fiscal year.
Section 9.17 ENVIRONMENTAL MATTERS. Neither the Borrower nor any
Subsidiary will cause or permit any of its Property to be in violation of, or do
anything or permit anything to be done which will subject any such Property to
any remedial obligations under any Environmental Laws, assuming disclosure to
the applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to such Property where such violations or
remedial obligations would have a Material Adverse Effect.
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Section 9.18 TRANSACTIONS WITH AFFILIATES. Neither the Borrower nor
any Subsidiary will enter into any transaction, including, without limitation,
any purchase, sale, lease or exchange of Property or the rendering of any
service, with any Affiliate (except for the Borrower or any Guarantor) unless
such transactions are otherwise permitted under this Agreement, are in the
ordinary course of its business and are upon fair and reasonable terms no less
favorable to it than it would obtain in a comparable arm's length transaction
with a Person not an Affiliate, or are disclosed in the Registration Statement.
Section 9.19 SUBSIDIARIES. The Borrower shall not, and shall not
permit any Subsidiary to, create any additional Subsidiaries except as permitted
by Section 9.03. The Borrower shall not and shall not permit any Subsidiary to
sell or to issue any stock or ownership interest of a Subsidiary except to the
Borrower or any Guarantor and except in compliance with Section 9.03.
Section 9.20 NEGATIVE PLEDGE AGREEMENTS. Neither the Borrower nor
any Subsidiary will create, incur, assume or suffer to exist any contract,
agreement or understanding (other than this Agreement and the Security
Instruments) which in any way prohibits or restricts the granting, conveying,
creation or imposition of any Lien on any of its Property or restricts any
Subsidiary from paying dividends to the Borrower, or which requires the consent
of or notice to other Persons in connection therewith.
Section 9.21 FISCAL YEAR. The Borrower will not change its fiscal
year without consent of the Majority Lenders.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 EVENTS OF DEFAULT. One or more of the following events
shall constitute an "EVENT OF DEFAULT":
(a) the Borrower shall default in the payment or prepayment when due of
any principal of or interest on any Loan, or any reimbursement obligation for a
disbursement made under any Letter of Credit, or any fees or other amount
payable by it hereunder or under any Security Instrument and such default, other
than a default of a payment or prepayment of principal (which shall have no cure
period), shall continue unremedied for a period of three (3) Business Days; or
(b) the Borrower or any Subsidiary shall default in the payment when due
of any principal of or interest on any of its other Debt aggregating $500,000 or
more, or any event specified in any note, agreement, indenture or other document
evidencing or relating to any such Debt shall occur if the effect of such event
is to cause, or (with the giving of any notice or the lapse of time or both) to
permit the holder or holders of such Debt (or a trustee or agent on behalf of
such holder or holders) to cause, such Debt to become due prior to its stated
maturity; or
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(c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by the Borrower or any Subsidiary, or any
certificate furnished to any Lender or the Agent pursuant to the provisions
hereof or any Security Instrument, shall prove to have been false or misleading
as of the time made or furnished in any material respect; or
(d) the Borrower shall default in the performance of any of its
obligations under Article IX or any other Article of this Agreement other than
under Article VIII; or the Borrower shall default in the performance of any of
its obligations under Article VIII or any Security Instrument (other than the
payment of amounts due which shall be governed by Section 10.01(a)) and such
default shall continue unremedied for a period of thirty (30) days after the
earlier to occur of (i) notice thereof to the Borrower by the Agent or any
Lender (through the Agent), or (ii) the Borrower otherwise becoming aware of
such default; or
(e) the Borrower shall admit in writing its inability to, or be generally
unable to, pay its debts as such debts become due; or
(f) the Borrower shall (i) apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, liquidation or composition or
readjustment of debts, (v) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under the Federal Bankruptcy Code, or (vi) take any corporate
action for the purpose of effecting any of the foregoing; or
(g) a proceeding or case shall be commenced, without the application or
consent of the Borrower, in any court of competent jurisdiction, seeking (i) its
liquidation, reorganization, dissolution or winding-up, or the composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of the Borrower of all or any substantial part
of its assets, or (iii) similar relief in respect of the Borrower under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or composition
or adjustment of debts, and such proceeding or case shall continue undismissed,
or an order, judgment or decree approving or ordering any of the foregoing shall
be entered and continue unstayed and in effect, for a period of 60 days; or (iv)
an order for relief against the Borrower shall be entered in an involuntary case
under the Federal Bankruptcy Code; or
(h) a judgment or judgments for the payment of money in excess of $500,000
in the aggregate shall be rendered by a court against the Borrower or any
Subsidiary and the same shall not be discharged (or provision shall not be made
for such discharge), or a stay of execution thereof shall not be procured,
within thirty (30) days from the date of entry thereof and the Borrower or such
Subsidiary shall not, within said period of 30 days, or such longer period
during which execution of
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the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal; or
(i) the Security Instruments after delivery thereof shall for any reason,
except to the extent permitted by the terms thereof, cease to be in full force
and effect and valid, binding and enforceable in accordance with their terms, or
cease to create a valid and perfected Lien of the priority required thereby on
any of the collateral purported to be covered thereby, except to the extent
permitted by the terms of this Agreement, or the Borrower shall so state in
writing; or
(j) any Letter of Credit becomes the subject matter of any order,
judgment, injunction or any other such determination, or if the Borrower or any
other Person shall petition or apply for or obtain any order restricting payment
by the Agent under any Letter of Credit or extending the Lenders' liability
under any Letter of Credit beyond the expiration date stated therein or
otherwise agreed to by the Agent; or
(k) a Change of Control occurs or the Borrower discontinues its usual
business; or
(l) any Guarantor takes, suffers or permits to exist any of the events or
conditions referred to in paragraphs (e), (f), (g) or (h) hereof or if any
provision of any guaranty agreement related thereto shall for any reason cease
to be valid and binding on any Guarantor or if any Guarantor shall so state in
writing; PROVIDED, HOWEVER, the foregoing shall not be considered an Event of
Default for any Guarantor with total assets of less than $1,000,000 and for
which the foregoing does not result in a Material Adverse Effect.
Section 10.02 REMEDIES.
(a) In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01 or in clause (l) to the extent it
relates to clauses (e), (f) or (g), the Agent, upon request of the Majority
Lenders, shall, by notice to the Borrower, cancel the Commitments and/or declare
the principal amount then outstanding of, and the accrued interest on, the Loans
and all other amounts payable by the Borrower hereunder and under the Notes
(including without limitation the payment of cash collateral to secure the LC
Exposure as provided in Section 2.09(b) hereof) to be forthwith due and payable,
whereupon such amounts shall be immediately due and payable without presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower.
(b) In the case of the occurrence of an Event of Default referred to in
clauses (e), (f) or (g) of Section 10.01 or in clause (l) to the extent it
relates to clauses (e), (f) or (g), the Commitments shall be automatically
canceled and the principal amount then outstanding of, and the accrued interest
on, the Loans and all other amounts payable by the Borrower hereunder and under
the Notes (including without limitation the payment of cash collateral to secure
the LC Exposure as provided in Section 2.09(b) hereof) shall become
automatically immediately due and payable without
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presentment, demand, protest, notice of intent to accelerate, notice of
acceleration or other formalities of any kind, all of which are hereby expressly
waived by the Borrower.
(c) All proceeds received after maturity of the Notes, whether by
acceleration or otherwise shall be applied first to reimbursement of expenses
and indemnities provided for in this Agreement and the Security Instruments;
second to accrued interest on the Notes; third to fees; fourth pro rata to
principal outstanding on the Notes and other Indebtedness; fifth to serve as
cash collateral to be held by the Agent to secure the LC Exposure; and any
excess shall be paid to the Borrower or as otherwise required by any
Governmental Requirement.
ARTICLE XI
THE AGENT
Section 11.01 APPOINTMENT, POWERS AND IMMUNITIES. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent under this
Agreement and the other Loan Documents with such powers and discretion as are
specifically delegated to the Agent by the terms of this Agreement and the other
Loan Documents, together with such other powers as are reasonably incidental
thereto. Neither the Agent nor the Fronting Bank (which terms as used in this
sentence and in Section 11.05 and the first sentence of Section 11.06 hereof
shall include each of their Affiliates and their own and their Affiliates'
officers, directors, employees, and agents): (a) shall have any duties or
responsibilities except those expressly set forth in this Agreement and shall
not be a trustee or fiduciary for any Lender; (b) shall be responsible to the
Lenders for any recital, statement, representation, or warranty (whether written
or oral) made in or in connection with any Loan Document or any certificate or
other document referred to or provided for in, or received by any of them under,
any Loan Document, or for the value, validity, effectiveness, genuineness,
enforceability, or sufficiency of any Loan Document, or any other document
referred to or provided for therein or for any failure by the Borrower, a
Guarantor or any other Person to perform any of its obligations thereunder; (c)
shall be responsible for or have any duty to ascertain, inquire into, or verify
the performance or observance of any covenants or agreements by the Borrower, a
Guarantor or any other Person or the satisfaction of any condition or to inspect
the property (including the books and records) of the Borrower or any of its
Subsidiaries or Affiliates; (d) shall be required to initiate or conduct any
litigation or collection proceedings under any Loan Document; and (e) shall be
responsible for any action taken or omitted to be taken by it under or in
connection with any Loan Document, except for its own gross negligence or
willful misconduct. The Agent may employ agents and attorneys-in-fact and shall
not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care.
Section 11.02 RELIANCE BY AGENT. The Agent and the Fronting Bank
shall be entitled to rely upon any certification, notice, instrument, writing or
other communication (including any thereof by telephone, telex, telecopier,
telegram or cable) believed by either of them to be genuine and correct and to
have been signed or sent by or on behalf of the proper Person or Persons, and
upon
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advice and statements of legal counsel, independent accountants and other
experts selected by the Agent or the Fronting Bank. The Agent may deem and treat
the payee of any Note as the holder thereof for all purposes hereof unless and
until the Agent receives and accepts an Assignment and Acceptance executed in
accordance with Section 12.06 hereof. As to any matters not expressly provided
for by this Agreement, neither the Agent nor the Fronting Bank shall be required
to exercise any discretion or take any action, but shall be required to act or
to refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Majority Lenders, and such
instructions shall be binding on all of the Lenders; PROVIDED, HOWEVER, that
neither the Agent nor the Fronting Bank shall be required to take any action
that exposes the Agent or the Fronting Bank to personal liability or that is
contrary to any Loan Document or applicable law or unless it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking any such action.
Section 11.03 DEFAULTS. The Agent shall not be deemed to have
knowledge or notice of the occurrence of a Default or Event of Default unless
the Agent has received written notice from a Lender or the Borrower specifying
such Default or Event of Default and stating that such notice is a "Notice of
Default." In the event that the Agent receives such a notice of the occurrence
of a Default or Event of Default, the Agent shall give prompt notice thereof to
the Lenders. The Agent shall (subject to Section 11.02 hereof) take such action
with respect to such Default or Event of Default as shall reasonably be directed
by the Majority Lenders, PROVIDED THAT, unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable in the best interest of the Lenders.
Section 11.04 RIGHTS AS A LENDER. With respect to its Commitments
and the Loans made by it and its participation in the issuance of Letters of
Credit, NationsBank (and any successor acting as Agent) in its capacity as a
Lender hereunder shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not acting as the Agent, and
the term "Lender" or "Lenders" shall, unless the context otherwise indicates,
include the Agent in its individual capacity. NationsBank (and any successor
acting as Agent) and its Affiliates may (without having to account therefor to
any Lender) accept deposits from, lend money to, make investments in, provide
services to and generally engage in any kind of lending, trust or other business
with the Borrower (and any of its Affiliates) as if it were not acting as the
Agent, and NationsBank and its Affiliates may accept fees and other
consideration from the Borrower for services in connection with this Agreement
or otherwise without having to account for the same to the Lenders.
Section 11.05 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY THE
AGENT AND THE FRONTING BANK RATABLY IN ACCORDANCE WITH THEIR PERCENTAGE SHARES
FOR THE INDEMNITY MATTERS AS DESCRIBED IN SECTION 12.03 TO THE EXTENT NOT
INDEMNIFIED OR REIMBURSED BY THE BORROWER UNDER SECTION 12.03, BUT WITHOUT
LIMITING THE OBLIGATIONS OF THE BORROWER UNDER SAID SECTION 12.03 AND FOR ANY
AND ALL OTHER LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, COSTS,
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EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED
ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR THE FRONTING BANK IN ANY WAY
RELATING TO OR ARISING OUT OF: (I) ANY LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED THEREBY OR ANY ACTION TAKEN OR OMITTED BY THE AGENT UNDER ANY LOAN
DOCUMENT (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF THE
AGENT), PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE
EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE
INDEMNIFIED PARTY. WITHOUT LIMITATION OF THE FOREGOING, EACH LENDER AGREES TO
REIMBURSE THE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY COSTS OR
EXPENSES PAYABLE BY THE BORROWER UNDER SECTION 12.03, TO THE EXTENT THAT THE
AGENT IS NOT PROMPTLY REIMBURSED FOR SUCH COSTS AND EXPENSES BY THE BORROWER.
THE AGREEMENTS CONTAINED IN THIS SECTION SHALL SURVIVE PAYMENT IN FULL OF THE
LOANS AND ALL OTHER AMOUNTS PAYABLE UNDER THIS AGREEMENT.
Section 11.06 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender
acknowledges and agrees that it has, independently and without reliance on the
Agent, the Fronting Bank or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Borrower and its decision to enter into this Agreement, and that it will,
independently and without reliance upon the Agent, the Fronting Bank or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. Except for notices, reports
and other documents and information expressly required to be furnished to the
Lenders by the Agent hereunder, neither the Agent nor the Fronting Bank shall
have any duty or responsibility to provide any Lender with any credit or other
information concerning the affairs, financial condition or business of the
Borrower (or any of its Affiliates) which may come into the possession of the
Agent, the Fronting Bank or any of their respective Affiliates. In this regard,
each Lender acknowledges that Vinson & Elkins L.L.P. is acting in this
transaction as special counsel to the Agent only, except to the extent otherwise
expressly stated in any legal opinion or any Loan Document. Each Lender will
consult with its own legal counsel to the extent that it deems necessary in
connection with the Loan Documents and the matters contemplated therein.
Section 11.07 RESIGNATION OR REMOVAL OF AGENT. The Agent may resign
at any time by giving notice thereof to the Lenders and the Borrower. Upon any
such resignation or removal, the Majority Lenders, with the consent of the
Borrower, shall have the right to appoint a successor Agent. If no successor
Agent shall have been so appointed by the Majority Lenders and shall have
accepted such appointment within thirty (30) days after the retiring Agent's
giving of notice of resignation, then the retiring Agent may, on behalf of the
Lenders, appoint a successor Agent which shall be a commercial bank organized
under the laws of the United States of America having combined capital and
surplus of at least $100,000,000. Upon the acceptance of such appointment as
Agent hereunder by a successor, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder. After any retiring Agent's resignation
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hereunder as Agent, the provisions of this Article XI and Section 12.03 shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as the Agent.
ARTICLE XII
MISCELLANEOUS
Section 12.01 WAIVER. No failure on the part of the Agent or any
Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under any of the Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under any of the Loan Documents preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Section 12.02 NOTICES. All notices and other communications provided
for herein and in the other Loan Documents (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the other Loan
Documents) shall be given or made by telex, telecopy, courier or U.S. Mail or in
writing and telexed, telecopied, mailed or delivered to the intended recipient
at the "Address for Notices" specified below its name on the signature pages
hereof or in the Loan Documents or, as to any party, at such other address as
shall be designated by such party in a notice to each other party. Except as
otherwise provided in this Agreement or in the other Loan Documents, all such
communications shall be deemed to have been duly given when transmitted, if
transmitted before 1:00 p.m. local time on a Business Day (otherwise on the next
succeeding Business Day) by telex or telecopier and evidence or confirmation of
receipt is obtained, or personally delivered or, in the case of a mailed notice,
three (3) Business Days after the date deposited in the mails, postage prepaid,
in each case given or addressed as aforesaid.
Section 12.03 PAYMENT OF EXPENSES, INDEMNITIES, ETC.
(a) The Borrower agrees to pay on demand all costs and expenses of the
Agent in connection with the syndication, preparation, execution, delivery,
administration, modification, and amendment of this Agreement, the other Loan
Documents, and the other documents to be delivered hereunder, including, without
limitation, the reasonable fees and expenses of counsel for the Agent (including
the cost of internal counsel) with respect thereto and with respect to advising
the Agent as to its rights and responsibilities under the Loan Documents. The
Borrower further agrees to pay on demand all costs and expenses of the Agent and
the Lenders, if any (including, without limitation, reasonable attorneys' fees
and expenses and the cost of internal counsel), in connection with the
enforcement (whether through negotiations, legal proceedings, or otherwise) of
the Loan Documents and the other documents to be delivered hereunder.
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(b) THE BORROWER AGREES TO INDEMNIFY AND HOLD HARMLESS THE AGENT AND EACH
LENDER AND EACH OF THEIR AFFILIATES AND THEIR RESPECTIVE OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, AND ADVISORS (EACH, AN "INDEMNIFIED PARTY") FROM AND AGAINST
ANY AND ALL CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS, AND EXPENSES
(INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES) THAT MAY BE INCURRED
BY OR ASSERTED OR AWARDED AGAINST ANY INDEMNIFIED PARTY, IN EACH CASE ARISING
OUT OF OR IN CONNECTION WITH OR BY REASON OF (INCLUDING, WITHOUT LIMITATION, IN
CONNECTION WITH ANY INVESTIGATION, LITIGATION, OR PROCEEDING OR PREPARATION OF
DEFENSE IN CONNECTION THEREWITH) THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS
CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE LOANS
(INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE OF THE INDEMNIFIED
PARTY), EXCEPT TO THE EXTENT SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR
EXPENSE IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT
JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PARTY'S GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT. IN THE CASE OF AN INVESTIGATION, LITIGATION OR OTHER
PROCEEDING TO WHICH THE INDEMNITY IN THIS SECTION 12.03 APPLIES, SUCH INDEMNITY
SHALL BE EFFECTIVE WHETHER OR NOT SUCH INVESTIGATION, LITIGATION OR PROCEEDING
IS BROUGHT BY THE BORROWER, ITS DIRECTORS, SHAREHOLDERS OR CREDITORS OR AN
INDEMNIFIED PARTY OR ANY OTHER PERSON OR ANY INDEMNIFIED PARTY IS OTHERWISE A
PARTY THERETO AND WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED HEREBY ARE
CONSUMMATED. TO THE MAXIMUM EXTENT ALLOWED BY APPLICABLE LAW, THE BORROWER
AGREES NOT TO ASSERT ANY CLAIM AGAINST THE AGENT, ANY LENDER, ANY OF THEIR
AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES,
ATTORNEYS, AGENTS, AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL,
INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE
RELATING TO THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR
THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE LOANS.
(c) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 12.03 shall survive the payment in full of the Loans and all other
amounts payable under this Agreement.
Section 12.04 AMENDMENTS, ETC. To the maximum extent allowed by
applicable law, any provision of this Agreement or any other Loan Document may
be amended or waived if, but only if, such amendment or waiver is in writing and
is signed by the Borrower and the Majority Lenders (and, if Article 11 or the
rights or duties of the Agent are affected thereby, by the Agent); PROVIDED that
no such amendment or waiver shall, unless signed by all the Lenders, (i)
increase the Commitments of the Lenders, (ii) reduce the principal of or rate of
interest on any Loan or any fees or other amounts payable hereunder, (iii)
postpone any date fixed for the payment of any scheduled installment of
principal of or interest on any Loan or any fees or other amounts payable
hereunder or for termination of any Commitment, (iv) change the percentage of
the Commitments or of the unpaid principal amount of the Notes, or the number of
Lenders, which shall be required for the Lenders or any of them to take any
action under this Section or any other provision of this Agreement or (v)
release any Guarantor or all or substantially all of the collateral.
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Section 12.05 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 12.06 ASSIGNMENTS AND PARTICIPATIONS.
(a) Each Lender may assign to one or more Eligible Assignees all or a
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Loans, its Note, and its Commitment);
PROVIDED, HOWEVER, that
(i) each such assignment shall be to an Eligible Assignee;
(ii) except in the case of an assignment to another Lender or an
assignment of all of a Lender's rights and obligations under this
Agreement, any such partial assignment shall be in an amount at least
equal to $5,000,000 or an integral multiple of $1,000,000 in excess
thereof;
(iii) each such assignment by a Lender shall be of a constant, and
not varying, percentage of all of its rights and obligations under this
Agreement and the Note; and
(iv) the parties to such assignment shall execute and deliver to the
Agent for its acceptance an Assignment and Acceptance in the form of
EXHIBIT E hereto, together with any Note subject to such assignment and a
processing fee of $3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance, the
assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender hereunder and
the assigning Lender shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this Section, the assignor, the Agent
and the Borrower shall make appropriate arrangements so that, if required, new
Notes are issued to the assignor and the assignee. If the assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Agent certification as to exemption
from deduction or withholding of Taxes in accordance with Section 4.06.
(b) The Agent shall maintain at its Principal Office a copy of each
Assignment and Acceptance delivered to and accepted by it and a register for the
recordation of the names and addresses of the Lenders and the Commitment of, and
principal amount of the Loans owing to, each Lender from time to time (the
"REGISTER"). The entries in the Register shall be conclusive and binding for all
purposes, absent manifest error, and the Borrower, the Agent and the Lenders may
treat each Person whose name is recorded in the Register as a Lender hereunder
for all purposes of this Agreement. The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
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(c) Upon its receipt of an Assignment and Acceptance executed by the
parties thereto, together with any Note subject to such assignment and payment
of the processing fee, the Agent shall, if such Assignment and Acceptance has
been completed and is in substantially the form of EXHIBIT E hereto, (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in
the Register and (iii) give prompt notice thereof to the parties thereto.
(d) Each Lender may sell participations to one or more Persons in all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and its Loans); PROVIDED, HOWEVER, that (i) such
Lender's obligations under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) the participant shall be entitled to the
benefit of the yield protection provisions contained in Article 5 and the right
of set-off contained in Section 4.05, and (iv) the Borrower shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement, and such Lender shall retain the
sole right to enforce the obligations of the Borrower relating to its Loans and
its Note and to approve any amendment, modification, or waiver of any provision
of this Agreement (other than amendments, modifications, or waivers decreasing
the amount of principal of or the rate at which interest is payable on such
Loans or Note, extending any scheduled principal payment date or date fixed for
the payment of interest on such Loans or Note, or extending its Commitment).
(e) Notwithstanding any other provision set forth in this Agreement, any
Lender may at any time assign and pledge all or any portion of its Loans and its
Note to any Federal Reserve Bank as collateral security pursuant to Regulation A
and any Operating Circular issued by such Federal Reserve Bank. No such
assignment shall release the assigning Lender from its obligations hereunder.
(f) Any Lender may furnish any information concerning the Borrower or any
of the Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants),
subject, however, to the provisions of Section 12.15 hereof.
Section 12.07 INVALIDITY. In the event that any one or more of the
provisions contained in any of the Loan Documents or the Letters of Credit, the
Letter of Credit Agreements shall, for any reason, be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of the Notes, this Agreement or any
Security Instrument.
Section 12.08 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 12.09 REFERENCES. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not
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to any particular article, section or subsection. Any reference herein to a
Section shall be deemed to refer to the applicable Section of this Agreement
unless otherwise stated herein. Any reference herein to an exhibit or schedule
shall be deemed to refer to the applicable exhibit or schedule attached hereto
unless otherwise stated herein.
Section 12.10 SURVIVAL. The obligations of the parties under Section
4.06, Article V, and Sections 11.05 and 12.03 shall survive the repayment of the
Loans and the termination of the Commitments. To the extent that any payments on
the Indebtedness or proceeds of any collateral are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver or other Person under any bankruptcy
law, common law or equitable cause, then to such extent, the Indebtedness so
satisfied shall be revived and continue as if such payment or proceeds had not
been received and the Agent's and the Lenders' Liens, security interests,
rights, powers and remedies under this Agreement and each Security Instrument
shall continue in full force and effect. In such event, each Security Instrument
shall be automatically reinstated and the Borrower shall take such action as may
be reasonably requested by the Agent and the Lenders to effect such
reinstatement.
Section 12.11 CAPTIONS. Captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
Section 12.12 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPO
RANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS BETWEEN THE PARTIES.
SECTION 12.13 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(A) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT THAT UNITED
STATES FEDERAL LAW PERMITS ANY LENDER TO CHARGE INTEREST AT THE RATE ALLOWED BY
THE LAWS OF THE STATE WHERE SUCH LENDER IS LOCATED. SECTION 346.001, ET SEQ., OF
THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS
AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE
NOTES.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS
SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, THE BORROWER TO THE MAXIMUM EXTENT ALLOWED BY APPLICABLE LAW,
HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
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UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN
SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE
AND DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM OBTAINING JURISDICTION OVER
THE BORROWER IN ANY COURT OTHERWISE HAVING JURISDICTION.
(C) EACH OF THE BORROWER AND EACH LENDER HEREBY (I) IRREVOCABLY AND
UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY SECURITY
INSTRUMENT AND FOR ANY COUNTERCLAIM THEREIN; (II) IRREVOCABLY WAIVE, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III) CERTIFY
THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OF COUNSEL FOR ANY PARTY
HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (IV)
ACKNOWLEDGE THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE SECURITY
INSTRUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 12.13.
Section 12.14 INTEREST. It is the intention of the parties hereto
that each Lender shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated hereby would be usurious as to any
Lender under laws applicable to it (including the laws of the United States of
America and the State of Texas or any other jurisdiction whose laws may be
mandatorily applicable to such Lender notwithstanding the other provisions of
this Agreement), then, in that event, notwithstanding anything to the contrary
in any of the Loan Documents or any agreement entered into in connection with or
as security for the Notes, it is agreed as follows: (i) the aggregate of all
consideration which constitutes interest under law applicable to any Lender that
is contracted for, taken, reserved, charged or received by such Lender under any
of the Loan Documents or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be canceled automatically and if
theretofore paid shall be credited by such Lender on the principal amount of the
Indebtedness (or, to the extent that the principal amount of the Indebtedness
shall have been or would thereby be paid in full, refunded by such Lender to the
Borrower); and (ii) in the event that the maturity of the Notes is accelerated
by reason of an election of the holder thereof resulting from any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to any Lender may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in
this Agreement or otherwise shall be canceled automatically by such Lender as of
the date of such acceleration or prepayment and, if theretofore paid, shall be
credited by such Lender on the principal amount of the Indebtedness (or, to the
extent that the principal amount of the
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Indebtedness shall have been or would thereby be paid in full, refunded by such
Lender to the Borrower). All sums paid or agreed to be paid to any Lender for
the use, forbearance or detention of sums due hereunder shall, to the extent
permitted by law applicable to such Lender, be amortized, prorated, allocated
and spread throughout the full term of the Loans evidenced by the Notes until
payment in full so that the rate or amount of interest on account of any Loans
hereunder does not exceed the maximum amount allowed by such applicable law. If
at any time and from time to time (i) the amount of interest payable to any
Lender on any date shall be computed at the Highest Lawful Rate applicable to
such Lender pursuant to this Section 12.14 and (ii) in respect of any subsequent
interest computation period the amount of interest otherwise payable to such
Lender would be less than the amount of interest payable to such Lender computed
at the Highest Lawful Rate applicable to such Lender, then the amount of
interest payable to such Lender in respect of such subsequent interest
computation period shall continue to be computed at the Highest Lawful Rate
applicable to such Lender until the total amount of interest payable to such
Lender shall equal the total amount of interest which would have been payable to
such Lender if the total amount of interest had been computed without giving
effect to this Section 12.14. To the extent that Section 303.301 et seq. of the
Texas Finance Code is relevant for the purpose of determining the Highest Lawful
Rate, such Lender elects to determine the applicable rate ceiling under such
Article by the weekly rate ceiling from time to time in effect.
Section 12.15 CONFIDENTIALITY. The Agent and each Lender (each, a
"LENDING PARTY") agrees to keep confidential any information furnished or made
available to it by the Borrower pursuant to this Agreement that is marked
confidential; PROVIDED that nothing herein shall prevent any Lending Party from
disclosing such information (a) to any other Lending Party or any Affiliate of
any Lending Party, or any officer, director, employee, agent, or advisor of any
Lending Party or Affiliate of any Lending Party to the extent required in
connection with their work on the Loans, (b) to any other Person if reasonably
incidental to the administration of the credit facility provided herein, (c) as
required by any law, rule, or regulation, (d) upon the order of any court or
administrative agency, (e) upon the request or demand of any regulatory agency
or authority, (f) that is or becomes available to the public or that is or
becomes available to any Lending Party other than as a result of a disclosure by
any Lending Party prohibited by this Agreement, (g) in connection with any
litigation to which such Lending Party or any of its Affiliates may be a party,
(h) to the extent necessary in connection with the exercise of any remedy under
this Agreement or any other Loan Document, and (i) subject to provisions
substantially similar to those contained in this Section, to any actual or
proposed participant or assignee.
Section 12.16 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE SECURITY
INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY
INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND HAS RECEIVED
THE
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ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE SECURITY
INSTRUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS
RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD
NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
"CONSPICUOUS."
[SIGNATURES BEGIN ON NEXT PAGE]
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The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
BORROWER: PENTACON, INC.
By:/s/ BRIAN FONTANA
Name: Brian Fontana
Title: Chief Financial Officer
Address for Notices:
9432 Old Katy Road
Suite 222
Houston, Texas 77055
Telecopier No.: (713) 463-8997
Telephone No.: (713) 463-8850
Attention:______________________
Signature Page - 1
<PAGE>
LENDER AND AGENT: NATIONSBANK OF TEXAS, N.A.
By:/s/ WILLIAM T. GRIFFIN
Name: William T. Griffin
Title: Vice President
Lending Office for Base Rate Loans and
Eurodollar Loans:
700 Louisiana
Houston, Texas 77002
Address for Notices:
P.O. Box 2518
Houston, Texas 77252-2518
Telephone No.: (713) 247-7457
Telecopier No.: (713) 247-7748
Attention: William T. Griffin
Signature Page - 2
<PAGE>
ANNEX 1
LIST OF MAXIMUM CREDIT AMOUNTS
MAXIMUM
NAME OF LENDER PERCENTAGE SHARE CREDIT AMOUNT
NationsBank of Texas, N.A. 100% $50,000,000
Annex 1-1
<PAGE>
EXHIBIT A-1
FORM OF NOTE
$_____________________________ ___________________, 199__
FOR VALUE RECEIVED, PENTACON, INC., a Delaware corporation (the
"BORROWER") hereby promises to pay to the order of
______________________________ (the "LENDER"), at the Principal Office of
NATIONSBANK OF TEXAS, N.A. (the "AGENT"), at ______________________________, the
principal sum of _____________ Dollars ($____________) (or such lesser amount as
shall equal the aggregate unpaid principal amount of the Loans made by the
Lender to the Borrower under the Credit Agreement, as hereinafter defined), in
lawful money of the United States of America and in immediately available funds,
on the dates and in the principal amounts provided in the Credit Agreement, and
to pay interest on the unpaid principal amount of each such Loan, at such
office, in like money and funds, for the period commencing on the date of such
Loan until such Loan shall be paid in full, at the rates per annum and on the
dates provided in the Credit Agreement.
The date, amount, Type, interest rate, Interest Period and maturity of
each Loan made by the Lender to the Borrower, and each payment made on account
of the principal thereof, shall be recorded by the Lender on its books and,
prior to any transfer of this Note, may be endorsed by the Lender on the
schedules attached hereto or any continuation thereof or on any separate record
maintained by the Lender.
This Note is one of the Notes referred to in the Credit Agreement dated as
of March 13, 1998 among the Borrower, the Lenders which are or become parties
thereto (including the Lender) and the Agent, and evidences Loans made by the
Lender thereunder (such Credit Agreement as the same may be amended or
supplemented from time to time, the "CREDIT AGREEMENT"). Capitalized terms used
in this Note have the respective meanings assigned to them in the Credit
Agreement.
This Note is issued pursuant to the Credit Agreement and is entitled to
the benefits provided for in the Credit Agreement and the Security Instruments.
The Credit Agreement provides for the acceleration of the maturity of this Note
upon the occurrence of certain events, for prepayments of Loans upon the terms
and conditions specified therein and other provisions relevant to this Note.
THIS NOTE AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND
UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER AGREEMENTS AND
UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND
THEREOF. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPO
RANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN
ORAL AGREEMENTS BETWEEN THE PARTIES.
Exhibit A-1-1
<PAGE>
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS.
PENTACON, INC.
By:
Name:
Title:
Exhibit A-1-2
<PAGE>
EXHIBIT A-2
FORM OF SWING LINE NOTE
$5,000,000 ___________________, 199__
FOR VALUE RECEIVED, PENTACON, INC., a Delaware corporation (the
"BORROWER") hereby promises to pay to the order of NATIONSBANK OF TEXAS, N.A.
(the "SWING LINE LENDER"), at its Principal Office at _______________________,
the principal sum of FIVE MILLION DOLLARS ($5,000,000) or, if less, the
outstanding principal amount advanced under this Swing Line Note, in lawful
money of the United States of America and in immediately available funds, on the
dates and in the principal amounts provided in the Credit Agreement, and to pay
interest on the unpaid principal amount of each such Loan, at such office, in
like money and funds, for the period commencing on the date of such Loan until
such Loan shall be paid in full, at the rates per annum and on the dates
provided in the Credit Agreement.
The date, amount, interest rate and maturity of each Loan made by the
Swing Line Lender to the Borrower, and each payment made on account of the
principal thereof, shall be recorded by the Swing Line Lender on its books and,
prior to any transfer of this Swing Line Note, may be endorsed by the Swing Line
Lender on the schedules attached hereto or any continuation thereof or on any
separate record maintained by the Swing Line Lender.
This Swing Line Note is one of the Notes referred to in the Credit
Agreement dated as of March 13, 1998 among the Borrower, the Lenders which are
or become parties thereto (including the Swing Line Lender) and the Agent, and
evidences Swing Line Loans made by the Swing Line Lender thereunder (such Credit
Agreement as the same may be amended or supplemented from time to time, the
"CREDIT AGREEMENT"). Capitalized terms used in this Swing Line Note have the
respective meanings assigned to them in the Credit Agreement.
This Swing Line Note is issued pursuant to the Credit Agreement and is
entitled to the benefits provided for in the Credit Agreement and the Security
Instruments. The Credit Agreement provides for the acceleration of the maturity
of this Swing Line Note upon the occurrence of certain events, for prepayments
of Swing Line Loans upon the terms and conditions specified therein and other
provisions relevant to this Swing Line Note.
THIS SWING LINE NOTE AND THE OTHER LOAN DOCUMENTS EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF. THIS SWING LINE NOTE AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Exhibit A-2-1
<PAGE>
THIS SWING LINE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF TEXAS.
PENTACON, INC.
By:
Name:
Title:
Exhibit A-2-2
<PAGE>
EXHIBIT B
FORM OF BORROWING, CONTINUATION AND CONVERSION REQUEST
_____________________, 199__
PENTACON, INC., a Delaware corporation (the "BORROWER"), pursuant to the
Credit Agreement dated as of March 13, 1998 (together with all amendments or
supplements thereto, the "CREDIT AGREEMENT") among the Borrower, NATIONSBANK OF
TEXAS, N.A., as Agent for the lenders (the "LENDERS") which are or become
parties thereto, and such Lenders, hereby makes the requests indicated below
(unless otherwise defined herein, capitalized terms are defined in the Credit
Agreement):
1. Loans:
(a) Aggregate amount of new Loans to be $______________________;
(b) Requested funding date is _________________, 199__;
(c) $____________________ of such borrowings are to be Eurodollar Loans;
$____________________ of such borrowings are to be Base Rate Loans;
and
(d) Length of Interest Period for Eurodollar Loans is:
_________________________.
2. Eurodollar Loan Continuation for Eurodollar Loans maturing on
_____________________:
(a) Aggregate amount to be continued as Eurodollar Loans is
$____________________;
(b) Aggregate amount to be converted to Base Rate Loans is
$____________________;
(c) Length of Interest Period for continued Eurodollar Loans is
_____________________.
3. Conversion of Outstanding Base Rate Loans to Eurodollar Loans:
Exhibit B-1
<PAGE>
Convert $__________________ of the outstanding Base Rate Loans to
Eurodollar Loans on ____________________ with an Interest Period of
______________________.
4. Conversion of outstanding Eurodollar Loans to Base Rate Loans:
Convert $__________________ of the outstanding Eurodollar Loans with
Interest Period maturing on ______________________, 199_, to Base
Rate Loans.
The undersigned certifies that he is the _____________________ of the
Borrower, and that as such he is authorized to execute this certificate on
behalf of the Borrower. The undersigned further certifies, represents and
warrants on behalf of the Borrower that the Borrower is entitled to receive the
requested borrowing, continuation or conversion under the terms and conditions
of the Credit Agreement.
PENTACON, INC.
By:_________________________________
Name:
Title:
Exhibit B-2
<PAGE>
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ________________ of
PENTACON, INC., a Delaware corporation (the "BORROWER") and that as such he is
authorized to execute this certificate on behalf of the Borrower. With reference
to the Credit Agreement dated as of March 13, 1998 (together with all amendments
or supplements thereto being the "AGREEMENT") among the Borrower, NATIONSBANK OF
TEXAS, N.A., as Agent for the lenders (the "LENDERS") and such Lenders, the
undersigned represents and warrants as follows (each capitalized term used
herein having the same meaning given to it in the Agreement unless otherwise
specified):
(a) The representations and warranties of the Borrower contained in
Article VII of the Agreement and in the Security Instruments and otherwise
made in writing by or on behalf of the Borrower pursuant to the Agreement
and the Security Instruments were true and correct when made, and are
repeated at and as of the time of delivery hereof and are true and correct
at and as of the time of delivery hereof, except to the extent such
representations and warranties are expressly limited to an earlier date or
the Majority Lenders have expressly consented in writing to the contrary.
(b) The Borrower has performed and complied with all agreements and
conditions contained in the Agreement and in the Security Instruments
required to be performed or complied with by it prior to or at the time of
delivery hereof.
(c) Since September 30, 1997, no change has occurred, either in any
case or in the aggregate, in the condition, financial or otherwise, of the
Borrower or any Subsidiary which would have a Material Adverse Effect.
(d) There exists, and, after giving effect to the loan or loans with
respect to which this certificate is being delivered, will exist, no
Default under the Agreement or any event or circumstance which
constitutes, or with notice or lapse of time (or both) would constitute,
an event of default under any loan or credit agreement, indenture, deed of
trust, security agreement or other agreement or instrument evidencing or
pertaining to any Debt of the Borrower or any Subsidiary, or under any
material agreement or instrument to which the Borrower or any Subsidiary
is a party or by which the Borrower or any Subsidiary is bound.
(e) Attached hereto are the detailed computations necessary to
determine whether the Borrower is in compliance with Sections 9.12, 9.13,
9.14 and 9.15 as of the end of the [fiscal quarter][fiscal year] ending .
Exhibit C-1
<PAGE>
(f) For the period beginning on _______________ and ending on the
next Determination Date (as defined in the definition of Applicable
Margin), the Applicable Margin for Eurodollar Loans should be _____% and
for Base Rate Loans should be _____% and the Commitment Fee Percentage
should be _____% and attached hereto are detailed computations necessary
to determine said Applicable Margin and Commitment Fee for such period.
EXECUTED AND DELIVERED this ____ day of ______________.
PENTACON, INC.
By:
Name:
Title:
Exhibit C-2
<PAGE>
EXHIBIT D
SECURITY INSTRUMENTS
1. Security Agreement (Stock and Other Securities) in favor of the Agent
executed by Borrower
2. Financing Statement relating to Security Agreement (Stock and Other
Securities)
3. Assignment Separate from Stock Certificate for stock of Guarantors
4. Guaranty Agreements in favor of the Agent from each Guarantor
5. Financing Statements relating to the Guaranty Agreements
Exhibit D-1
<PAGE>
EXHIBIT E
FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement dated as of March 13, 1998 (the
"CREDIT AGREEMENT") among PENTACON, INC., a Delaware corporation (the
"BORROWER"), the Lenders (as defined in the Credit Agreement) and NATIONSBANK OF
TEXAS, N.A., as agent for the Lenders (the "AGENT"). Terms defined in the Credit
Agreement are used herein with the same meaning.
The "Assignor" and the "Assignee" referred to on SCHEDULE 1 agree as
follows:
1. The Assignor hereby sells and assigns to the Assignee, without recourse
and without representation or warranty except as expressly set forth herein, and
the Assignee hereby purchases and assumes from the Assignor, an interest in and
to the Assignor's rights and obligations under the Credit Agreement and the
other Loan Documents as of the date hereof equal to the percentage interest
specified on SCHEDULE 1 of all outstanding rights and obligations under the
Credit Agreement and the other Loan Documents. After giving effect to such sale
and assignment, the Assignee's Commitment and the amount of the Loans owing to
the Assignee will be as set forth on SCHEDULE 1.
2. The Assignor (i) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (ii) makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Loan Documents
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Loan Documents or any other instrument or document furnished
pursuant thereto; (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of Borrower or the
performance or observance by Borrower of any of its obligations under the Loan
Documents or any other instrument or document furnished pursuant thereto; and
(iv) attaches the Note held by the Assignor and requests that the Agent exchange
such Note for new Notes payable to the order of the Assignee in an amount equal
to the Commitment assumed by the Assignee pursuant hereto and to the Assignor in
an amount equal to the Commitment retained by the Assignor, if any, as specified
on SCHEDULE 1.
3. The Assignee (i) confirms that it has received a copy of the Credit
Agreement, together with copies of the financial statements referred to in
Section 8.01 thereof and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into this
Assignment and Acceptance; (ii) agrees that it will, independently and without
reliance upon the Agent, the Assignor or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Credit
Agreement; (iii) confirms that it is an Eligible Assignee;
Exhibit E-1
<PAGE>
(iv) appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers and discretion under the Credit Agreement as
are delegated to the Agent by the terms thereof, together with such powers and
discretion as are reasonably incidental thereto; (v) agrees that it will perform
in accordance with their terms all of the obligations that by the terms of the
Credit Agreement are required to be performed by it as a Lender; and (vi)
attaches any U.S. Internal Revenue Service or other forms required under Section
4.06.
4. Following the execution of this Assignment and Acceptance, it will be
delivered to the Agent for acceptance and recording by the Agent. The effective
date for this Assignment and Acceptance (the "EFFECTIVE DATE") shall be the date
of acceptance hereof by the Agent, unless otherwise specified on SCHEDULE 1.
5. Upon such acceptance and recording by the Agent, as of the Effective
Date, (i) the Assignee shall be a party to the Credit Agreement and, to the
extent provided in this Assignment and Acceptance, have the rights and
obligations of a Lender thereunder and (ii) the Assignor shall, to the extent
provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by the Agent, from and after the
Effective Date, the Agent shall make all payments under the Credit Agreement and
the Notes in respect of the interest assigned hereby (including, without
limitation, all payments of principal, interest and commitment fees with respect
thereto) to the Assignee. The Assignor and Assignee shall make all appropriate
adjustments in payments under the Credit Agreement and the Notes for periods
prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in
accordance with, the laws of the State of Texas.
8. This Assignment and Acceptance may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of SCHEDULE 1 to this Assignment and Acceptance by telecopier shall
be effective as delivery of a manually executed counterpart of this Assignment
and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused SCHEDULE 1
to this Assignment and Acceptance to be executed by their officers thereunto
duly authorized as of the date specified thereon.
Exhibit E-2
<PAGE>
SCHEDULE 1
to
ASSIGNMENT AND ACCEPTANCE
Percentage interest assigned: _______%
Assignee's Commitment: $_______
Aggregate outstanding principal amount
of Loans assigned: $_______
Principal amount of Note payable to Assignee $_______
Principal amount of Note payable to Assignor $_______
Effective Date (if other than date
of acceptance by Agent): *_______, 19__
[NAME OF ASSIGNOR], as Assignor
By:
Title:
Dated:_______________________, 199_
[NAME OF ASSIGNEE], as Assignee
By:
Title:
Domestic Lending Office:
Eurodollar Lending Office:
* This date should be no earlier than five Business Days after the delivery
of this Assignment and Acceptance to the Agent.
Exhibit E-3
<PAGE>
Accepted [and Approved] **
this ___ day of ___________, 19 _
NATIONSBANK OF TEXAS, N.A., AS AGENT
By:
Title:
[Approved this ____ day
of ____________, 19__
[NAME OF BORROWER]
By: ]**
Title:
** Required if the Assignee is an Eligible Assignee solely by reason of
clause (iii) of the definition of "Eligible Assignee".
Exhibit E-4
<PAGE>
EXHIBIT F
BORROWING BASE CERTIFICATE
Status as of _____________________, 199__.
In accordance with the terms of the Credit Agreement dated March 13, 1998 (the
"CREDIT AGREEMENT") among PENTACON, INC., a Delaware corporation, the Lenders
(as defined in the Credit Agreement) and NATIONSBANK OF TEXAS, N.A., as agent
for the Lenders (the "AGENT"), we hereby represent and warrant as follows:
1. Total Accounts Receivable $_________________
2. Less ineligible accounts receivable (as set forth in the definition of
Eligible Accounts in the Credit Agreement) $_________________
3. Eligible Accounts $_________________
4. a. ___% of Eligible Accounts $__________________
b. ___% of Eligible Inventory (not to exceed
$_________________) $__________________
c. Total Available $__________________
5. Maximum loan amount $__________________
6. Outstanding balance as of report date $__________________
7. Available for further advances (lesser of line
4c or line 5 minus line 6) $__________________
PENTACON, INC.
By:__________________________
Name:
Title:
Exhibit F-1
<PAGE>
EXHIBIT G
FORM OF ACQUISITION CERTIFICATE
The undersigned hereby certifies that he is the ________________ of
PENTACON, INC., a Delaware corporation (the "BORROWER") and that as such he is
authorized to execute this certificate on behalf of the Borrower. Reference is
made to the Credit Agreement dated as of March 13, 1998, among the Borrower,
NationsBank of Texas, N.A., as Agent for the lenders (the "LENDERS") and such
Lenders (together with all amendments or supplements thereto being the "CREDIT
AGREEMENT"; each capitalized term used herein having the same meaning given to
it in the Credit Agreement unless otherwise specified). The Borrower intends to
make an Acquisition and in connection therewith hereby certifies to the Agent
and the Lenders that:
(a) EXHIBIT A attached hereto describes in reasonable detail the
Property to be acquired [and, to the extent requested by the Agent or any
Lender, delivered herewith to the Agent is all title or other pertinent
information with respect to the Property to be acquired].
(b) Attached hereto as EXHIBIT B are [audited] financial statements
of the target entity to be acquired covering the most recent two (2)
fiscal years together with current internally prepared interim financial
statements prepared by such target entity, in each case in accordance with
GAAP. [Such financial statements for at least the most recent fiscal year
to be audited with respect to all target entities with an aggregate
purchase price in an amount in excess of fifteen percent (15%) of Net
Worth.]
(c) Attached hereto as EXHIBIT C are financial projections of the
target entity.
(d) Delivered concurrently herewith is a Compliance Certificate
(with pro-forma computations for financial covenants) and a Borrowing Base
Certificate, taking into account the Acquisition (including EBITDA for the
target entity for the last four fiscal quarters).
EXECUTED AND DELIVERED this ____ day of ______________.
PENTACON, INC.
By:
Name:
Title:
Exhibit G-1
<PAGE>
SCHEDULE 1.01(A)
ELIGIBLE ACCOUNTS
Any account receivable from Canadian customers.
A foreign account receivable from the following companies or affiliates of such
companies:
Cummins Engine Company - UK, Brazil, Mexico, Japan
Dana Corporation - Mexico
American Standard - Mexico
Thomassen - Netherlands
General Electric - Mexico
European Gas Turbine - France
Schedule 1.01(a)-1
<PAGE>
SCHEDULE 1.01(B)
ELIGIBLE INVENTORY
1. 3010 Independence Drive
Fort Wayne, Indiana 46808
2. 4920 North Warren Drive
Columbus, Indiana
3. 1111 North Country Club Road
Indianapolis, IN
4. 8251 Indy Court, Suite B
Indianapolis, Indiana 46214
5. 45445 Warm Springs Blvd.
Fremont, California 94539
6. 12109 Bridgeton Square Dr.
Bridgeton, Missouri 63044
7. 2100 Hwy. 360
Grand Prairie, Texas 75050
8. 400 W. Cummings Park
Woburn, Massachusetts 01801
9. 11438 Cronridge Dr.
Owings Mills, Maryland 21117
10. 528 S. North Lake Blvd.
Altamonte Springs, Florida 32701
11. 170 N. Callaham Unit 101
Wentzville, Missouri 63385
12. 5275 Edina Industrial Blvd., Suite 140
Edina, Minnesota 55439
13. 1926 Peach Street
Erie, Pennsylvania
Schedule 1.01(b)-1
<PAGE>
14. 7300 North Oak Park Avenue
Niles, Illinois
15. 850 NW Broad Street
Lyons, Georgia 30436
16. 1940-A East Fairchild
Danville, Illinois 61832
17. 700 Aberdeen Loop, Suite D
Panama City, Florida 32405
18. 6015 Billard Circle
Austin, Texas 78752
19. 3804-C Woodbury
Austin, Texas 78704
20. 320 S. Wilcox
Rockdale, Texas 76567
21. 1702 WSW Loop 323
Tyler, Texas 75701
22. 4509 South 16th Street
Ft. Smith, Arkansas 72901
23. 1259 Armory Road
Chester County, South Carolina
24. 810 Hickory Lane
Allentown, Pennsylvania 18106
Schedule 1.01(b)-2
<PAGE>
SCHEDULE 7.02
LIABILITIES
None.
Schedule 7.02-1
<PAGE>
SCHEDULE 7.03
LITIGATION
None.
Schedule 7.03-1
<PAGE>
SCHEDULE 7.09
TAXES
None, except as those relating to Alatec Products Inc., as described in said
party's financial statements which have previously been provided to the Agent.
Schedule 7.09-1
<PAGE>
SCHEDULE 7.10
TITLES, ETC.
See Schedule 9.02
Schedule 7.10-1
<PAGE>
SCHEDULE 7.14
SUBSIDIARIES OF BORROWER AND PRINCIPAL PLACE OF BUSINESS
SUBSIDIARY AND CHIEF EXECUTIVE OFFICE OTHER JURISDICTIONS OF OPERATION
Maumee Industries, Inc. None
3010 Independence Dr.
Ft. Wayne, Indiana 46808
Alatec Products, Inc. Florida
21123 Nordhoff Street Maryland
Chatsworth, California 91311 Massachusetts
Minnesota
Missouri
Texas
AXS Solutions, Inc. Illinois
1926 Peach Street Pennsylvania
Erie, Pennsylvania 16502
Capitol Bolt & Supply, Inc. Arkansas
6015 Dillard Circle Florida
Austin, Texas 78752 Georgia
Illinois
Sales Systems, Limited
810 Hickory Lane
Allentown, Pennsylvania 18106 South Carolina
Schedule 7.14-1
<PAGE>
SCHEDULE 7.17
ENVIRONMENTAL MATTERS
None.
Schedule 7.17-1
<PAGE>
SCHEDULE 7.20
HEDGING AGREEMENTS
None.
Schedule 7.20-1
<PAGE>
SCHEDULE 7.22
MATERIAL AGREEMENTS
None.
Schedule 7.22-1
<PAGE>
SCHEDULE 9.01
DEBT
Company Debt Creditor
ALATEC
(2) Related Party Loan List
(2) Line of Credit City Nat'l
(2) Term Loan City Nat'l
(2) SBA Loan SBA
AXS
(2) Demand Note Core State
(2) Line of Credit PNC
(3) Liability on Non-Compete Former Stockholder
CAPITOL
(2) Line of Credit TCB
(2) Term Note TCB
MAUMEE
(2) Line of Credit Norwest
(2) Overadvance Norwest
(2) Equipment Note Norwest
(2) Stockholder Notes Black
SSL
(2) Stockholder Notes(1) Former Stockholders
(2) Line of Credit Nat'l Penn
(2) Notes Payable Nat'l Penn
(2) Richard Knorr Knorr
(2) Stockholder Notes Spence/Mitchell
The Companies also lease certain facilities and equipment under capital and
operating leases which are generally secured by the facility or equipment which
are leased.
(1) Obligation under Redemption Agreement with minority stockholders.
(2) To be paid at the Consummation Date or within 14 days of such date.
(3) Balance at December 31, 1997 - $391,931.
Schedule 9.01-1
<PAGE>
SCHEDULE 9.02
LIENS
None.
Schedule 9.02-1
<PAGE>
SCHEDULE 9.03
INVESTMENTS, LOANS AND ADVANCES
None.
Schedule 9.03-1
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.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Houston, Texas
April 8, 1998
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.
/s/ McGLADREY & PULLEN, LLP
---------------------------
McGLADREY & PULLEN, LLP
Pasadena, California
April 8, 1998
