FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED __________
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998
COMMISSION FILE NUMBER: 001-13931
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE, SUITE 700 HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-860-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT, PAR VALUE $.01 PER SHARE,
OUTSTANDING AT JANUARY 31, 1999 WAS 16,668,129.
<PAGE>
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Historical Consolidated Balance Sheets - Pentacon, Inc. as of
December 31, 1998 and September 30, 1998.....................3
Consolidated Statements of Operations - Pentacon, Inc. Historical
for the Three Months ended December 31, 1998 and 1997
and Pro Forma for the Three Months ended
December 31, 1998 and 1997...................................4
Historical Consolidated Statements of Cash Flows - Pentacon, Inc.
for the Three Months ended December 31, 1998 and 1997........6
Notes to Consolidated Financial Statements.........................7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................12
Part II - Other Information
Item 6 - Exhibits and Reports...........................................18
Signature...............................................................18
<PAGE>
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
(Unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................... $ 744 $ 835
Accounts receivable ................................. 34,610 40,670
Inventories ......................................... 116,390 112,392
Deferred income taxes ............................... 4,216 4,430
Other current assets ................................ 897 923
-------- --------
Total current assets ....................... 156,857 159,250
Property and equipment, net of accumulated
depreciation ..................................... 7,404 7,077
Goodwill, net of accumulated amortization ........... 134,528 135,381
Deferred income taxes ............................... 672 670
Other assets ........................................ 1,892 2,013
-------- --------
Total assets ............................... $301,353 $304,391
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .................................... $ 33,895 $ 30,314
Accrued expenses .................................... 8,875 7,281
Income taxes payable ................................ 3,384 1,988
Current maturities of long-term debt ................ 31,957 51,513
-------- --------
Total current liabilities .................. 78,111 91,096
Long-term debt, net of current maturities ........... 106,632 98,381
-------- --------
Total liabilities .......................... 184,743 189,477
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding ..... -- --
Common stock, $.01 par value, 51,000,000
shares authorized, 16,668,129 shares issued
and outstanding .................................. 167 167
Additional paid in capital .......................... 100,501 100,436
Retained earnings ................................... 15,942 14,311
-------- --------
Total stockholders' equity ................. 116,610 114,914
-------- --------
Total liabilities and stockholders' equity . $301,353 $304,391
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
December 31,
--------------------------
1998 1997
--------- ---------
(in thousands, except
per share data)
Revenues ................................... $ 66,720 $ 14,502
Cost of sales .............................. 45,021 8,555
-------- --------
Gross profit ..................... 21,699 5,947
Operating expenses ......................... 14,575 5,397
Goodwill amortization ...................... 853 20
-------- --------
Operating income ................. 6,271 530
Other (income) expense, net ................ (7) (13)
Interest expense ........................... 3,102 295
-------- --------
Income before taxes .............. 3,176 248
Income taxes ............................... 1,545 103
-------- --------
Net income ....................... $ 1,631 $ 145
======== ========
Net income per share:
Basic ............................ $ 0.10 $ 0.05
Diluted .......................... $ 0.10 $ 0.05
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
December 31,
--------------------------
1998 1997
------- --------
(in thousands, except
per share data)
Revenues .................................... $ 66,720 $ 39,042
Cost of sales ............................... 45,021 25,367
-------- --------
Gross profit ...................... 21,699 13,675
Operating expenses .......................... 14,575 10,799
Goodwill amortization ....................... 853 374
-------- --------
Operating income .................. 6,271 2,502
Other (income) expense, net ................. (7) 8
Interest expense ............................ 3,102 246
-------- --------
Income before taxes ............... 3,176 2,248
Income taxes ................................ 1,590 1,075
-------- --------
Net income ........................ $ 1,586 $ 1,173
======== ========
Net income per share:
Basic ............................. $ 0.10 $ 0.08
Diluted ........................... $ 0.10 $ 0.08
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------
December 31,
----------------------
1998 1997
-------- --------
(in thousands)
Cash Flows From Operating Activities:
Net income .................................. $ 1,631 $ 145
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............... 1,487 45
Deferred income taxes ....................... 212 1
Loss on disposal of assets .................. 5 --
Changes in operating assets and liabilities:
Accounts receivable ..................... 6,060 (715)
Inventories ............................. (3,998) (1,852)
Other current assets .................... 26 --
Accounts payable and accrued expenses ... 5,175 1,730
Income taxes payable .................... 1,396 (179)
Other assets and liabilities, net ....... (4) --
-------- --------
Net cash provided by (used in)
operating activities .................... 11,990 (825)
Cash Flows From Investing Activities:
Capital expenditures ........................ (795) (85)
Other ....................................... 1 (71)
-------- --------
Net cash used in investing activities ..... (794) (156)
Cash Flows From Financing Activities:
Principal payments on debt .................. (19,105) (52)
Borrowings of debt .......................... 7,800 300
Debt issuance costs ......................... 18 --
-------- --------
Net cash provided by (used in) financing
activities .............................. (11,287) 248
Decrease in cash and cash equivalents ................ (91) (733)
Cash and cash equivalents, beginning of period ....... 835 733
-------- --------
Cash and cash equivalents, end of period ............. $ 744 $ --
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
Pentacon, Inc. ("Pentacon" or the "Company") was incorporated in March
1997. On March 10, 1998, Pentacon and separate wholly-owned subsidiaries
acquired in separate transactions, simultaneously with the closing of its
initial public offering (the "Offering") of its common stock, five businesses
(the "Initial Acquisitions"): Alatec Products, Inc. (Alatec), AXS Solutions,
Inc. (AXS), Capitol Bolt & Supply, Inc. (Capitol), Maumee Industries, Inc.
(Maumee), and Sales Systems, Limited (SSL), collectively referred to as the
"Founding Companies." The consideration for the Initial Acquisitions consisted
of a combination of cash and common stock. Because (i) the stockholders of the
Founding Companies owned a majority of the outstanding shares of Pentacon common
stock following the Offering and the Initial Acquisitions, and (ii) the
stockholders of Alatec received the greatest number of shares of Pentacon common
stock among the stockholders of the Founding Companies, for financial statement
presentation purposes, Alatec has been identified as the accounting acquiror.
The acquisitions of the remaining Founding Companies have been accounted for
using the purchase method of accounting. Therefore Alatec's historical financial
statements for all periods prior to March 10, 1998 are presented as the
historical financial statements of the registrant. Unless the context otherwise
requires, all references herein to the Company include Pentacon and the Founding
Companies. The allocations of the purchase price to the assets acquired and
liabilities assumed of the Founding Companies has been initially assigned and
recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available.
In October 1998, the Company changed its year end from September 30 to
December 31. This Transition Report on Form 10-Q is filed for the three-month
transition period. The accompanying unaudited financial statements are prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and footnotes required by generally accepted accounting
principles for complete financial statements are not included herein. The
Company believes all adjustments necessary for a fair presentation of these
statements have been included and are of a normal and recurring nature. The
statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998.
The pro forma financial information for the three months ended December
31, 1998 and 1997 includes the results of Pentacon combined with the Founding
Companies as if the Initial Acquisitions had occurred at the beginning of each
respective three-month period. The pro forma financial information includes the
effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain
reductions in salaries and benefits to the former owners of the Founding
Companies to which they agreed prospectively (iv) certain reductions in lease
expense paid to the former owners of the Founding Companies to which they agreed
prospectively (v) elimination of non-recurring, non-cash compensation charges
related to common stock issued to management (vi) amortization of goodwill
resulting from the Initial Acquisitions and (vii) advances under the Credit
Facility (see Note 4) including decreases in interest expense resulting from the
repayment or refinancing of the Founding Companies' debt and (viii) adjustments
to the provisions for federal and state income taxes. Acquisitions subsequent to
the Offering ("Subsequent Acquisitions") are included in the Historical and Pro
Forma Consolidated Statements of
<PAGE>
Operations only for those periods subsequent to the dates of acquisition. The
pro forma financial information may not be comparable to and may not be
indicative of the Company's post-acquisition results of operations because the
Founding Companies were not under common control or management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There has been no significant change in the accounting policies of the
Company during the periods presented. For a description of these policies, refer
to Note 1 of the Notes to Consolidated Financial Statements of Pentacon included
in the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1998.
3. ACQUISITIONS
During the year ended December 31, 1998, the Company completed four
acquisitions in addition to the acquisitions of the Founding Companies. In May
1998, the Company acquired Pace Products, Inc., a distributor of fasteners and
other small parts which also provides inventory procurement and management
services primarily to the telecommunications industry. In June 1998, the Company
acquired D-Bolt Company Inc., a distributor of fasteners and other small parts
primarily to the fabrication, construction and mining industries. In July 1998,
the Company acquired Texas International Aviation, Inc., a distributor of
fasteners and other small parts which provides inventory procurement and
management services primarily to the aerospace industry. In September 1998, the
Company acquired ASI Aerospace Group, Inc., a distributor of fasteners and other
small parts which provides inventory procurement and management services
primarily to the aerospace industry. The consideration paid consisted of an
aggregate of 1,134,010 shares of Common Stock and approximately $77.0 million in
cash. The acquisitions were accounted for using the purchase method of
accounting and the results of operations of the acquired companies are included
from the date of acquisition. The allocations of purchase price to the assets
acquired and liabilities assumed has been initially assigned and recorded based
on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available.
If all acquisitions completed during the year ended December 31, 1998,
including the Founding Companies, were effective on the first day of the period
being reported, the unaudited pro forma revenues, gross margin, operating income
and net income would have been:
Three Months Ended
December 31,
---------------------
1998 1997
--------- ---------
(in thousands, except
share data)
Revenues .................. $ 66,720 $ 65,345
Gross margin .............. 21,669 21,501
Operating income .......... 6,271 5,487
Net income ................ 1,586 1,335
Net income per share:
Basic ................... $ 0.10 $ 0.08
Diluted ................. $ 0.10 $ 0.08
<PAGE>
4. CREDIT FACILITY
The Company has a credit agreement with a group of banks (the "Credit
Facility"). The Credit Facility provides the Company with a revolving line of
credit of up to $110 million ($90 million on or after March 15, 1999), which may
be used for general corporate purposes, future acquisitions, capital
expenditures and working capital and a revolving term loan of $40 million. The
Credit Facility is secured by Company stock and assets. Advances under the
Credit Facility bear interest at the banks' designated variable rate plus a
margin of 100 points. At the Company's option, the loans may bear interest based
on a designated London interbank offering rate plus a margin of 300 basis
points. Commitment fees of 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility contains a provision for
standby letters of credit up to $5.0 million. The Credit Facility prohibits the
payment of dividends by the Company, restricts the Company's incurring or
assuming other indebtedness and requires the Company to comply with certain
financial covenants including a minimum net worth and minimum fixed charge
ratio. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable December 31, 2001. At December 31,
1998, the Company has approximately $14.6 million available under the Credit
Facility.
The Credit Facility also contains provisions for quarterly reductions in
the ratio of the Company's interest-bearing debt to its pro forma trailing
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the previous four quarters. Based upon the Company's projections of the ensuing
year's pro forma trailing EBITDA, a portion of the borrowings under the Credit
Facility has been classified as current liabilities. Management is exploring
alternatives to obtain additional capital and/or debt, or refinance all or a
portion of its existing debt, in order to remain in compliance with these
covenants. Although management believes that it will be able to obtain such
additional capital or debt or will be able to refinance its existing debt, there
can be no assurances that sufficient funds will be available to the Company at
the time it is required or on terms acceptable to the Company. Failure of the
Company to obtain such additional capital or debt, or to refinance its existing
debt, would have a material and adverse effect on the Company.
5. CAPITAL STOCK
On March 10, 1998, the Company completed the Offering, which involved the
sale by the Company of 5,980,000 shares of common stock at a price to the public
of $10.00 per share, including 780,000 shares pursuant to an over-allotment
option granted by the Company to the underwriters in connection with the
Offering. The net proceeds to the Company from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$50.8 million. Of this amount, $21.9 million (net of cash acquired) was used to
pay the cash portion of the purchase price relating to the Initial Acquisitions
with the remainder being used to pay certain indebtedness of the Founding
Companies, make capital expenditures and fund working capital requirements.
On April 20, 1998, the Company's registration statement covering 3,350,000
additional shares of common stock for use in connection with future acquisitions
was declared effective.
<PAGE>
6. EARNINGS PER SHARE
The historical period ended December 31, 1997 represents the results of
operations of Alatec under its historical capital and income tax structure.
Accordingly, the shares of common stock attributable to Alatec are presented to
calculate earnings per share for this period. Pro forma net income per share for
the period ended December 31, 1997 is computed based on the weighted average
shares of common stock outstanding assuming the Initial Acquisitions and
Offering occurred at the beginning of the period. The computation of historical
and pro forma net income per share for the three-month period ended December 31,
1998 is based on the weighted average shares of common stock outstanding, which
includes shares:
Issued in consideration for Initial Acquisitions.......... 6,720,000
Sold pursuant to the Offering and the over-allotment...... 5,980,000
Issued to McFarland, Grossman Capital Ventures II, L.C.... 2,295,000
Issued to management and directors........................ 539,119
Issued in connection with Subsequent Acquisitions......... 1,134,010
----------
16,668,129
Basic and diluted historical net income per share is computed based on
the following information:
Three Months Ended
-----------------------
December 31,
-----------------------
1998 1997
------- -------
BASIC: (in thousands)
Net income ..................................... $ 1,631 $ 145
======= =======
Average common shares .......................... 16,668 2,969
======= =======
DILUTED:
Net income ..................................... $ 1,631 $ 145
======= =======
Average common shares .......................... 16,668 2,969
Common share equivalents:
Warrants ................................... -- --
Options .................................... -- --
------- -------
Total common share equivalents ......... -- --
------- -------
Average common shares and
common share equivalents .................. 16,668 2,969
======= =======
<PAGE>
Basic and diluted pro forma net income per share is computed based on the
following information:
Three Months Ended
-----------------------
December 31,
-----------------------
1998 1997
------- -------
(in thousands)
BASIC:
Net income ..................................... $ 1,586 $ 1,173
======= =======
Average common shares .......................... 16,668 15,530
======= =======
DILUTED:
Net income ..................................... $ 1,586 $ 1,173
======= =======
Average common shares .......................... 16,668 15,530
Common share equivalents:
Warrants ................................... -- 20
Options .................................... -- --
------- -------
Total common share equivalents ......... -- 20
------- -------
Average common shares and
common share equivalents .................. 16,668 15,550
======= =======
7. INCOME TAXES
The provision for income taxes included in the Historical Consolidated
Statement of Operations for the three-month period ended December 31, 1998
assumes the application of statutory federal and state income tax rates, the
non-deductibility of goodwill amortization and the non-deductibility of
compensation related to common stock sold to management. The provision for
income taxes included in the Historical Consolidated Statement of Operations for
the three-month period ended December 31, 1997 reflects the activity of the
accounting acquiror prior to the Initial Acquisitions. The provision for income
taxes included in the Pro Forma Consolidated Statements of Operations for the
three-month periods ended December 31, 1998 and 1997 assumes the application of
statutory federal and state income tax rates and the non-deductibility of
goodwill amortization.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
<PAGE>
PENTACON, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the financial
statements of the Company and related notes thereto and management's discussion
and analysis of financial condition and results of operations related thereto
which are included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998. This discussion contains forward-looking
statements that are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. Key factors that could cause actual
results to differ materially from expectations include, but are not limited to
(i) estimates of costs or projected or anticipated changes to cost estimates
relating to entering new markets or expanding in existing markets (ii) changes
in economic and industry conditions (iii) changes in regulatory requirements
(iv) changes in interest rates (v) levels of borrowings under the Company's
Credit Facility (vi) accumulation of excess inventories by certain customers in
the aerospace industry and (vii) volume or price adjustments with respect to
sales to major customers. These and other risks and assumptions are described in
the Company's reports that are available from the United States Securities and
Exchange Commission.
RESULTS OF OPERATIONS
In October 1998, the Company changed its year end from September 30 to
December 31. This Transition Report on Form 10-Q is filed for the three month
transition period.
The pro forma financial information for the three months ended December
31, 1998 and 1997 includes the results of Pentacon combined with the Founding
Companies as if the Initial Acquisitions had occurred at the beginning of each
respective three-month period. The pro forma financial information includes the
effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain
reductions in salaries and benefits to the former owners of the Founding
Companies to which they agreed prospectively (iv) certain reductions in lease
expense paid to the former owners of the Founding Companies to which they agreed
prospectively (v) elimination of non-recurring, non-cash compensation charges
related to common stock issued to management (vi) amortization of goodwill
resulting from the Initial Acquisitions and (vii) advances under the Credit
Facility (see Note 4 to the Financial Statements) including decreases in
interest expense resulting from the repayment or refinancing of the Founding
Companies' debt and (viii) adjustments to the provisions for federal and state
income taxes. Subsequent Acquisitions are included in the Pro Forma Consolidated
Statements of Operations only for those periods subsequent to the dates of
acquisition. The pro forma financial information may not be comparable to and
may not be indicative of the Company's post-acquisition results of operations
because the Founding Companies were not under common control or management.
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, assimilation costs, costs of opening new facilities,
gain or loss of a material customer and variation in product mix. Accordingly,
the operating results for any three-month period are not necessarily indicative
of the results that may be achieved for any subsequent three-month month period
or for a full year.
<PAGE>
PRO FORMA THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth certain selected pro forma financial data
as a percentage of pro forma revenues for the periods indicated:
Pro Forma
Three Month Period Ended
December 31,
-----------------------------------
1998 1997
---------------- -----------------
(dollar amounts in thousands)
Revenues ................................. $ 66,720 100.0% $ 39,042 100.0%
Cost of sales ........................... 45,021 67.5 25,367 65.0
------- ----- ------- -----
Gross profit .......... 21,699 32.5 13,675 35.0
Operating expenses ....................... 14,575 21.8 10,799 27.6
Goodwill amortization .................... 853 1.3 374 1.0
------- ----- ------- -----
Operating income ...... 6,271 9.4 2,502 6.4
REVENUES
Pro forma revenues increased 71.0% to $66.7 million for the three months
ended December 31, 1998 from $39.0 million for the three months ended December
31, 1997. The increase in pro forma revenues was attributable primarily to the
Subsequent Acquisitions and, to a lesser extent, internal revenue growth of the
Founding Companies. The increase in the Founding Companies' pro forma revenues
resulted primarily from increases in sales to existing customers. However, the
internal growth rate of the Founding Companies' revenues was adversely affected
during the three months ended December 31, 1998 due to reduced sales into the
agricultural equipment market and essentially no increase in sales to a large
aerospace customer.
COST OF SALES
Pro forma cost of sales increased $19.6 million, or 77.2%, to $45.0
million for the three months ended December 31, 1998 from $25.4 million for the
three months ended December 31, 1997. As a percentage of pro forma revenues, pro
forma cost of sales increased from 65.0% in the three months ended December 31,
1997 to 67.5% in the three months ended December 31, 1998. The increase in pro
forma cost of sales as a percentage of pro forma revenues was a result of an
increase at the Founding Companies and lower margins historically attained by
the Subsequent Acquisitions. The increase at the Founding Companies primarily
results from decreases in margins attained with an existing customer supplying
the agricultural equipment market and lower margins experienced with a new
customer.
OPERATING EXPENSES
Pro forma operating expenses increased $3.8 million, or 35.2%, to $14.6
million for the three months ended December 31, 1998 from $10.8 million for the
three months ended December 31, 1997. As a percentage of pro forma revenues, pro
forma operating expenses decreased to 21.8% for the three months ended December
31, 1998 from 27.6% for the three months ended December 31, 1997. Pro forma
operating expenses as a percentage of pro forma revenues for the Founding
Companies decreased from 27.6% for the three months ended December 31, 1997 to
25.7% for the three months ended December 31, 1998. The decrease was primarily
attributable to reductions in personnel and related costs while maintaining a
level volume of sales. In addition, the Company incurred lower sales commissions
as a result of decreased international
<PAGE>
sales. The percentage of pro forma operating expenses compared to pro forma
revenues incurred by Subsequent Acquisitions caused the remainder of the
decrease.
OPERATING INCOME
Due to the factors discussed above, pro forma operating income increased
$3.8 million to $6.3 million for the three months ended December 31, 1998 from
$2.5 million for the three months ended December 31, 1997. As a percentage of
pro forma revenues, pro forma operating income increased to 9.4% for the three
months ended December 31, 1998 from 6.4% for the three months ended December 31,
1997.
HISTORICAL THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
The historical financial information represents the information of Alatec
prior to the Initial Acquisitions and the Offering and the consolidated results
of Pentacon subsequent to the Initial Acquisitions and the Offering on March 10,
1998. The following table sets forth certain selected historical financial data
as a percentage of historical revenues for the periods indicated:
Historical
Three Month Period Ended
December 31,
----------------------------------------
1998 1997
------------------- ------------------
(dollar amounts in thousands)
Revenues .......................... $ 66,720 100.0% $ 14,502 100.0%
Cost of sales ..................... 45,021 67.5 8,555 59.0
------- ------- ------- -------
Gross profit ............ 21,699 32.5 5,947 41.0
Operating expenses ................ 14,575 21.8 5,397 37.2
Goodwill amortization ............. 853 1.3 20 0.1
------- ------- ------- -------
Operating income ........ 6,271 9.4 530 3.7
REVENUES
Revenues increased $52.2 million, or 360.0%, from $14.5 million for the
three months ended December 31, 1997 to $66.7 million for the three months ended
December 31, 1998. The increase in revenues primarily results from the Initial
Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
COST OF SALES
Cost of sales increased $36.4 million, or 423.3%, from $8.6 million for
the three months ended December 31, 1997 to $45.0 million for the three months
ended December 31, 1998. The increase in cost of sales primarily results from
the Initial Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
OPERATING EXPENSES
Operating expenses increased $9.2 million, or 170.4%, from $5.4 million
for the three months ended December 31, 1997 to $14.6 million for the three
months ended December 31,
<PAGE>
1998. The increase in operating expenses primarily results from the Initial
Acquisitions and the Offering on March 10, 1998 and the Subsequent Acquisitions.
OPERATING INCOME
Operating income increased $5.8 million, or 1,160.0%, from $0.5 million
for the three months ended December 31, 1997 to $6.3 million for the three
months ended December 31, 1998 due to the factors noted above.
NON OPERATING COSTS AND EXPENSES
Interest expense for the three months ended December 31, 1998 totaled $3.1
million compared to $0.3 million for the three months ended December 31, 1997.
The increase in interest expense primarily results from the Initial Acquisitions
and the Offering on March 10, 1998 and the Subsequent Acquisitions.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended December 31,
1998 was $1.5 million (an effective rate of 48.6%) compared with $0.1 million
(an effective rate of 41.5%) for the three months ended December 31, 1997. The
higher effective tax rate for the year ended December 31, 1998 primarily related
to expenses of $3.8 million recorded for goodwill amortization and stock-based
compensation which are not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided $12.0 million of net cash from operating activities
during the three months ended December 31, 1998, primarily from working capital
reductions. Net cash used in investing activities was $.8 million for capital
expenditures. Net cash used in financing activities was $11.3 million for the
three months ended December 31, 1998 and primarily consisted of $19.1 million
repayment of debt partially offset by $7.8 million of borrowings on debt. At
December 31, 1998, the Company had cash of $.8 million, working capital of $78.7
million and total debt of $138.6 million.
The Company has entered into a credit agreement with a group of banks (the
"Credit Facility"). The Credit Facility provides the Company with a revolving
line of credit of up to $110 million (90 million on or after March 15, 1999),
which may be used for general corporate purposes, future acquisitions, capital
expenditures and working capital and a revolving term loan of $40 million. The
Credit Facility is secured by Company stock and assets. Advances under the
Credit Facility bear interest at the banks' designated variable rate plus a
margin of 100 basis points. At the Company's option, the loans may bear interest
based on a designated London interbank offering rate plus a margin of 300 basis
points. Commitment fees of 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility contains a provision for
standby letters of credit up to $5.0 million. The Credit Facility prohibits the
payment of dividends by the Company, restricts the Company's incurring or
assuming other indebtedness and requires the Company to comply with certain
financial covenants including a minimum net worth and minimum fixed charge
ratio. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable December 31, 2001. At December 31,
1998, the Company has approximately $14.6 million available under the Credit
Facility.
<PAGE>
The Credit Facility also contains provisions for quarterly reductions in
the ratio of the Company's interest-bearing debt to its pro forma trailing
EBITDA. Based upon the Company's projections of the ensuing year's pro forma
trailing EBITDA, a portion of the borrowings under the Credit Facility has been
classified as current liabilities.
On March 10, 1998, the Company completed the Offering, which involved the
sale by the Company of 5,980,000 shares of common stock at a price to the public
of $10.00 per share, including 780,000 shares pursuant to an over-allotment
option granted by the Company to the underwriters in connection with the
Offering. The net proceeds to the Company from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$50.8 million. Of this amount, $21.9 million (net of cash acquired) was used to
pay the cash portion of the purchase price relating to the Initial Acquisitions
with the remainder being used to pay certain indebtedness of the Founding
Companies, make capital expenditures and fund working capital requirements.
The Company may require significant additional capital and/or debt. The
Company intends to seek additional capital as necessary to fund its operating
plans through one or more funding sources that may include borrowings under the
Credit Facility or offerings of debt and/or equity securities of the Company. As
noted above, the Company's Credit Facility anticipates certain reductions in the
line of credit made available under the Credit Facility. Management is exploring
alternatives to obtain additional capital and/or debt, or refinance all or a
portion of its existing debt, in order to remain in compliance with the
provisions of the Credit Facility. Although management believes that it will be
able to obtain such additional capital or debt or will be able to refinance its
existing debt, there can be no assurances that sufficient funds will be
available to the Company at the time it is required or on terms acceptable to
the Company. Failure of the Company to obtain such additional capital or debt,
or to refinance its existing debt, would have a material and adverse effect on
the Company.
On April 20, 1998, the Company's registration statement covering 3,350,000
additional shares of common stock for use in connection with future acquisitions
was declared effective. During the year ended December 31, 1998, 1,134,010
shares of common stock were issued in connection with acquisitions.
The Company currently operates in a decentralized information systems
environment and uses a variety of software, computer systems and related
technologies for accounting and reporting purposes and for revenue-generating
activities. The Pentacon companies which primarily serve the aerospace industry
are in the process of migrating to a common information system which will
facilitate product ordering, pricing and reporting among the companies. The
total expenditures for these information systems are expected to be
approximately $3.0 million, the majority of which will be capitalized as
computer hardware and software as it is installed and depreciated over the
estimated useful life of the assets. Funding for these expenditures will come
from operating cash flows and the Company's Credit Facility as necessary.
YEAR 2000
The Company is working to resolve the potential impact of the Year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and other infrastructure that contains embedded technology.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date
<PAGE>
using "00" as the Year 1900 rather than the Year 2000, which could result in
miscalculations or system failures.
The Company believes that substantially all of its computerized
information systems and other infrastructure that contains embedded technology
are Year 2000 compliant or will be modified so as to become Year 2000 compliant
by mid-1999. Costs of addressing potential problems are not currently expected
to have a material adverse impact on the Company's financial position, results
of operations or cash flows. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could have a
significant impact on the Company's ability to conduct its business and result
in a material financial risk.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and service
providers. The Company has sent, and will continue to send, letters,
questionnaires and surveys to its significant business partners inquiring about
their Year 2000 efforts. If a significant supplier or customer of the Company
fails to be Year 2000 compliant, the Company could suffer a material loss of
business or incur material expenses.
As of December 31, 1998, the Company has spent $0.1 million in costs that
are directly attributable to addressing Year 2000 issues. Management currently
estimates that the Company will incur $0.3 million in additional costs during
1999 relating to Year 2000 issues. The Company expects that it will spend
approximately $3.0 million to purchase software and hardware and on
implementation expenses associated with the migration to a common information
technology system in the Pentacon companies which primarily serve the aerospace
industry. The Company believes that these costs are not, for the most part,
directly related to Year 2000 issues, but are required for the implementation of
its new system in the Pentacon companies which primarily serve the aerospace
industry.
The Company is developing and evaluating contingency plans in the event
that the Company has not completed all of its remediation plans in a timely
manner or if third parties who provide goods or services to the Company fail to
address their Year 2000 issues appropriately. These plans include identification
of alternative suppliers and service providers, depletion of safety stocks of
inventory and identification of important areas of record retention.
<PAGE>
PART II -OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.17 -- First Amendment to Amended and Restated Credit Agreement
10.18 -- Second Amendment to Amended and Restated Credit Agreement
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated November 2, 1998 concerning a
change from a September 30 fiscal year to a December 31 calendar year.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENTACON, INC.
Dated: February 16, 1999 By: /s/ BRIAN FONTANA
-----------------
BRIAN FONTANA
Senior Vice President
& Chief Financial Officer
EXHIBIT 10.17
FIRST AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
AMONG
PENTACON, INC.
AS BORROWER,
NATIONSBANK, N.A.,
AS ADMINISTRATIVE AGENT,
NATIONSBANC MONTGOMERY SECURITIES LLC,
AS LEAD ARRANGER,
AND
THE LENDERS SIGNATORY HERETO
DATED AS OF
DECEMBER 31, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINITIONS
Section 1.01 TERMS DEFINED ABOVE .................................... 1
Section 1.02 TERMS DEFINED IN CREDIT AGREEMENT ...................... 1
Section 1.03 OTHER DEFINITIONAL PROVISIONS .......................... 1
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 AMENDMENTS TO DEFINITIONS .............................. 2
Section 2.02 AMENDMENTS TO ARTICLE II ............................... 5
Section 2.03 AMENDMENTS TO ARTICLE III .............................. 9
Section 2.04 AMENDMENTS TO ARTICLE IV ............................... 9
Section 2.05 AMENDMENTS TO ARTICLE VIII ............................. 9
Section 2.06 AMENDMENTS TO ARTICLE IX ............................... 10
Section 2.07 AMENDMENTS TO ARTICLE XII .............................. 13
Section 12.04 AMENDMENTS, ETC........................................ 13
Section 2.08 AMENDMENTS TO ANNEXES, SCHEDULES AND EXHIBITS .......... 13
ARTICLE IV. CONDITIONS
Section 4.01 LOAN DOCUMENTS ......................................... 14
Section 4.02 CORPORATE PROCEEDINGS OF LOAN PARTIES .................. 14
Section 4.03 REPRESENTATIONS AND WARRANTIES ......................... 14
Section 4.04 NO DEFAULT ............................................. 15
Section 4.05 NO CHANGE .............................................. 15
Section 4.06 SECURITY INSTRUMENTS ................................... 15
Section 4.07 FEE .................................................... 15
Section 4.08 LEGAL FEES ............................................. 15
Section 4.09 OTHER INSTRUMENTS OR DOCUMENTS ......................... 15
ARTICLE V. MISCELLANEOUS
Section 5.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT
AGREEMENT ........................................... 15
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<PAGE>
Section 5.02 RATIFICATION AND AFFIRMATION OF GUARANTY ............... 15
Section 5.03 SUCCESSORS AND ASSIGNS ................................. 16
Section 5.04 COUNTERPARTS .......................................... 16
Section 5.05 NUMBER AND GENDER ...................................... 16
Section 5.06 ENTIRE AGREEMENT ....................................... 16
Section 5.07 INVALIDITY ............................................. 16
Section 5.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS ........... 16
Section 5.09 GOVERNING LAW .......................................... 17
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Percentage Shares, Maximum Revolving Credit
Amounts, and Revolver Term Loans
Exhibit G - Borrowing Base Certificate
Exhibit H - Eligible Account
Exhibit I - Eligible Inventory
Exhibit J - Form of Landlord Subordination Agreement
Schedule 3.01(b) - Amortization Schedule - Revolver Term Loans
-iii-
<PAGE>
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "First
Amendment") executed effective as of the 31st day of December, 1998 (the
"Effective Date"), is by and 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 and to the hereinafter
described Credit Agreement as provided in Section 12.06 of the Credit Agreement
(individually, together with its successors and assigns, a "Lender" and,
collectively, the "Lenders"); and NationsBank, N.A., a national banking
association (in its individual capacity, "NationsBank"), and as administrative
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Administrative Agent and the Lenders are
parties to that certain Amended and Restated Credit Agreement dated as of
September 3, 1998 (the "Credit Agreement"), pursuant to which the Lenders agreed
to make loans to and extensions of credit on behalf of the Borrower; and
WHEREAS, the Borrower and the Lenders desire to amend the Credit Agreement
in the particulars hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01 TERMS DEFINED ABOVE. As used in this First Amendment, each of
the terms "Administrative Agent", "Borrower", "Credit Agreement", "Effective
Date", "First Amendment", "Lenders" and "NationsBank" shall have the meaning
assigned to such term hereinabove.
SECTION 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in the
Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
SECTION 1.03 OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereby", "herein", "hereinafter", "hereof", "hereto"
and "hereunder" when used in this First Amendment shall refer to this
First Amendment as a whole and not to any particular Article, Section,
subsection or provision of this First Amendment.
<PAGE>
(b) Section, subsection and Exhibit references herein are to such
Sections, subsections and Exhibits to this First Amendment unless
otherwise specified.
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
The Borrower, the Administrative Agent, and the Lenders agree that the
Credit Agreement is hereby amended, effective as of the Effective Date, in the
following particulars.
SECTION 2.01 AMENDMENTS TO DEFINITIONS.
(a) The following terms, which are defined in Section 1.02 of the Credit
Agreement, are hereby amended in their entirety to read as follows:
"Agreement" shall mean this Amended and Restated Credit Agreement, as
amended and supplemented by the First Amendment, as the same may from time to
time be further amended or supplemented.
"Aggregate Maximum Revolving Credit Amounts" at any time shall equal the
sum of the Maximum Revolving Credit Amounts of the Lenders, as the same may be
reduced pursuant to Section 2.03 or otherwise amended.
"Applicable Margin" shall mean for 3.0% per annum for Eurodollar Loans and
1.0% per annum for Base Rate Loans; provided, however, if a Capital Market Event
has not occurred on or before March 1, 1999, "Applicable Margin" shall mean,
from and after March 1, 1999, 4.0% per annum for Eurodollar Loans and 2.0% per
annum for Base Rate Loans; and further provided, however, on the first
Determination Date (hereinafter defined) following the occurrence of a Capital
Market Event, "Applicable Margin" shall mean the applicable per annum percentage
set forth at the appropriate intersection in the table shown below, based on the
Leverage Ratio, for the four quarterly periods ending on and determined as of
the immediately preceding Quarterly Date:
- --------------------------------------------------------------------------
LEVERAGE RATIO APPLICABLE MARGIN APPLICABLE
FOR EURODOLLAR LOANS MARGIN FOR BASE
RATE LOANS
- --------------------------------------------------------------------------
Less than 3.00 1.750% 0.25%
- --------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------
Less than 3.50, but 2.000% 0.50%
greater than or
equal to 3.00
- --------------------------------------------------------------------------
Less than 4.00, but 2.375% 0.75%
greater than or
equal to 3.50
- --------------------------------------------------------------------------
Less than 4.50, but 2.625% 1.00%
greater than or
equal to 4.00
- --------------------------------------------------------------------------
Less than 5.0, but 2.875% 1.25%
greater than or
equal to 4.50
- --------------------------------------------------------------------------
Greater than or 3.250% 1.50%
equal to 5.0
- --------------------------------------------------------------------------
After the occurrence of a Capital Market Event, 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 Administrative Agent pursuant to Section 8.01(h) or Section
9.03(i), subject to review and approval of such computations by the
Administrative 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(h), then the
Applicable Margin shall be the highest percentage amount stated for each Type of
Loan as set forth in the then applicable table until the appropriate certificate
is so delivered.
"Final Maturity Date" shall mean the earlier to occur of (i) December 31,
2001, and (ii) the date that the Revolver Term Notes are prepaid in full
pursuant to Section 2.07 at any time after the Revolver Term Loan Conversion
Date.
"Maximum Revolving Credit Amount" shall mean, as to each Lender, the
amount set forth opposite such Lender's name on the appropriate table of Annex I
under the caption "Maximum Revolving Credit Amounts", as the same may be (i)
reduced pursuant to Section 2.03 hereof pro rata to each Lender based on its
Percentage Share, (ii) modified from time to time to reflect any assignments
permitted by Section 12.06(b), or (iii) otherwise amended.
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<PAGE>
"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 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; (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; and (e) any payment
(including, without limitation, a payment effecting a defeasance), purchase or
redemption of Subordinated Debt prior to its stated maturity.
"Revolving Credit Commitment" shall mean, for any Lender, its obligation
to make Revolving Credit Loans and participate in the issuance of Letters of
Credit as provided in Section 2.01(d) up to the lesser of (i) such Lender's
Maximum Revolving Credit Amount and (ii) the Lender?s Percentage Share of the
then effective Borrowing Base.
"Revolving Credit Termination Date" shall mean, the earlier to occur of
(i) December 31, 2001, or (ii) the date that the Aggregate Revolving Credit
Commitments are sooner terminated pursuant to Sections 2.03 or 10.02.
"Revolver Term Loan Conversion Date" shall mean December 31, 1998.
"Subordinated Debt Event" shall mean the consummation of the issuance of
Subordinated Debt resulting in gross cash proceeds to the Borrower of at least
$100,000,000, but not to exceed $150,000,000, upon terms and conditions and
pursuant to documentation, all in form and substance satisfactory to the
Majority Lenders.
(b) Section 1.02 of the Credit Agreement is hereby further amended and
supplemented by adding the following new definitions where alphabetically
appropriate, which read in their entirety as follows:
"Borrowing Base" shall mean at any time the sum of (i) a determined
percentage of Eligible Accounts Receivable plus (ii) a determined percentage of
Eligible Inventory, but not to exceed 50% of the Borrowing Base; such
percentages to be determined upon completion of the Collateral Field Exam;
provided, however, prior to the occurrence of a Capital Market Event, the
Borrowing Base shall be equal to the Aggregate Maximum Revolving Credit Amounts.
"Borrowing Base Certificate" shall mean a certificate of a Responsible
Officer in the form of Exhibit G attached to the First Amendment.
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<PAGE>
"Capital Market Event" shall mean the occurrence of an Equity Event or
Subordinated Debt Event.
"Collateral Field Exam" shall mean an examination of the Borrower's and
Subsidiaries' accounts and inventory and all records, reports and other
documents related thereto, and any other affairs of such parties' businesses as
reasonably requested by the Lenders, conducted at such time as agreed to by the
Borrower and the Lenders (but prior to the occurrence of a Capital Market
Event), in order to determine an appropriate formula for determining a Borrowing
Base and the components related thereon upon the occurrence of a Capital Market
Event.
"Eligible Accounts Receivable" shall have a meaning as determined from the
results of the Collateral Field Exam and defined and set forth in a subsequent
amendment to the Credit Agreement.
"Eligible Inventory" shall have a meaning as determined from the results
of the Collateral Field Exam and defined and set forth in a subsequent amendment
to the Credit Agreement.
"Fee Letters" shall mean the fee letters between the Borrower and each of
the Lenders, executed in connection with the First Amendment.
"First Amendment" shall mean that certain First Amendment to Amended and
Restated Credit Agreement dated as of December 31, 1998, by and among the
Borrower, the Administrative Agent and the Lenders.
"Landlord Subordination Agreement" shall mean an agreement with a landlord
of any location where any Property subject to the Lien of a Security Instrument
is located, and being substantially in the form of Exhibit J attached to the
First Amendment."
SECTION 2.02 AMENDMENTS TO ARTICLE II.
(a) Section 2.03 of the Credit Agreement is hereby amended in its entirety
to read as follows:
SECTION 2.03 CHANGES OF REVOLVING CREDIT COMMITMENT.
(a) The Aggregate Revolving Credit Commitments shall at all times be
equal to the lesser of (i) the Aggregate Maximum Revolving Credit Amounts
after adjustments resulting from reductions pursuant to this Section 2.03
and (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 Revolving Credit Amounts at any time or
from time to time upon not
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<PAGE>
less than three (3) Business Days' prior notice to the Administrative
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 Administrative Agent.
(c) After the Revolver Term Loans have been repaid in full pursuant
to Section 2.07, the Aggregate Maximum Revolving Credit Amounts shall be
reduced dollar for dollar by the amount of all net cash proceeds up to
$45,000,000 in the aggregate (exclusive of any proceeds used to repay the
Revolver Term Loans) received from Capital Market Events and the
incurrence of any other Debt or other issuances of equity. For
clarification of the preceding sentence, the Aggregate Maximum Revolving
Credit Amounts shall never be reduced to an amount less than $65,000,000
solely as a result of the operation of the preceding sentence.
(d) If a Subordinated Debt Event occurs on or before March 1, 1999,
the Percentage Shares, Maximum Revolving Credit Amounts and Revolver Term
Loans of each Lender shall be the amounts set forth on Annex I under item
B thereof.
(e) Unless previously reduced to an amount equal to or less than
$90,000,000 pursuant to Sections 2.03(b), (c) or (d), on March 1, 1999 the
Aggregate Maximum Revolving Credit Amounts shall automatically be reduced
to $90,000,000.
(f) The Aggregate Maximum Revolving Credit Amounts once terminated
or reduced may not be reinstated."
(b) Section 2.04(a) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(a) Commitment Fee. The Borrower shall pay to the Administrative
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 Revolving
Credit Commitments, for the period from and including the Effective Date
as defined in the First Amendment up to, but excluding, the earlier of the
date the Aggregate Revolving Credit Commitments are terminated or the
Revolving Credit Termination Date at a rate per annum equal to ? of 1%;
provided, however, if a Capital Market Event shall have occurred, then on
the first Determination Date (hereinafter defined) following the
occurrence of such Capital Market Event, the per annum rate for the
commitment fee shall be determined based on the Leverage Ratio for the
four quarterly periods ending and determined as of the immediately
preceding Quarterly Date, as set forth at the appropriate intersection in
the table below:
-6-
<PAGE>
- ------------------------------------------------------
COMMITMENT FEE
LEVERAGE RATIO PERCENTAGE
- ------------------------------------------------------
Less than 2.50 .250%
- ------------------------------------------------------
Less than 3.00, but .300%
greater than or equal
to 2.50
- ------------------------------------------------------
Less than 3.50 but .375%
greater than or equal
to 3.00
- ------------------------------------------------------
Greater than or equal .500%
to 3.50
- ------------------------------------------------------
After the occurrence of such Capital Market Event, 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 Administrative Agent pursuant to Section
8.01(h), subject to review and approval of such computations by the
Administrative Agent and each change in the commitment fee percentage
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
commitment fee percentage 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(h), then the
applicable commitment fee percentage shall be the highest percentage
amount set forth in the then applicable table until the appropriate
certificate is so delivered.
Accrued commitment fees shall be payable quarterly in arrears on each
Quarterly Date and on the earlier of the date the Aggregate Revolving
Credit Commitments are terminated or the Revolving Credit Termination
Date."
(c) Section 2.07(b) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(b) Mandatory Prepayments.
(i) If, after giving effect to any termination or reduction of
the Aggregate Maximum Revolving Credit Amounts pursuant to Section
2.03, the outstanding aggregate principal amount of the Revolving
Credit Loans and the Swing Line Loans, plus the LC Exposure exceeds
the Aggregate Maximum Revolving Credit Amounts, the Borrower shall
(i) prepay the Revolving Credit Loans on the date of such
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<PAGE>
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, (ii) if any excess remains
after prepaying all Revolving Credit Loans, prepay the Swing Line
Loans on the date of such termination or reduction in an aggregate
principal amount equal to such remaining excess, together with
interest on the principal amount paid accrued to the date of such
prepayment, and (iii) if any excess remains after prepaying all of
the Revolving Credit Loans and Swing Line Loans because of LC
Exposure, pay to the Administrative Agent on behalf of the Lenders
an amount equal to such remaining excess to be held as cash
collateral as provided in Section 2.09(b) hereof.
(ii) 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 Revolving Credit Loans and the
Swing Line Loans, plus the LC Exposure, then the Borrower shall
within five (5) days after delivery of the Borrowing Base
Certificate required under Section 8.01(i): (A) prepay the Revolving
Credit 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, (B) if any excess remains after prepaying
all Revolving Credit Loans, prepay the Swing Line 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 (C) if a Borrowing Base deficiency remains after
prepaying all of the Revolving Credit Loans and Swing Line Loans
because of LC Exposure, the Borrower shall pay to the Administrative
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.
(iii) The Borrower shall use all net cash proceeds received
from Capital Market Events and the incurrence of any other Debt or
other issuances of equity to repay (immediately upon receipt of such
proceeds) the Loans in the following order -- first, outstanding
principal of the Revolver Term Loans, plus interest on the principal
amount of Revolver Term Loans paid accrued to the date of such
prepayment, second, outstanding principal of the Revolving Credit
Loans, plus interest on the principal amount of Revolving Credit
Loans paid accrued to the date of such prepayment, and last,
outstanding principal of Swing Line Loans, plus interest on the
principal amount of Swing Line Loans paid accrued to the date of
such prepayment.
(iv) The Borrower shall, and shall cause any Subsidiary to,
use the net cash proceeds received from any Transfers to the extent
that during any consecutive 12 month period such net cash proceeds
exceed $500,000, based on the net book value of the Property sold or
the net proceeds received to promptly repay the Revolver Term
Loans."
-8-
<PAGE>
(d) Section 2.11 of the Credit Agreement is hereby amended by deleting
therefrom subsection (b) in its entirety.
SECTION 2.03 AMENDMENTS TO ARTICLE III. Section 3.01(b) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(b) Revolver Term Loans. Commencing with a payment on September 30,
1999 and on each Quarterly Date thereafter and the Final Maturity Date,
the aggregate principal amount of the Revolver Term Notes outstanding on
the Revolver Term Conversion Date shall be payable in installments in the
principal amounts as set forth on Schedule 3.01(b) (as attached to the
First Amendment), with final payment of the remaining principal balance on
the Revolver Term Notes due on the Final Maturity Date."
SECTION 2.04 AMENDMENTS TO ARTICLE IV. Section 4.02 of the Credit
Agreement is hereby amended by changing all references therein to Section
2.03(a)(ii) to be references to Section 2.03.
SECTION 2.05 AMENDMENTS TO ARTICLE VIII.
(a) Section 8.01 of the Credit Agreement is hereby amended by adding
thereto a new subsection, to be Section 8.01(i), to read as follows:
"(i) After the occurrence of a Capital Market Event:
(A) 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;
(B) not later than 30 days after and as of the end of each
calendar year or on the request from the Administrative Agent, a
list of the names and addresses of all of Borrower's account
debtors;
(C) not later than 30 days after and as of the end of each
month, or on the request of the Administrative Agent, an inventory
summary of balances at the lower of cost or market for the Borrower
and each Subsidiary; and
(D) not later than 30 days after and as of the end of each
month, a Borrowing Base Certificate."
(b) Section 8.09 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"Section 8.09 Inspection. The Borrower shall and shall cause
each Subsidiary to permit the Administrative Agent and the Lenders, at
Borrower's expense, to
-9-
<PAGE>
visit and inspect any of their respective Properties, to examine all of
such Person's inventories, books of account records, reports, and other
papers, to make copies and extracts therefrom, and to discuss their
respective affairs, finances, accounts and inventories 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 accountants or other third parties are contacted, and
provided further that so long as no Default or Event of Default exists,
the Administrative Agent and the Lenders shall not exercise the foregoing
inspection right more often than once in any calendar quarter."
(c) Article VIII of the Credit Agreement is hereby amended to add a new
section, to be Section 8.11, to read as follows:
"Section 8.11 Landlord Subordination Agreements. Within 90
days after the Effective Date of the First Amendment (as defined therein),
the Borrower shall deliver to the Administrative Agent duly executed
original counterparts of Landlord Subordination Agreements relating to
each location leased by the Borrower or any Subsidiary at which any
Property subject to the Lien of a Security Instrument is located.
Concurrently with the execution and delivery of any Security Instruments
pursuant to Section 8.08, the Borrower shall, or shall cause its
Subsidiary to, obtain and deliver to the Administrative Agent any Landlord
Subordination Agreements deemed necessary by the Administrative Agent in
its reasonable determination.
SECTION 2.06 AMENDMENTS TO ARTICLE IX.
(a) Section 9.01(e) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(e) Subordinated Debt not to exceed $150,000,000 at any one time
outstanding which matures on a date subsequent to the Revolving Credit
Termination Date and Subsidiary guaranties of such Subordinated Debt
subordinate to the Guaranty Agreements upon terms and conditions and
pursuant to documentation, all in form and substance satisfactory to the
Majority Lenders."
(b) Section 9.01(h) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(h) Subordinated Debt not to exceed $25,000,000 in the aggregate at
any one time outstanding and in each case which matures (i) not less than
two years from the date incurred."
-10-
<PAGE>
(c) Section 9.03 (i) of the Credit Agreement is hereby amended by
replacing the first sentence thereof with the following sentence:
"investments and/or loans for Acquisitions; provided, however, any
Acquisitions prior to the occurrence of a Capital Market Event 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 and after
the occurrence of a Capital Market Event any 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."
(d) Section 9.13 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"Section 9.13 Leverage Ratio. The Borrower will not permit its
ratio of Funded Debt as of the end of any fiscal quarter to Adjusted
EBITDA ("Leverage Ratio") for the four fiscal quarters ending on such date
to be greater than the ratio corresponding to the applicable period set
forth below:
- ------------------------------------------------
PERIOD RATIO
- ------------------------------------------------
from the Closing Date 4.00 to 1.00
until, but excluding
9/30/2001
- ------------------------------------------------
on 9/30/2001 and 3.75 to 1.00
thereafter
- ------------------------------------------------
provided, however, upon the occurrence of a Capital Market Event, from and
after such Capital Market Event, 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 the ratio
corresponding to the applicable period set forth below:
- ------------------------------------------------
PERIOD RATIO
- ------------------------------------------------
from the Closing Date 5.5 to 1.0
until, but excluding
3/31/2000
- ------------------------------------------------
from 3/31/2000 until, 5.0 to 1.0
but excluding 6/30/2000
- ------------------------------------------------
on 6/30/2000 and 4.5 to 1.0
thereafter
- ------------------------------------------------
-11-
<PAGE>
For the purposes of Sections 9.13 and 9.14, "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 to the extent that such EBITDA is not included in the
EBITDA of the Borrower plus certain extraordinary or non-recurring
expenses as specifically listed on Schedule 9.13.
(e) Section 9.14 of the Credit Agreement is hereby amended in its entirety
to read as follows:
Section 9.14 Senior Debt Leverage Ratio. The Borrower will not
permit its ratio of Senior 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 the ratio corresponding to the applicable period set forth
below:
- ------------------------------------------------
PERIOD RATIO
- ------------------------------------------------
from the Closing Date 4.00 to 1.00
until, but excluding
3/31/99
- ------------------------------------------------
on and after 3/31/99 3.50 to 1.00
until, but excluding
6/30/99
- ------------------------------------------------
on and after 6/30/99 3.25 to 1.00
until, but excluding
12/31/99
- ------------------------------------------------
on 12/31/99 and 3.00 to 1.00
thereafter
- ------------------------------------------------
provided, however, upon the occurrence of a Capital Market Event, from and
after such Capital Market Event, the Borrower will not permit its ratio of
Senior 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 2.25 to 1.0.
For the purposes of Sections 9.13 and 9.14, "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 to the extent that such EBITDA is not included in the
EBITDA of the Borrower plus certain extraordinary or non-recurring
expenses as specifically listed on Schedule 9.13."
(f) Section 9.19 of the Credit Agreement is hereby amended by adding
thereto as the last sentence, the following:
"The Borrower will not create or designate any Subsidiary as an
"Unrestricted Subsidiary" (as such term shall be defined in any
documentation evidencing Subordinated Debt issued
-12-
<PAGE>
in connection with a Subordinated Debt Event) without the prior consent of
the Majority Lenders."
SECTION 2.07 AMENDMENTS TO ARTICLE XII. Section 12.04 of the Credit
Agreement is hereby amended in its entirety to read as follows:
"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 Administrative Agent are
affected thereby, by the Administrative 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, (v) revise the definition of Borrowing Base (except for a
decrease in the percentage of any component thereof, which shall require
only Majority Lenders approval) or eliminate the Borrowing Base as a
variable in determining the Aggregate Revolving Credit Commitments
pursuant to Section 2.03(a), or (vi) release any Guarantor or all or
substantially all of the collateral."
SECTION 2.08 AMENDMENTS TO ANNEXES, SCHEDULES AND EXHIBITS.
(a) Annex I to the Credit Agreement is hereby replaced with Annex I
attached hereto. Accordingly, all references in the Credit Agreement, to Annex I
shall be deemed to be references to Annex I attached to this First Amendment.
(b) Exhibit F to the Credit Agreement is hereby amended by restating
paragraph (d) thereof to read in its entirety as follows:
"(d) Delivered concurrently herewith is a Compliance Certificate
(with pro-forma computations for financial covenants) and (if this
certificate is delivered after the occurrence of a Capital Market Event) a
Borrowing Base Certificate, taking into account the Acquisition (including
EBITDA for the target entity for the last four fiscal quarters)."
-13-
<PAGE>
ARTICLE IV. CONDITIONS
The enforceability of this First Amendment against the Administrative
Agent and the Lenders is subject to the satisfaction of the following conditions
precedent:
SECTION 4.01 LOAN DOCUMENTS. The Administrative Agent shall have received:
(a) multiple original counterparts, as requested by the
Administrative Agent, of this First Amendment executed and delivered by a
duly authorized officer of the Borrower, the Administrative Agent, each
Guarantor, and each Lender;
(b) multiple original counterparts, as requested by each Lender, of
the Fee Letters executed and delivered by a duly authorized officer of the
Borrower and the respective Lenders; and
(c) multiple original counterparts, as requested by the
Administrative Agent, of financing statements and/or financing statement
amendments reflecting the Borrower's and Guarantors' change of address,
executed and delivered by a duly authorized officer of the Borrower, each
Guarantor, and the Administrative Agent, as appropriate.
SECTION 4.02 CORPORATE PROCEEDINGS OF LOAN PARTIES. The Administrative
Agent shall have received multiple copies, as requested by the Administrative
Agent, of the resolutions, in form and substance reasonably satisfactory to the
Administrative Agent, of the Boards of Directors of the Borrower and the
Guarantors, authorizing the execution, delivery and performance of this First
Amendment and any other Loan Documents to which they are respectively a party,
executed in connection with this First Amendment, each such copy being attached
to original certificates of the Secretary or an Assistant Secretary of the
Borrower and each Guarantor, dated as of the Effective Date, certifying (i) that
the resolutions attached thereto are true, correct and complete copies of
resolutions duly adopted by written consent or at a meeting of the Board of
Directors of the Borrower or such Guarantor, as applicable, (ii) that such
resolutions constitute all resolutions adopted with respect to the transactions
contemplated hereby, (iii) that such resolutions have not been amended,
modified, revoked or rescinded as of the Effective Date, (iv) that the articles
of incorporation and bylaws of the Borrower or such Guarantor have not been
amended or otherwise modified since the effective date of the Credit Agreement,
except pursuant to any amendments attached thereto, and (v) as to the incumbency
and signature of the officers of the Borrower or such Guarantor, as applicable,
executing this First Amendment and any other Loan Document executed pursuant
hereto.
SECTION 4.03 REPRESENTATIONS AND WARRANTIES. Except as affected by the
transactions contemplated in the Credit Agreement and this First Amendment, each
of the representations and warranties made by the Borrower and the Guarantors in
or pursuant to the Security Instruments, including the Credit Agreement, shall
be true and correct in all material respects as of the Effective
-14-
<PAGE>
Date, as if made on and as of such date. Borrower hereby represents and warrants
to the Administrative Agent that the execution, delivery and performance of this
First Amendment has been duly authorized and that the representation in the
Credit Agreement as to the enforceability and authorization thereof shall refer
to the Credit Agreement, as amended by this First Amendment.
SECTION 4.04 NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
SECTION 4.05 NO CHANGE. No event shall have occurred since September 30,
1998, which, in the reasonable opinion of the Lenders, could have a material
adverse effect on the condition (financial or otherwise), business, operations
or prospects of the Borrower or the Guarantors.
SECTION 4.06 SECURITY INSTRUMENTS. All of the Security Instruments shall
be in full force and effect and provide to the Administrative Agent the security
intended thereby to secure the Indebtedness, as amended and supplemented hereby.
SECTION 4.07 FEE. On or before the Effective Date, the Borrower shall have
paid to each Lender all fees required by the Fee Letters.
SECTION 4.08 LEGAL FEES. On or before the Effective Date, the Borrower
shall have paid in full all outstanding fees and expenses of the Administrative
Agent?s legal counsel.
SECTION 4.09 OTHER INSTRUMENTS OR DOCUMENTS. The Administrative Agent or
any Lender or counsel to the Administrative Agent shall receive such other
instruments or documents as they may reasonably request.
ARTICLE V. MISCELLANEOUS
SECTION 5.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT AGREEMENT.
Each of the Borrower, the Guarantors, the Administrative Agent, and the Lenders
does hereby adopt, ratify and confirm the Credit Agreement, as amended hereby,
and acknowledges and agrees that the Credit Agreement, as amended hereby, is and
remains in full force and effect.
SECTION 5.02 RATIFICATION AND AFFIRMATION OF GUARANTY. Each Guarantor
hereby expressly (i) acknowledges the terms of this First Amendment, (ii)
ratifies and affirms its obligations under its Amended and Restated Guaranty
Agreement or Guaranty Agreement, as applicable, dated as of September 3, 1998,
in favor of the Administrative Agent and the Lenders, as amended, supplemented
or otherwise modified (the "Guaranty Agreement"), (iii) acknowledges, renews and
extends its continued liability under its Guaranty Agreement and agrees that its
Guaranty Agreement
-15-
<PAGE>
remains in full force and effect; and (iv) guarantees to the Administrative
Agent and each Lender to promptly pay when due all amounts owing or to be owing
by it under its Guaranty Agreement pursuant to the terms and conditions thereof.
SECTION 5.03 SUCCESSORS AND ASSIGNS. This First Amendment shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
SECTION 5.04 COUNTERPARTS. This First Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Borrower, the Guarantors, the
Administrative Agent and the Lenders. In this regard, each of the parties hereto
acknowledges that a counterpart of this First Amendment containing a set of
counterpart execution pages reflecting the execution of each party hereto shall
be sufficient to reflect the execution of this First Amendment by each necessary
party hereto and shall constitute one instrument.
SECTION 5.05 NUMBER AND GENDER. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the
general but shall be construed as cumulative. Definitions of terms defined in
the singular or plural shall be equally applicable to the plural or singular, as
the case may be, unless otherwise indicated.
SECTION 5.06 ENTIRE AGREEMENT. This First Amendment constitutes the entire
agreement among the parties hereto with respect to the subject hereof. All prior
understandings, statements and agreements, whether written or oral, relating to
the subject hereof are superseded by this First Amendment.
SECTION 5.07 INVALIDITY. In the event that any one or more of the
provisions contained in this First Amendment 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 this First Amendment.
SECTION 5.08 TITLES OF ARTICLES, SECTIONS AND Subsections. All titles or
headings to Articles, Sections, subsections or other divisions of this First
Amendment or the exhibits hereto, if any, are only for the convenience of the
parties and shall not be construed to have any effect or meaning with respect to
the other content of such Articles, Sections, subsections, other divisions or
exhibits, such other content being controlling as the agreement among the
parties hereto.
-16-
<PAGE>
SECTION 5.09 GOVERNING LAW. This First Amendment shall be deemed to be a
contract made under and shall be governed by and construed in accordance with
the internal laws of the State of Texas.
THIS FIRST AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION
HEREOF TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND 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.
[SIGNATURES BEGIN NEXT PAGE]
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the Effective Date.
BORROWER: PENTACON, INC.
By: ________________________
Name:
Title:
LENDER AND AGENT: NATIONSBANK, N.A.
By: ________________________
Name:
Title:
LENDERS: PARIBAS
By: ________________________
Name:
Title:
By: ________________________
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By: ________________________
Name:
Title:
Signature Page - 1
<PAGE>
GUARANTORS: ALATEC PRODUCTS, INC.
By: ________________________
Name:
Title:
AXS SOLUTIONS, INC.
By: ________________________
Name:
Title:
CAPITOL BOLT & SUPPLY, INC.
By: ________________________
Name:
Title:
MAUMEE INDUSTRIES, INC.
By: ________________________
Name:
Title:
SALES SYSTEMS, LIMITED
By: ________________________
Name:
Title:
Signature Page - 2
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
By: ________________________
Name:
Title:
PACE PRODUCTS, INC.
By: ________________________
Name:
Title:
D-BOLT PRODUCTS, INC.
By: ________________________
Name:
Title:
WEST COAST AERO PRODUCTS
HOLDING CORPORATION, INC.
By: ________________________
Name:
Title:
ASI AEROSPACE GROUP, INC.
By: ________________________
Name:
Title:
Signature Page - 3
<PAGE>
POLLARD AVIATION, INC.
By: ________________________
Name:
Title:
Signature Page - 4
<PAGE>
ANNEX I
LIST OF PERCENTAGE SHARES,
MAXIMUM REVOLVING CREDIT AMOUNTS
AND REVOLVER TERM LOANS
A. So long as a Subordinated Debt Event has not occurred on or before
March 1, 1999:
- --------------------------------------------------------------------------------
PERCENTAGE MAXIMUM REVOLVING REVOLVER
NAME OF LENDER SHARE CREDIT AMOUNT TERM LOANS
- --------------------------------------------------------------------------------
NationsBank, N.A. 80.000% $88,000,000 $32,000,000
- --------------------------------------------------------------------------------
Paribas 8.5714% $9,428,540 $3,428,571.43
- --------------------------------------------------------------------------------
Union Bank of
California, N.A. 11.4286% $12,571,460 $4,571,428.57
- --------------------------------------------------------------------------------
TOTAL 100% $110,000,000 $40,000,000
- --------------------------------------------------------------------------------
B. If a Subordinated Debt Event occurs on or before March 1, 1999:
- --------------------------------------------------------------------------------
PERCENTAGE MAXIMUM REVOLVING REVOLVER
NAME OF LENDER SHARE CREDIT AMOUNT TERM LOANS
- --------------------------------------------------------------------------------
NationsBank, N.A. 60.6594% $39,428,590.00 -0-
- --------------------------------------------------------------------------------
Paribas 8.5714% $5,571,410 -0-
- --------------------------------------------------------------------------------
Union Bank of
California, N.A. 30.7692% $20,000,000 -0-
- --------------------------------------------------------------------------------
TOTAL 100% $65,000,000 -0-
- --------------------------------------------------------------------------------
Annex I-1
<PAGE>
EXHIBIT G
FORM OF BORROWING BASE CERTIFICATE
Status as of _____________________, _________.
In accordance with the terms of the Amended and Restated Credit Agreement dated
as of September 3, 1998, as amended (the "Credit Agreement") among PENTACON,
INC., a Delaware corporation, the Lenders (as defined in the Credit Agreement)
and NATIONSBANK, N.A., as administrative agent for the Lenders, the undersigned
hereby represents and warrants as follows:
1. Total Accounts Receivable $_________________
2. Less ineligible accounts receivable
(as set forth in the definition of
Eligible Accounts Receivable in the
Credit Agreement) $_________________
3. Eligible Accounts Receivable $_________________
4. a. ___% of Eligible Accounts Receivable $________________
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 G-1
<PAGE>
EXHIBIT H
ELIGIBLE ACCOUNTS RECEIVABLE
Exhibit H-1
<PAGE>
EXHIBIT I
ELIGIBLE INVENTORY
Exhibit I-1
<PAGE>
EXHIBIT J
FORM OF
LANDLORD'S SUBORDINATION AGREEMENT
STATE OF TEXAS ss
ss
COUNTY OF [COUNTY WHICH INSTRUMENT FILED] ss
WHEREAS, [LANDLORD'S NAME] ("Landlord") is the owner of those certain
premises located at [STREET ADDRESS OF PROPERTY], which is further described as
follows (the "Premises"); and
[LEGAL DESCRIPTION OR AN ATTACHMENT]
WHEREAS, Landlord leases said Premises to [BORROWER'S/SUBSIDIARIES' NAME]
("Tenant"), subject to a lease agreement dated [DATE OF LEASE AGREEMENT] by and
between Landlord and Tenant (the "Lease"); and
WHEREAS, Landlord understands that NationsBank, N.A., as Agent (the
"Agent") for the lenders ("Lenders") parties to a credit agreement with [TENANT
(IF BORROWER)/PENTACON, INC. (IF SUBSIDIARY)] has been granted a security
interest as evidenced by a Security Agreement dated [SECURITY AGREEMENT DATE] in
certain property, as more fully described on Exhibit A attached hereto and made
a part hereof (the "Mortgaged Property") and may from time to time be granted
additional security interests in additional Mortgaged Property, which is or
shall be situated upon the Premises.
NOW, THEREFORE, in consideration of these premises, the promises, mutual
covenants and agreements contained herein and for good and valuable
consideration, the receipt of which is hereby acknowledged, Landlord and Agent
hereby agrees as follows:
1. Landlord subordinates to Agent all rights to maintain or enforce a
landlord's lien (whether statutory or contractual) or any other claim against
the Mortgaged Property which may now or hereafter be situated upon the Premises,
regardless of whether or not Tenant (i) fails to perform any obligation or term
of the Lease or (ii) otherwise defaults under the Lease, or (iii) abandons the
Premises and the Mortgaged Property is either moved to a new location without
the prior written consent of Agent, or the Mortgaged Property remains at the
Premises.
2. The Mortgaged Property shall remain personal property notwithstanding
the manner or mode of attachment of the Mortgaged Property to the Premises and
shall not become fixtures as long as Tenant is indebted to Lenders.
Exhibit J-1
<PAGE>
3. In the event that default exists on any indebtedness to Lenders which
is secured by the Mortgaged Property, Agent may, at its election notify Landlord
by written notice at Landlord's address set forth below of Agent's intent to
enter the Premises for the purpose of removing the Mortgaged Property, and
Landlord agrees to allow Agent to have access to the Premises for such removal
during reasonable hours.
4. Landlord shall notify Agent by written notice at Agent's address set
forth below within thirty (30) days from the date that Tenant (i) defaults on
the Lease or (ii) abandons the Premises. Agent nor Lenders shall be required to
take any action in the event either of these circumstances occur.
5. In addition to the rights granted in paragraph 3 above, Agent may elect
to take possession of the Mortgaged Property located on the Premises. Agent
agrees to pay Landlord past due "Base Rent", if any is owing by Tenant for a
period not to exceed [# OF DATES OF BANK RENT] days, plus the monthly Base Rent
for the period in which the Agent is in possession of and utilizing the
Premises. Base Rent shall be defined as the stated sum of money set forth in the
Lease for rent, which amount, shall be payable to Landlord for each month during
the term of the Lease, less any sum of money due for expenses by Landlord with
respect to the ownership, maintenance, servicing, repairing and operation of the
Premises, including, but not limited t maintenance, repair and replacement
costs, electricity, fuel, water, sewer, gas and other utility charges.
6. Agent agrees to reimburse Landlord for the repair of damage incurred
during the process of Agent removing the Mortgaged Property, if applicable,
which amount shall be the reasonable cost of repairing the Premises to the
condition that the Premises were in prior to such removal, and taking into
account normal wear and tear. The removal of any fastening devices for the
purpose of removing any of the Mortgaged Property shall not constitute a
required need for Agent to reimburse Landlord for repairs to the Premises under
this Section, as a result of such removal. Agent shall have no further liability
or obligation of any kind under the Lease while in possession of and utilizing
the Premises.
7. This Agreement shall remain in full force and effect so long as any
indebtedness secured by the Mortgaged Property remains outstanding to Lenders.
Lenders, or their assigns may, without affecting the validity of this Agreement,
extend the times of payment of any indebtedness secured by the Mortgaged
Property, or the performance of any of the terms and conditions of any loan
agreement or other documents evidencing the pledge to Agent of the Mortgaged
Property, without the consent of the Landlord and without giving notice thereof
to the Landlord.
8. Notice shall be deemed reasonable if mailed postage prepaid at least
five (5) days before the related action to the address of Landlord or Agent, at
their respective addresses indicated at the end of this Landlord's Subordination
Agreement, or to such other address as any party may designate by written notice
to the other party. Each notice, request and demand shall
Exhibit J-2
<PAGE>
be deemed given or made, if sent by mail, upon the earlier of the date of
receipt or five (5) days after deposit in the U.S. Mail, first class postage
prepaid, or if sent by any other means, upon delivery.
9. This Agreement shall inure to the benefit of any heirs, administrators,
personal representatives, successors or assigns of Agent and Landlord.
This Agreement is executed and effective as of the _____ day of _______________,
19__.
LANDLORD: BANK:
[LANDLORD NAME] NationsBank, N.A.
By:_________________________________ By:_________________________________
Name: [AUTHORIZED SIGNER NAME] Name: [LENDING OFFICER'S NAME]
Title: [AUTHORIZED SIGNER TITLE] Title: [LENDING OFFICER'S TITLE]
Address: Address:
[STREET ADDRESS] [STREET ADDRESS]
[CITY, STATE, ZIP CODE] [CITY, STATE, ZIP CODE]
Exhibit J-3
<PAGE>
(CORPORATE/PARTNERSHIP ACKNOWLEDGMENT)
THE STATE OF TEXAS ss
ss
COUNTY OF _______ ss
This instrument was acknowledged before me on _______________, 19__, by
_________________________ of _________________________, a
_________________________ on behalf of said corporation/partnership.
[SEAL]
___________________________________
Notary Public, State of Texas
(INDIVIDUAL ACKNOWLEDGMENT)
THE STATE OF TEXAS ss
ss
COUNTY OF ______ ss
This instrument was acknowledged before me on _______________, 19__, by
_________________________.
[SEAL]
___________________________________
Notary Public, State of Texas
(BANK ACKNOWLEDGMENT)
THE STATE OF TEXAS ss
ss
COUNTY OF ______ ss
This instrument was acknowledged before me on _______________, 19__, by
_________________________ of NationsBank, N.A., a national banking association,
on behalf of said bank.
[SEAL]
__________________________________
Notary Public, State of Texas
Exhibit J-4
<PAGE>
EXHIBIT A
MORTGAGED PROPERTY
Exhibit J-5
<PAGE>
SCHEDULE 3.01(B)
AMORTIZATION SCHEDULE FOR REVOLVER TERM LOANS
---------------------------------------------------
PAYMENT DATE PRINCIPAL PAYMENT
AMOUNT
---------------------------------------------------
9/30/99 $2,500,000
---------------------------------------------------
12/31/99 $2,500,000
---------------------------------------------------
3/31/2000 $2,500,000
---------------------------------------------------
6/30/2000 $2,500,000
---------------------------------------------------
9/30/2000 $2,500,000
---------------------------------------------------
12/31/2000 $2,500,000
---------------------------------------------------
3/31/2001 $2,500,000
---------------------------------------------------
6/30/2001 $2,500,000
---------------------------------------------------
9/30/2001 $2,500,000
---------------------------------------------------
12/31/2001 $17,500,000
---------------------------------------------------
TOTAL $40,000,000
---------------------------------------------------
Schedule 3.01(b)-1
SECOND AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
AMONG
PENTACON, INC.
AS BORROWER,
NATIONSBANK, N.A.,
AS ADMINISTRATIVE AGENT,
NATIONSBANC MONTGOMERY SECURITIES LLC,
AS LEAD ARRANGER,
AND
THE LENDERS SIGNATORY HERETO
DATED AS OF
FEBRUARY 12, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINITIONS
Section 1.01 TERMS DEFINED ABOVE ................................ 1
Section 1.02 TERMS DEFINED IN CREDIT AGREEMENT .................. 1
Section 1.03 OTHER DEFINITIONAL PROVISIONS ...................... 2
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
Section 2.01 AMENDMENTS TO DEFINITIONS .......................... 2
Section 2.02 AMENDMENTS TO ARTICLE II ........................... 4
Section 2.03 AMENDMENTS TO ANNEXES, SCHEDULES AND EXHIBITS ...... 4
ARTICLE III. CONDITIONS
Section 3.01 LOAN DOCUMENTS ..................................... 4
Section 3.02 REPRESENTATIONS AND WARRANTIES ..................... 4
Section 3.03 NO DEFAULT ......................................... 4
Section 3.04 NO CHANGE .......................................... 4
Section 3.05 SECURITY INSTRUMENTS ............................... 5
Section 3.06 OTHER INSTRUMENTS OR DOCUMENTS ..................... 5
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF
CREDIT AGREEMENT ................................. 5
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY ........... 5
Section 4.03 SUCCESSORS AND ASSIGNS ............................. 5
Section 4.04 COUNTERPARTS ....................................... 5
Section 4.05 NUMBER AND GENDER .................................. 6
Section 4.06 ENTIRE AGREEMENT ................................... 6
Section 4.07 INVALIDITY ......................................... 6
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS ....... 6
Section 4.09 GOVERNING LAW ...................................... 6
-ii-
<PAGE>
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Percentage Shares, Maximum Revolving Credit Amounts,
and Revolver Term Loans
-iii-
<PAGE>
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Second Amendment") executed effective as of the 12th day of February, 1999 (the
"Effective Date"), is by and 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 and to the hereinafter
described Credit Agreement as provided in Section 12.06 of the Credit Agreement
(individually, together with its successors and assigns, a "Lender" and,
collectively, the "Lenders"); and NationsBank, N.A., a national banking
association (in its individual capacity, "NationsBank"), and as administrative
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Borrower, the Administrative Agent and the Lenders are
parties to that certain Amended and Restated Credit Agreement dated as of
September 3, 1998, as amended by the First Amendment to Credit Agreement dated
as of December 31, 1998 (the "Credit Agreement"), pursuant to which the Lenders
agreed to make loans to and extensions of credit on behalf of the Borrower; and
WHEREAS, the Borrower and the Lenders desire to amend the Credit Agreement
in the particulars hereinafter provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01 TERMS DEFINED ABOVE. As used in this Second Amendment, each
of the terms "Administrative Agent", "Borrower", "Credit Agreement", "Effective
Date", "Second Amendment", "Lenders" and "NationsBank" shall have the meaning
assigned to such term hereinabove.
SECTION 1.02 TERMS DEFINED IN CREDIT AGREEMENT. Each term defined in the
Credit Agreement and used herein without definition shall have the meaning
assigned to such term in the Credit Agreement, unless expressly provided to the
contrary.
<PAGE>
SECTION 1.03 OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereby", "herein", "hereinafter", "hereof", "hereto"
and "hereunder" when used in this Second Amendment shall refer to this
Second Amendment as a whole and not to any particular Article, Section,
subsection or provision of this Second Amendment.
(b) Section, subsection and Exhibit references herein are to such
Sections, subsections and Exhibits to this Second Amendment unless
otherwise specified.
ARTICLE II. AMENDMENTS TO CREDIT AGREEMENT
The Borrower, the Administrative Agent, and the Lenders agree that the
Credit Agreement is hereby amended, effective as of the Effective Date, in the
following particulars.
SECTION 2.01 AMENDMENTS TO DEFINITIONS.
(a) The following terms, which are defined in Section 1.02 of the Credit
Agreement, are hereby amended in their entirety to read as follows:
"Agreement" shall mean this Amended and Restated Credit Agreement, as
amended and supplemented by the First Amendment and the Second Amendment, as the
same may from time to time be further amended or supplemented.
"Applicable Margin" shall mean for 3.0% per annum for Eurodollar Loans and
1.0% per annum for Base Rate Loans; provided, however, if a Capital Market Event
has not occurred on or before March 15, 1999, "Applicable Margin" shall mean,
from and after March 15, 1999, 4.0% per annum for Eurodollar Loans and 2.0% per
annum for Base Rate Loans; and further provided, however, on the first
Determination Date (hereinafter defined) following the occurrence of a Capital
Market Event, "Applicable Margin" shall mean the applicable per annum percentage
set forth at the appropriate intersection in the table shown below, based on the
Leverage Ratio, for the four quarterly periods ending on and determined as of
the immediately preceding Quarterly Date:
- --------------------------------------------------------------------------
LEVERAGE RATIO APPLICABLE MARGIN APPLICABLE
FOR EURODOLLAR LOANS MARGIN FOR BASE
RATE LOANS
- --------------------------------------------------------------------------
Less than 3.00 1.750% 0.25%
- --------------------------------------------------------------------------
-2-
<PAGE>
- --------------------------------------------------------------------------
Less than 3.50, but 2.000% 0.50%
greater than or
equal to 3.00
- --------------------------------------------------------------------------
Less than 4.00, but 2.375% 0.75%
greater than or
equal to 3.50
- --------------------------------------------------------------------------
Less than 4.50, but 2.625% 1.00%
greater than or
equal to 4.00
- --------------------------------------------------------------------------
Less than 5.0, but 2.875% 1.25%
greater than or
equal to 4.50
- --------------------------------------------------------------------------
Greater than or 3.250% 1.50%
equal to 5.0
- --------------------------------------------------------------------------
After the occurrence of a Capital Market Event, 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 Administrative Agent pursuant to Section 8.01(h) or Section
9.03(i), subject to review and approval of such computations by the
Administrative 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(h), then the
Applicable Margin shall be the highest percentage amount stated for each Type of
Loan as set forth in the then applicable table until the appropriate certificate
is so delivered.
(b) Section 1.02 of the Credit Agreement is hereby further amended and
supplemented by adding the following new definition where alphabetically
appropriate, which reads in its entirety as follows:
"Second Amendment" shall mean that certain Second Amendment to Amended and
Restated Credit Agreement dated as of February 12, 1999, by and among the
Borrower, the Administrative Agent and the Lenders.
-3-
<PAGE>
SECTION 2.02 AMENDMENTS TO ARTICLE II. Subsections 2.03(d) and (e) of the
Credit Agreement are hereby amended in their entirety to read as follows:
"(d) If a Subordinated Debt Event occurs on or before March 15,
1999, the Percentage Shares, Maximum Revolving Credit Amounts and Revolver
Term Loans of each Lender shall be the amounts set forth on Annex I under
item B thereof.
(e) Unless previously reduced to an amount equal to or less than
$90,000,000 pursuant to Sections 2.03(b), (c) or (d), on March 15, 1999
the Aggregate Maximum Revolving Credit Amounts shall automatically be
reduced to $90,000,000."
SECTION 2.03 AMENDMENTS TO ANNEXES, SCHEDULES AND Exhibits. Annex I to the
Credit Agreement is hereby replaced with Annex I attached hereto. Accordingly,
all references in the Credit Agreement, to Annex I shall be deemed to be
references to Annex I attached to this Second Amendment.
ARTICLE III. CONDITIONS
The enforceability of this Second Amendment against the Administrative
Agent and the Lenders is subject to the satisfaction of the following conditions
precedent:
SECTION 3.01 LOAN DOCUMENTS. The Administrative Agent shall have received
multiple original counterparts, as requested by the Administrative Agent, of
this Second Amendment executed and delivered by a duly authorized officer of the
Borrower, the Administrative Agent, each Guarantor, and each Lender.
SECTION 3.02 REPRESENTATIONS AND WARRANTIES. Except as affected by the
transactions contemplated in the Credit Agreement and this Second Amendment,
each of the representations and warranties made by the Borrower and the
Guarantors in or pursuant to the Security Instruments, including the Credit
Agreement, shall be true and correct in all material respects as of the
Effective Date, as if made on and as of such date. Borrower hereby represents
and warrants to the Administrative Agent that the execution, delivery and
performance of this Second Amendment has been duly authorized and that the
representation in the Credit Agreement as to the enforceability and
authorization thereof shall refer to the Credit Agreement, as amended by this
Second Amendment.
SECTION 3.03 NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
SECTION 3.04 NO CHANGE. No event shall have occurred since September 30,
1998, which, in the reasonable opinion of the Lenders, could have a material
adverse effect on the condition
-4-
<PAGE>
(financial or otherwise), business, operations or prospects of the Borrower or
the Guarantors.
SECTION 3.05 SECURITY INSTRUMENTS. All of the Security Instruments shall
be in full force and effect and provide to the Administrative Agent the security
intended thereby to secure the Indebtedness, as amended and supplemented hereby.
SECTION 3.06 OTHER INSTRUMENTS OR DOCUMENTS. The Administrative Agent or
any Lender or counsel to the Administrative Agent shall receive such other
instruments or documents as they may reasonably request.
ARTICLE IV. MISCELLANEOUS
SECTION 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT AGREEMENT.
Each of the Borrower, the Guarantors, the Administrative Agent, and the Lenders
does hereby adopt, ratify and confirm the Credit Agreement, as amended hereby,
and acknowledges and agrees that the Credit Agreement, as amended hereby, is and
remains in full force and effect.
SECTION 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY. Each Guarantor
hereby expressly (i) acknowledges the terms of this Second Amendment, (ii)
ratifies and affirms its obligations under its Amended and Restated Guaranty
Agreement or Guaranty Agreement, as applicable, dated as of September 3, 1998,
in favor of the Administrative Agent and the Lenders, as amended, supplemented
or otherwise modified (the "Guaranty Agreement"), (iii) acknowledges, renews and
extends its continued liability under its Guaranty Agreement and agrees that its
Guaranty Agreement remains in full force and effect; and (iv) guarantees to the
Administrative Agent and each Lender to promptly pay when due all amounts owing
or to be owing by it under its Guaranty Agreement pursuant to the terms and
conditions thereof.
SECTION 4.03 SUCCESSORS AND ASSIGNS. This Second Amendment shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted pursuant to the Credit Agreement.
SECTION 4.04 COUNTERPARTS. This Second Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts, and all of
such counterparts taken together shall be deemed to constitute one and the same
instrument and shall be enforceable as of the Effective Date upon the execution
of one or more counterparts hereof by the Borrower, the Guarantors, the
Administrative Agent and the Lenders. In this regard, each of the parties hereto
acknowledges that a counterpart of this Second Amendment containing a set of
counterpart execution pages reflecting the execution of each party hereto shall
be sufficient to reflect the execution of this Second Amendment by each
necessary party hereto and shall constitute one instrument.
-5-
<PAGE>
SECTION 4.05 NUMBER AND GENDER. Whenever the context requires, reference
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Words denoting
sex shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the
general but shall be construed as cumulative. Definitions of terms defined in
the singular or plural shall be equally applicable to the plural or singular, as
the case may be, unless otherwise indicated.
SECTION 4.06 ENTIRE AGREEMENT. This Second Amendment constitutes the
entire agreement among the parties hereto with respect to the subject hereof.
All prior understandings, statements and agreements, whether written or oral,
relating to the subject hereof are superseded by this Second Amendment.
SECTION 4.07 INVALIDITY. In the event that any one or more of the
provisions contained in this Second Amendment 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 this Second Amendment.
SECTION 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles or
headings to Articles, Sections, subsections or other divisions of this Second
Amendment or the exhibits hereto, if any, are only for the convenience of the
parties and shall not be construed to have any effect or meaning with respect to
the other content of such Articles, Sections, subsections, other divisions or
exhibits, such other content being controlling as the agreement among the
parties hereto.
SECTION 4.09 GOVERNING LAW. This Second Amendment shall be deemed to be a
contract made under and shall be governed by and construed in accordance with
the internal laws of the State of Texas.
THIS SECOND AMENDMENT AND OTHER LOAN DOCUMENTS EXECUTED BY ANY OF THE
PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION
HEREOF TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT AND 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.
[SIGNATURES BEGIN NEXT PAGE]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the Effective Date.
BORROWER: PENTACON, INC.
By: ____________________________
Name:
Title:
LENDER AND AGENT: NATIONSBANK, N.A.
By: ____________________________
Name:
Title:
LENDERS: PARIBAS
By: ____________________________
Name:
Title:
By: ____________________________
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By: ____________________________
Name:
Title:
Signature Page - 1
<PAGE>
GUARANTORS: ALATEC PRODUCTS, INC.
By: ____________________________
Name:
Title:
AXS SOLUTIONS, INC.
By: ____________________________
Name:
Title:
CAPITOL BOLT & SUPPLY, INC.
By: ____________________________
Name:
Title:
MAUMEE INDUSTRIES, INC.
By: ____________________________
Name:
Title:
SALES SYSTEMS, LIMITED
By: ____________________________
Name:
Title:
Signature Page - 2
<PAGE>
TEXAS INTERNATIONAL AVIATION,
INC.
By: ____________________________
Name:
Title:
PACE PRODUCTS, INC.
By: ____________________________
Name:
Title:
D-BOLT PRODUCTS, INC.
By: ____________________________
Name:
Title:
WEST COAST AERO PRODUCTS
HOLDING CORPORATION, INC.
By: ____________________________
Name:
Title:
ASI AEROSPACE GROUP, INC.
By: ____________________________
Name:
Title:
Signature Page - 3
<PAGE>
POLLARD AVIATION, INC.
By: ____________________________
Name:
Title:
Signature Page - 4
<PAGE>
ANNEX I
LIST OF PERCENTAGE SHARES,
MAXIMUM REVOLVING CREDIT AMOUNTS
AND REVOLVER TERM LOANS
A. So long as a Subordinated Debt Event has not occurred on or before
March 15, 1999:
- --------------------------------------------------------------------------------
PERCENTAGE MAXIMUM REVOLVING REVOLVER
NAME OF LENDER SHARE CREDIT AMOUNT TERM LOANS
- --------------------------------------------------------------------------------
NationsBank, N.A. 80.000% $88,000,000 $32,000,000
- --------------------------------------------------------------------------------
Paribas 8.5714% $9,428,540 $3,428,571.43
- --------------------------------------------------------------------------------
Union Bank of 11.4286% $12,571,460 $4,571,428.57
California, N.A.
- --------------------------------------------------------------------------------
TOTAL 100% $110,000,000 $40,000,000
- --------------------------------------------------------------------------------
B. If a Subordinated Debt Event occurs on or before March 15, 1999:
- --------------------------------------------------------------------------------
PERCENTAGE MAXIMUM REVOLVING REVOLVER
NAME OF LENDER SHARE CREDIT AMOUNT TERM LOANS
- --------------------------------------------------------------------------------
NationsBank, N.A. 60.6594% $39,428,590.00 -0-
- --------------------------------------------------------------------------------
Paribas 8.5714% $5,571,410 -0-
- --------------------------------------------------------------------------------
Union Bank of 30.7692% $20,000,000 -0-
California, N.A.
- --------------------------------------------------------------------------------
TOTAL 100% $65,000,000 -0-
- --------------------------------------------------------------------------------
Annex I-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM (Identify specific financial statements) AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 744
<SECURITIES> 0
<RECEIVABLES> 34,610
<ALLOWANCES> 0
<INVENTORY> 116,390
<CURRENT-ASSETS> 156,857
<PP&E> 10,240
<DEPRECIATION> (2,836)
<TOTAL-ASSETS> 301,353
<CURRENT-LIABILITIES> 78,111
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 116,443
<TOTAL-LIABILITY-AND-EQUITY> 301,353
<SALES> 66,720
<TOTAL-REVENUES> 66,720
<CGS> 45,021
<TOTAL-COSTS> 60,449
<OTHER-EXPENSES> (7)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,102
<INCOME-PRETAX> 3,176
<INCOME-TAX> 1,545
<INCOME-CONTINUING> 1,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,631
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
