AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1999
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PENTACON, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<CAPTION>
<S> <C> <C>
DELAWARE 5085 76-0531585
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
10375 RICHMOND AVE., SUITE 700
HOUSTON, TEXAS 77042
(713) 860-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANTS PRINCIPAL EXECUTIVE OFFICES)
------------------------
BRUCE M. TATEN
SENIOR VICE PRESIDENT, CHIEF ADMINISTRATIVE OFFICER,
CORPORATE SECRETARY AND GENERAL COUNSEL
10375 RICHMOND AVE., SUITE 700
HOUSTON, TEXAS 77042
(713) 860-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
CHRISTOPHER S. COLLINS
ANDREWS & KURTH L.L.P.
600 TRAVIS, SUITE 4200
HOUSTON, TEXAS 77002
(713) 220-4200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective Amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/4% Series B Senior Subordinated
Notes due 2009..................... $100,000,000 100% $100,000,000 $27,800(1)
- ------------------------------------------------------------------------------------------------------------------
Guarantees of 12 1/4% Series B Senior
Subordinated Notes due 2009........ -- -- -- (2)
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(1) Calculated in accordance with Rule 457(f)(2). For purposes of this
calculation, the Offering Price per Series B Note was assumed to be the
stated principal amount of each Series A Note that may be received by the
Registrant in the exchange transaction in which the Series B Notes will be
offered.
(2) Pursuant to Rule 457(n), no registration fee is required for the Guarantees
of the Series B Notes registered hereby.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
* The subsidiaries of Pentacon, Inc. will guarantee the securities being
registered hereby and therefore are also registrants. Information about such
additional registrants appears on the following pages.
<PAGE>
ADDITIONAL REGISTRANTS
ALATEC CABLE HARNESS & ASSEMBLY DIVISION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 5085 95-4635930
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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ALATEC FASTENER AND COMPONENT GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 5085 95-4619561
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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ALATEC INTERNATIONAL SALES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
U.S. VIRGIN ISLANDS 5085 66-0419714
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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ALATEC PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 5085 95-2748943
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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ALATEC RACE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 5085 95-4619562
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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ASI AEROSPACE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5085 33-0453406
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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AXS SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5085 25-1797606
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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<PAGE>
CAPITOL BOLT & SUPPLY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
TEXAS 5085 74-1750631
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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MAUMEE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
INDIANA 5085 35-1458381
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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PACE PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
TEXAS 5085 74-2879730
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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PENTACON AEROSPACE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
NEVADA 5085 76-0602590
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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PENTACON INDUSTRIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
NEVADA 5085 76-0602591
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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POLLARD ACQUISITION CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5085 75-2600681
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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SALES SYSTEMS, LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
PENNSYLVANIA 5085 23-2093530
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
TEXAS 5085 75-0576731
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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TIA INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
U.S. VIRGIN ISLANDS 5085 66-0533077
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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TRACE ALATEC SUPPLY COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 5085 95-4619560
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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WEST COAST AERO PRODUCTS HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5085 13-3555274
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 27, 1999
PROSPECTUS
[Pentacon Logo]
OFFER TO EXCHANGE
$1,000 PRINCIPAL AMOUNT OF 12 1/4% SERIES B NOTES DUE 2009
FOR EACH $1,000 PRINCIPAL AMOUNT OF OUTSTANDING
12 1/4% SERIES A NOTES DUE 2009
($100,000,000 IN PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER
o Expires 5:00 p.m., New York City time, ,
1999, unless extended.
o Subject to certain customary conditions, which we may waive, the
exchange offer is not conditioned upon a minimum aggregate principal
amount of Series A Notes being tendered.
o All outstanding Series A Notes validly tendered and not withdrawn will
be exchanged.
o The exchange offer is not subject to any condition other than that the
exchange offer not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission
("SEC" or "Commission").
THE EXCHANGE NOTES
o The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the existing notes, except that we have
registered the exchange notes with the SEC. In addition, the exchange
notes will not be subject to certain transfer restrictions, and
certain provisions relating to an increase in the stated interest rate
on the existing notes will be eliminated.
o Interest on the exchange notes will accrue from March 30, 1999 at the
rate of 12 1/4% per annum, payable semi-annually in arrears on each
April 1 and October 1, beginning October 1, 1999.
------------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 11 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about Pentacon, Inc. and general economic
conditions, including, among other things:
o our anticipated internal and external growth strategies,
o anticipated trends in our businesses and industry and those of our
customers,
o our ability to control costs,
o our ability to integrate acquired businesses and
o the performance of our significant customers.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
------------------------
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATION OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR
TRANSACTION. IT IS UNLAWFUL TO MAKE OR CAUSE TO BE MADE TO ANY PROSPECTIVE
PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
------------------------
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement under
the Securities Act on Form S-4 with respect to the exchange notes offered by
this prospectus. As allowed by Commission rules, this prospectus does not
contain all the information set forth in the registration statement. With
respect to any contract, agreement or other document filed as an exhibit to the
registration statement, please see the exhibits for a more complete description
of the matter involved.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files periodic reports, proxy statements and
other information with the Commission. Reports, proxy and information
statements, and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can be obtained at
prescribed rates by writing to the Commission, Public Reference Section, 450
Fifth Street N.W., Washington, D.C. 20549. The Commission also maintains a web
site (http://www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, including the Company, that file
electronically with the Commission.
i
<PAGE>
SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. PLEASE READ THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE TERMS "THE COMPANY," "OUR COMPANY" AND "WE" AS USED IN
THIS PROSPECTUS REFER TO PENTACON, INC. AND ITS SUBSIDIARIES AND PREDECESSORS AS
A COMBINED ENTITY, EXCEPT WHERE IT IS CLEAR FROM THE CONTEXT THAT SUCH TERM
MEANS ONLY PENTACON, INC., THE PARENT COMPANY. THE TERM "PENTACON" AS USED IN
THIS PROSPECTUS REFERS TO PENTACON, INC., THE PARENT COMPANY. THE TERMS
"SUBSIDIARIES" AND "OUR SUBSIDIARIES" AS USED IN THIS PROSPECTUS REFER TO
ALL OF PENTACON'S OPERATING SUBSIDIARIES. ON OCTOBER 28, 1998, THE COMPANY
CHANGED ITS FISCAL YEAR END FROM SEPTEMBER 30 TO DECEMBER 31. ACCORDINGLY, IN
SOME INSTANCES YEAR-END FINANCIAL INFORMATION MAY BE PRESENTED AS OF SEPTEMBER
30 AND IN OTHER INSTANCES YEAR-END FINANCIAL INFORMATION (PARTICULARLY PRO FORMA
DATA) MAY BE PRESENTED AS OF DECEMBER 31. INVESTORS SHOULD CAREFULLY CONSIDER
THE INFORMATION UNDER THE HEADING "RISK FACTORS." IN ADDITION, CERTAIN
STATEMENTS INCLUDE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. SEE "FORWARD-LOOKING STATEMENTS."
THE COMPANY
We are the second largest distributor of fasteners and small parts to
original equipment manufacturers (OEMs) in the United States. Fasteners and
small parts are incorporated into a wide variety of end use applications across
a broad spectrum of industries and include screws, bolts, nuts, washers, pins,
rings, fittings, springs, electrical connectors and similar small parts, many of
which are specialized or highly engineered for particular applications. We are
also an industry leader in providing advanced inventory management services for
fasteners and small parts, including procurement, just-in-time delivery, quality
assurance testing, advisory engineering services, component kit production,
small component assembly and electronic data interchange to OEMs. We offer our
customers comprehensive supply chain management solutions designed to reduce
their procurement and management costs and enhance their production
efficiencies. We believe that the fastener distribution industry is in the early
stages of consolidation. We attribute this consolidation primarily to OEMs
focusing on their core competencies, streamlining their production processes and
reducing their overall production costs by reducing the number of their
suppliers and by outsourcing certain inventory management functions to more
efficient providers. Our objective is to differentiate ourselves from our
competitors and benefit from the consolidation of the fastener industry by
leveraging our nationwide distribution network, critical mass, breadth of
product line and sophisticated supply chain management capabilities to expand
our market position.
According to the Freedonia Group, Inc., total sales by fastener
manufacturers in 1996 (the latest period for which we believe industry data is
available) were approximately $8.0 billion domestically and $25 billion
globally. The U.S. fastener market is estimated to have over 2,000 distributors
serving OEMs; however, including our company, we estimate that there are only 9
fastener distributors which have annual sales in excess of $100 million. Our
company was initially formed through the combination of five companies, each of
which has over 25 years of experience in the fastener distribution industry.
Since then, we have acquired four additional companies in separate transactions.
Total U.S. manufacturer sales of fasteners have increased at a compound annual
rate of approximately 4.1% during the four years ended December 1996; however,
we have achieved (on a consolidated basis after giving effect to all of our
acquisitions) an internal compound annual sales growth rate for product sales
and services of approximately 20.0% during the five years ended December 1998.
We believe our strong growth during this period resulted from (1) the expansion
of our product offerings, (2) the expansion of services to additional customer
locations, (3) the delivery of superior customer service and (4) marketing
value-added inventory management services. Assuming all of our acquisitions of
all of our subsidiaries and our initial public offering had occurred on January
1, 1998, we would have had sales of $285 million and earnings before interest,
taxes, depreciation and
1
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amortization of $38 million for the twelve months ended December 31, 1998. See
footnote 1 to "Summary Financial Data."
Although fasteners and other small parts constitute a majority of the total
number of parts needed by OEMs to produce their end products, they represent
only a small fraction of the total materials costs of the end product. We
estimate that, on average, it may cost an OEM up to five times the direct cost
of a fastener to manage its procurement and use in the production process. The
relatively high cost for an OEM to internally manage its procurement and
inventory of fasteners results from (1) the vast number and individual
quantities of fasteners and other small parts needed to be maintained in
inventory to avoid the risk of stockouts, (2) the substantial administrative
cost of purchasing and handling such a large number of small parts, (3) the time
and costs of managing a large number of vendors and (4) the need to perform
fastener quality assurance testing.
We have two principal operating groups: our Aerospace Group and our
Industrial Group. Our Aerospace Group serves the aerospace and aeronautics
industries and our Industrial Group serves a broad base of industrial
manufacturers producing items such as diesel engines, locomotives, power
turbines, motorcycles, telecommunications equipment and refrigeration equipment.
Our largest customers include The Boeing Company, Cummins Engine Company,
General Electric Corporation, Harley-Davidson, Inc., the Hughes Aircraft
subsidiary of General Motors Corporation, Lockheed Martin Corporation and The
Trane Company. Our relationships with these customers have been built over a
period of 8 to 30 years.
BUSINESS STRENGTHS
We believe that we have a strong competitive position because of our
business strengths:
o LONG-TERM CUSTOMER RELATIONSHIPS. We believe our success is closely
linked to our ability to maintain and cultivate customer
relationships. During their operating histories, which have exceeded
on average 25 years, our subsidiaries have established a number of
strong long-term customer relationships. We have had relationships
with our ten largest customers for an average of 18 years. Sales to
these customers represented approximately 40% of our pro forma revenue
for the year ended December 31, 1998. In many cases, these
relationships involve significantly integrating ourselves into our
customers' inventory management systems by providing procurement,
information system and on-site management services (which may include
locating employees at customer sites on a full-time basis) designed to
improve our customers' operating efficiencies. We believe these
relationships will continue to provide significant growth
opportunities as our OEM customers consolidate suppliers and further
outsource inventory management services.
o BREADTH OF PRODUCTS AND SERVICES. We believe OEMs are seeking to
reduce their operating costs by, among other things, decreasing the
number of suppliers they use, often eliminating suppliers which
provide only a limited range of products and services. We distribute
over 100,000 types of fasteners and small parts and provide an
extensive array of supply chain management services. Certain of the
fasteners we provide are only made available to a limited number of
distributors that are recognized as authorized dealers. For example,
we are one of a limited number of U.S. fastener distributors that has
direct access to and can supply the full range of highly engineered
fasteners required by aerospace customers. We believe that the
sophistication and scope of our service offerings combined with the
breadth of our product offerings increase our opportunities for sales
growth and capturing market share.
o NATIONAL PRESENCE; CRITICAL MASS. We operate a national sales and
distribution network with 32 distribution facilities in 14 states. To
serve our aerospace clients, we also maintain sales offices in Europe
and Australia. We believe our national presence provides us with a
significant advantage in competing for business with multi-site OEMs
since smaller
2
<PAGE>
distributors often cannot effectively serve multi-site customers. In
addition, our national presence provides us with opportunities to grow
business with existing multi-site customers by cross-marketing between
sites and providing company-wide procurement and inventory management
solutions. We believe our size and geographical diversity may provide
us with opportunities to form strategic alliances with suppliers which
could lead to purchasing synergies and reliable access to fasteners
and small parts.
o DIVERSIFIED INDUSTRY PLATFORM. We serve approximately 7,500 customers
which operate in a wide range of markets in both the aerospace and
industrial sectors. Principal markets within the aerospace sector
include airframe, defense, space, satellite communications, and
commercial and general aviation. Principal markets within the
industrial sector include industrial machinery, electrical machinery
and electronics, motor vehicles and fabricated metal products. In
calendar 1998, approximately 57% of our revenue was derived from
aerospace customers and 43% was derived from industrial customers.
While our ten largest customers represented approximately 40% of our
pro forma revenues in calendar 1998, no other customer represented
more than 1.2% of our revenues on a pro forma basis in calendar 1998.
Over time we expect that through certain targeted acquisitions, we
will become further diversified with industrial customers providing a
larger share of our revenues. We believe that our diversified customer
mix is a competitive strength and helps us to better balance industry
cycles. By participating in a wide variety of industries, we are also
able to share the best inventory management practices across all of
our industry segments.
o STRONG MANAGEMENT TEAM. Our company benefits from the extensive
experience of our management team. Our executive and operating
management have combined experience of over 100 years in the fastener
and OEM distribution businesses. Collectively, our senior management
team and employees own approximately 45% of our company's stock on a
fully-diluted basis. In addition to our significant industry
experience, our senior executives have collectively completed over 100
merger and acquisition transactions and have extensive public company
experience.
BUSINESS STRATEGY
Our objective is to further our market position as a leading distributor of
fasteners and small parts and to enhance shareholder value. Key elements of our
business strategy include:
o CONTINUE TO DELIVER SUPERIOR CUSTOMER SERVICE. Our customers choose
fastener suppliers based, in significant part, on the quality and
reliability of service. We believe that superior customer service
includes: meeting just-in-time delivery schedules which are critical
to our customers' production processes and providing innovative supply
chain management services, which can help our customers improve their
operating efficiencies and reduce their costs. By providing these
services, we become more integrated into our customers' internal
manufacturing and decision making processes. We believe such
integration leads to higher sales to existing customers and improves
customer retention. In connection with our strategy to continuously
improve customer service, we continue to identify and adopt "best
practices" of each of our subsidiaries that can be successfully
implemented throughout the company. Some of our customers have
recognized our superior customer service. For example, we received
Cummins' awards for 100% On-Time Delivery and for Outstanding
Performance for Cost Reduction and Partnership in Continuous
Improvement, in each of the last four years (1995-1998).
o GROW SALES REVENUE. We seek to grow internally generated revenues by:
capturing market share from smaller competitors who cannot match our
product breadth, services or geographic coverage; pursuing the
expanding opportunities to deliver a wide range of inventory
3
<PAGE>
management services which less sophisticated distributors are unable
to provide; expanding the number of sites to which we provide services
for our existing multi-site customers; and pursuing new multi-site
customers. To leverage our breadth of products and services and our
broad geographic presence, we have developed a national marketing and
sales effort to focus on penetrating existing and new multi-site OEM
accounts.
o CAPITALIZE ON INTEGRATION OPPORTUNITIES. We believe there are
significant opportunities to leverage our capabilities to further
increase our revenues and operating efficiencies. We are initiating
our revenue enhancement strategy by implementing a cross-selling
program to existing customers. Our national footprint is an integral
component of our strategy to sell more integrated inventory management
services and products to multi-site customers nationwide. We will seek
to expand operating margins by realizing purchasing economies and
exploiting operational efficiencies. We believe that centralizing
purchasing activities will allow us to realize volume discounts.
Further, as we integrate our operations we are beginning to realize
further efficiencies through (1) the elimination of redundant
facilities, (2) headcount reductions, (3) plant reconfigurations, (4)
the implementation of common information systems in our Aerospace
Group, (5) administrative savings and (6) reductions in working
capital.
o PURSUE STRATEGIC ACQUISITIONS. We have a disciplined acquisition
program, which targets companies that will help us increase our
presence in markets we currently serve, develop new customer
relationships and expand our range of products and services. Since our
initial public offering in March 1998, we have increased our annual
pro forma revenues from $168 million to $285 million for the year
ended December 31, 1998, through our acquisition of four additional
companies: Pace Products, Inc., D-Bolt Company, Inc., Texas
International Aviation, Inc. and ASI Aerospace Group Inc. The addition
of Texas International Aviation, Inc. and ASI Aerospace Group Inc.
added significant product depth and market share in the aerospace
fastener distribution industry and resulted in our Aerospace Group
becoming one of the premier aerospace fastener distribution and
related service companies in the United States. We believe there are a
significant number of acquisition candidates and that we are regarded
as an attractive acquiror because of our position as an industry
leader and the potential for our targets to realize improved growth
and profitability as part of our company. All of our acquisitions have
been immediately accretive to earnings and we expect future
acquisitions also will be immediately accretive.
4
<PAGE>
THE EXCHANGE OFFER
Registration Rights Agreement...... We sold the existing notes on March
30, 1999 to the initial purchasers
under a purchase agreement dated
March 25, 1999. Pursuant to the
purchase agreement, Pentacon, our
subsidiaries who guaranteed our
obligations under the existing notes
and the initial purchasers entered
into a registration rights agreement
which granted the holders of the
existing notes certain exchange and
registration rights. This exchange
offer is intended to satisfy certain
of our obligations under the
registration rights agreement.
The Exchange Offer................. We are offering to exchange up to
$100,000,000 of the exchange notes
for up to $100,000,000 of the
existing notes. Existing notes may be
exchanged only in $1,000 increments.
The terms of the exchange notes are
identical in all material respects to
the existing notes except for certain
transfer restrictions and
registration rights relating to the
existing notes and certain provisions
relating to an increase in the stated
interest rate on the existing notes.
Resale............................. We believe that you will be able to
freely transfer the exchange notes
without registration or any
prospectus delivery requirement;
however, certain broker-dealers and
certain of our affiliates may be
required to deliver copies of this
prospectus if they resell any
exchange notes.
Expiration Date.................... 5:00 p.m., New York City time, on
, 1999, unless the
exchange offer is extended. You may
withdraw existing notes you tender
pursuant to the exchange offer at any
time prior to ,
1999. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
Accrued Interest on the Exchange
Notes and the Existing Notes..... The exchange notes will bear interest
at a rate of 12 1/4% per annum,
payable semi-annually on April 1 and
October 1 of each year, commencing
October 1, 1999. Holders of exchange
notes of record at the close of
business on the March 15 and
September 15 immediately preceding
such interest payment date will
receive interest accruing from the
most recent date to which interest
has been paid. The interest rate on
the exchange notes will increase to
12 3/4% per annum if our EBITDA for
each of the quarters ended March 31,
1999 and June 30, 1999 is not at
least $7.25 million.
Termination of the Exchange Offer.. We may terminate the exchange offer
if we determine that our ability to
proceed could be materially impaired
due to the occurrence of certain
conditions. We do not expect any of
the foregoing conditions to occur,
although there can be no assurance
that such conditions will not occur.
You will have certain rights against
us under the registration rights
agreement should we fail to
consummate the exchange offer. See
"The Exchange Offer --
Termination."
Procedures for Tendering Existing
Notes............................ If you wish to accept the exchange
offer, sign and date the letter of
transmittal in accordance with the
instructions, and deliver the letter
of transmittal, along with the
existing notes and any other required
documentation, to the exchange agent.
By executing the letter of
transmittal, you will represent to us
that, among other things:
5
<PAGE>
o the exchange notes you receive
will be acquired in the ordinary
course of your business,
o you have no arrangement with
any person to participate in the
distribution of the exchange
notes, and
o you are not an affiliate of
Pentacon or, if you are an affiliate,
you will comply with the
registration and prospectus
delivery requirements of the
Securities Act to the extent
applicable.
Special Procedures for Beneficial
Owners........................... If you are a beneficial owner whose
existing notes are registered in the
name of a broker, dealer, commercial
bank, trust company or other nominee
and wish to tender such existing
notes in the exchange offer, please
contact the registered holder as soon
as possible and instruct them to
tender on your behalf and comply with
our instructions set forth elsewhere
in this prospectus.
Guaranteed Delivery
Procedures....................... If you wish to tender your existing
notes, you may, in certain instances,
do so according to the guaranteed
delivery procedures set forth
elsewhere in this prospectus under
"The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights.................. You may withdraw existing notes you
tender pursuant to the exchange offer
by furnishing a written or facsimile
transmission notice of withdrawal to
the exchange agent containing the
information set forth in "The
Exchange Offer -- Withdrawal of
Tenders."
Acceptance of Existing Notes and
Delivery of Exchange Notes....... Subject to certain conditions (as
summarized above in "Termination of
the Exchange Offer" and described
more fully in "The Exchange
Offer -- Termination"), we will
accept for exchange any and all
existing notes that are properly
tendered in the exchange offer prior
to the expiration date. See "The
Exchange Offer -- Procedures for
Tendering." The exchange notes
issued pursuant to the exchange offer
will be delivered promptly following
the expiration date.
Exchange Agent..................... State Street Bank and Trust Company,
the trustee under the indenture, is
serving as exchange agent in
connection with the exchange offer.
The mailing address of the exchange
agent and the address for deliveries
by overnight courier is State Street
Bank and Trust Company, Two
International Place, P.O. Box 778,
Boston, Massachusetts 02110, and the
address for hand deliveries is State
Street Bank and Trust Company, Two
International Place, 4th Floor,
Boston, Massachusetts 02110. For
assistance and requests for
additional copies of this Prospectus,
the Letter of Transmittal or the
Notice of Guaranteed Delivery, the
telephone number for the exchange
agent is (617) 664-5587, and the
facsimile number for the exchange
agent is (617) 664-5290.
SEE "THE EXCHANGE OFFER" FOR MORE DETAILED INFORMATION CONCERNING THE
TERMS OF THE EXCHANGE OFFER.
6
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
Issuer................................... Pentacon, Inc.
10375 Richmond Avenue, Suite 700
Houston, Texas 77042
Tel: (713) 860-1000
Notes Offered............................ $100,000,000 aggregate principal
amount of 12% Senior Subordinated
Notes due 2009.
Maturity................................. April 1, 2009.
Interest Payment Dates................... April 1 and October 1 commencing
October 1, 1999.
Guarantees............................... Each of our subsidiaries will fully
and unconditionally guarantee the
exchange notes on a senior
subordinated basis. Future
subsidiaries also may be required to
guarantee the exchange notes on a
senior subordinated basis. See
"Description of the
Notes -- Subsidiary Guarantees."
Ranking.................................. The exchange notes will be unsecured
senior subordinated obligations and
will be subordinated to all our
existing and future senior
indebtedness. The exchange notes will
rank equally with all our other
existing and future senior
subordinated indebtedness and will
rank senior to all our subordinated
indebtedness. The guarantees will be
unsecured senior subordinated
obligations and will be subordinated
to all existing and future senior
indebtedness of the guarantors. The
terms "senior indebtedness" and
"subordinated indebtedness" are
defined in the "Description of the
Notes -- Certain Definitions"
section of this prospectus.
Assuming the issuance of the existing
notes and our use of the net proceeds
occurred on December 31, 1998, we
would have had $41.4 million of
senior indebtedness outstanding and
our subsidiaries would have had $3.5
million of senior indebtedness
outstanding, excluding their
guarantee of the $41.4 million of our
senior indebtedness.
Optional Redemption...................... We may redeem the exchange notes, in
whole or in part, at any time on or
after April 1, 2004, at the
redemption prices set forth in this
prospectus. See "Description of the
Notes -- Optional Redemption."
Optional Redemption Upon Certain
Equity Offerings....................... On or before April 1, 2002, we may
redeem up to 35% of the exchange
notes with the net proceeds of
certain equity offerings at 112.25%
of the principal amount thereof, plus
accrued interest, if at least 65% of
the aggregate principal amount of the
exchange notes originally issued
remains outstanding. See
"Description of the
Notes -- Optional Redemption."
7
<PAGE>
Change of Control........................ Upon certain change of control
events, each holder of exchange notes
may require us to repurchase all or a
portion of its notes at a purchase
price equal to 101% of the principal
amount thereof, plus accrued
interest. Our ability to repurchase
the exchange notes upon a change of
control event will be limited by the
terms of our debt agreements. In
addition, we cannot assure you that
we will have the financial resources
to repurchase the exchange notes. See
"Description of the Notes -- Change
of Control."
Certain Covenants........................ The indenture governing the exchange
notes will contain covenants that,
among other things, will limit our
ability and the ability of certain of
our subsidiaries to:
o incur additional indebtedness,
o pay dividends on, redeem or
repurchase our capital stock,
o make investments,
o engage in transactions with
affiliates,
o create certain liens,
o in the case of certain of our
subsidiaries, guarantee
indebtedness,
o sell assets,
o sell capital stock of
restricted subsidiaries, and
o consolidate, merge or transfer
all or substantially all our
assets and the assets of our
subsidiaries on a consolidated
basis.
These covenants are subject to
important exceptions and
qualifications, which are described
in the "Description of the Notes"
section of this prospectus.
Risk Factors............................. See "Risk Factors" for a discussion
of factors you should carefully
consider before deciding to invest in
the exchange notes.
Certain Tax Considerations............... For federal income tax purposes, the
exchange notes will be treated as
having been issued with original
issue discount equal to the
difference between the issue price of
the existing notes and their stated
redemption price at maturity. As a
result, holders may be required to
include amounts in income prior to
the receipt of cash attributable
thereto. See "Certain United States
Federal Income Tax Considerations."
SEE "DESCRIPTION OF THE NOTES" FOR MORE DETAILED INFORMATION CONCERNING
THE TERMS OF THE EXCHANGE NOTES.
8
<PAGE>
SUMMARY FINANCIAL DATA
Pentacon was incorporated in March 1997. Simultaneously with the closing of
the initial public offering of its common stock, in March 1998, Pentacon
acquired in separate transactions (the "Initial Acquisitions") five
businesses: 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").
For financial reporting purposes, Alatec has been identified as the accounting
acquiror. Accordingly, the historical financial statements of Alatec have become
the historical financial statements of Pentacon. Since March 1998, Pentacon has
acquired in separate transactions (the "Subsequent Acquisitions" and, together
with the Initial Acquisitions, the "Acquisitions") four additional businesses:
Pace Products, Inc., D-Bolt Company, Inc., Texas International Aviation, Inc.
and ASI Aerospace Group, Inc. The companies acquired in the Acquisitions are
referred to as the "Acquired Businesses."
The pro forma consolidated financial data give effect to all the
Acquisitions by Pentacon as if such acquisitions were consummated as of the
beginning of the periods presented, but do not give effect to the issuance and
sale of the notes, except where noted below. The pro forma results of operations
are not necessarily indicative of the results that would have occurred had the
Acquisitions been consummated as of October 1, 1996 or that might be attained in
the future.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
HISTORICAL PRO FORMA(1) ------------ -------------
----------- ---------------------------------- THREE LAST TWELVE
FISCAL TWELVE FISCAL THREE MONTHS MONTHS MONTHS
YEAR MONTHS YEAR ENDED ENDED ENDED
ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31,
9/30/98(2) 9/30/97 9/30/98 1997 1998 1998
----------- --------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 141,078 $ 223,673 $ 283,794 $ 65,345 $ 66,720 $ 285,169
Cost of sales........................ 91,026 150,652 188,813 43,844 45,021 189,990
----------- --------- --------- ------------ ------------ -------------
Gross profit..................... 50,052 73,021 94,981 21,501 21,699 95,179
Operating expenses................... 36,524 49,485 59,746 15,161 14,575 59,160
Goodwill amortization................ 1,111 3,407 3,400 853 853 3,400
----------- --------- --------- ------------ ------------ -------------
Operating income................. 12,417 20,129 31,835 5,487 6,271 32,619
Other (income) expense, net.......... (91) (30) (44) 77 (7) (128)
Interest expense..................... 2,448 10,248 10,467 2,555 3,102 11,014
----------- --------- --------- ------------ ------------ -------------
Income before taxes.............. 10,060 9,911 21,412 2,855 3,176 21,733
Income taxes......................... 5,373 5,461 10,172 1,520 1,545 10,242
----------- --------- --------- ------------ ------------ -------------
Net income....................... $ 4,687 $ 4,450 $ 11,240 $ 1,335 $ 1,631 $ 11,491
=========== ========= ========= ============ ============ =============
OTHER DATA:
EBITDA(3)............................ $ 14,306 $ 25,369 $ 36,862 $ 6,743 $ 7,765 $ 37,884
Depreciation and amortization........ 1,798 5,210 4,983 1,333 1,487 5,137
Capital expenditures................. 3,097 952 4,296 355 795 4,736
SELECTED RATIOS:
As adjusted long-term debt (including
current maturities) to
EBITDA(3)(4)....................... 3.8x
EBITDA to as adjusted interest
expense(3)(4)...................... 2.4x
Ratio of earnings to fixed charges(5)
Actual........................... 4.4x 2.0x
Pro forma(6)..................... 3.0x 1.2x
Supplemental pro forma(7)........ 1.9x
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------
HISTORICAL AS ADJUSTED(8)
---------- --------------
<S> <C> <C>
(Dollars in thousands)
BALANCE SHEET DATA
Total assets......................... $ 301,353 $304,853
Long-term debt (including current
maturities......................... 138,589 142,089
Stockholders' equity................. 116,610 116,610
</TABLE>
- ------------
(1) The pro forma income statement data assumes that the Acquisitions and our
initial public offering occurred at the beginning of the period presented
(except for Capitol, whose historical results for the twelve months from
September 1, 1996 to August 31, 1997 were used for the twelve months ended
September 30, 1997 pro forma information). These pro forma results are not
necessarily indicative of the results we would have obtained had these
events actually then occurred or of our future results. During the periods
presented above, the Acquired Businesses were not under common control or
management and, therefore, the data presented may not be comparable to or
indicative of our post-Acquisition results. The pro forma income statement
data is based on available information and certain assumptions that
management deems appropriate and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
prospectus. Neither the potential cost savings from consolidating certain
operational and administrative functions nor the costs of corporate
overhead, other than salaries of executive officers, nor those other costs
and savings actually experienced after the Acquisitions have been included
in the pro forma financial information. In addition, the pro forma
information may not be indicative of actual 1999 results of operations. See
"Risk Factors -- Concentration of Customer Base; Factors Relating to
Certain Customers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Introduction."
(2) On October 28, 1998, we changed our fiscal year end from September 30 to
December 31.
(3) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is not intended to represent cash flow in accordance with generally accepted
accounting principles and does not represent the measure of cash available
for distribution. EBITDA is commonly used to analyze companies on the basis
of operating performance, leverage and liquidity, and provides additional
information for evaluating our ability to make payments on the notes. EBITDA
is not intended as an alternative to earnings from continuing operations or
net income.
(4) Gives effect to the refinancing of a portion of our historical debt with the
net proceeds received from the issuance and sale of the existing notes.
(5) For purposes of this ratio, "earnings" consist of earnings before income
taxes and fixed charges, and "fixed charges" consist of interest expense,
the interest portion of rental expense and amortization of debt issuance
costs.
(6) Gives effect to the refinancing of a portion of our historical debt with the
net proceeds received from the offering of the existing notes.
(7) Gives effect to the businesses we have acquired as if such acquisitions were
consummated as of the beginning of the periods presented and to the
refinancing of a portion of our historical debt with the net proceeds
received from the offering of the existing notes.
(8) The as adjusted balance sheet data adjusts for the issuance and sale of the
existing notes and the application of the net proceeds therefrom to reduce
borrowings under our bank credit facility. The as adjusted amounts do not
reflect an approximately $1.4 million, net of tax, write-off of debt
issuance costs on our bank credit facility as a result of the restructuring
and partial extinguishment of the bank credit facility, which has been
recorded in the quarter ended March 31, 1999. Such amounts may be reborrowed
to the extent described in "Description of Bank Credit Facility" and "Use
of Proceeds."
10
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION
IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN THE NOTES.
SIGNIFICANT INDEBTEDNESS
We will be highly leveraged after the exchange offer. Assuming the issuance
of the existing notes and our use of the net proceeds had occurred on December
31, 1998 or February 28, 1999, on such dates we would have had $142.1 million
and $149.4 million, respectively, of total consolidated debt. Assuming the
issuance of the existing notes and the application of the net proceeds had
occurred on December 31, 1998 or February 28, 1999, on such dates we estimate we
would have had the ability to borrow up to an additional $32.1 million and $34.1
million, respectively, under our bank credit facility (based on borrowing base
limitations of $73.5 million and $82.9 million, respectively) and we may incur
other indebtedness in the future. Subject to borrowing base limitations, in the
future we will have borrowing capacity of $85.0 million under our bank credit
facility. See "Description of the Notes" and "Description of Bank Credit
Facility." Assuming the Acquisitions, the issuance of the existing notes and
our use of the net proceeds had occurred on January 1, 1998, our ratio of
earnings to fixed charges for the fiscal year ended December 31, 1998 would have
been 1.9:1.0.
Our high level of indebtedness could have important consequences to
noteholders, such as:
o limiting our ability to obtain additional financing to fund our growth
strategy, working capital, capital expenditures, debt service
requirements or other purposes;
o limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds
to pay debt service;
o limiting our ability to compete with others who are not as highly
leveraged; and
o limiting our ability to react to changing market conditions, changes
in our industry and in our customers' industries and economic
downturns.
Our ability to satisfy our debt obligations will depend upon our future
operating performance. Prevailing economic conditions and financial, business
and other factors, many of which are beyond our control, will affect our ability
to make payments on our debt obligations. If we can not generate sufficient cash
from operations to meet our other obligations, we may need to refinance or sell
assets. We can not assure you that our business will generate sufficient cash
flow, or that we will be able to obtain sufficient funding to make the payments
required by all of our debt.
SUBORDINATION OF THE EXCHANGE NOTES AND THE GUARANTEES; UNSECURED STATUS OF THE
EXCHANGE NOTES AND THE GUARANTEES
The exchange notes will be subordinated to all of our existing and future
senior indebtedness and the guarantees will be subordinated to all existing and
future senior indebtedness of the guarantors. Assuming the issuance of the
existing notes and our use of the proceeds had occurred on December 31, 1998 or
February 28, 1999, on such dates we would have had $44.9 million and $52.2
million, respectively, of consolidated senior indebtedness outstanding. Pentacon
and the guarantors expect to incur additional senior indebtedness under our bank
credit facility and otherwise. See "Description of Bank Credit Facility." In
the event of a bankruptcy, liquidation or dissolution of Pentacon or any
guarantor, the assets available to pay obligations on the notes or the
guarantees, as applicable, will only be available after all payments had been
made on senior indebtedness. We can not assure you that sufficient assets would
remain to make any payments on the exchange notes or the guarantees. In
addition, certain events of default under certain senior indebtedness would
prohibit Pentacon and the guarantors from making any payments on the exchange
notes and the guarantees. The term "senior indebtedness" is defined in the
"Description of the Notes -- Certain Definitions" section of this prospectus.
11
<PAGE>
The exchange notes will not be secured by any of Pentacon's assets and the
guarantees will not be secured by any of the assets of the guarantors. Our
obligations under our bank credit facility are secured by substantially all of
our assets and the assets of the guarantors. If Pentacon or a guarantor becomes
insolvent or is liquidated, or if payment under our bank credit facility is
accelerated, the lenders under our bank credit facility would have a claim on
such assets before the holders of the exchange notes. See "Description of Bank
Credit Facility."
HOLDING COMPANY STRUCTURE; GUARANTEES MAY BE UNENFORCEABLE DUE TO FRAUDULENT
CONVEYANCE STATUTES
Pentacon is a holding company. Our subsidiaries conduct all of our
consolidated operations and own substantially all of our consolidated assets.
Consequently, our cash flow and our ability to meet our debt service obligations
depend upon the cash flow of our subsidiaries and the payment of funds by the
subsidiaries to us in the form of loans, dividends or otherwise. Their ability
to make any payments will depend on their earnings, the terms of their
indebtedness, tax considerations and legal restrictions. In addition, as
described below, the guarantees may be unenforceable under certain
circumstances. In such event, and to the extent one of our future subsidiaries
is not a guarantor, all claims against such subsidiaries will need to be
satisfied before funds will be available to Pentacon to meet its obligations.
While our existing subsidiaries are obligated to guarantee the exchange notes,
future subsidiaries may not become guarantors.
Although laws differ among various jurisdictions, in general, under
fraudulent conveyance laws, a court could subordinate or avoid any guarantee if
it found that:
o the guarantee was incurred with actual intent to hinder, delay or
defraud creditors, or
o the guarantor did not receive fair consideration or reasonably
equivalent value for the guarantee and the guarantor was any of the
following:
-- insolvent or was rendered insolvent because of the guarantee,
-- engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital, or
-- intended to incur, or believed that it would incur, debts beyond
its ability to pay at maturity.
If a court avoided a guarantee as a result of fraudulent conveyance, or held it
unenforceable for any other reason, noteholders would cease to have a claim
against the guarantor and would be creditors solely of Pentacon and the
remaining guarantors.
RESTRICTIONS IN DEBT AGREEMENTS
The operating and financial restrictions and covenants in our debt
agreements, including the bank credit facility and the indenture governing the
notes, may adversely affect our ability to finance future operations or capital
needs or to engage in other business activities. Our bank credit facility
includes covenants that will require us to meet certain financial ratios and
financial tests, including a maximum total debt to Adjusted EBITDA (as defined
therein) ratio, a maximum senior debt to Adjusted EBITDA ratio, a minimum fixed
charge coverage ratio, a minimum net worth test and a maximum capital
expenditures test. Such covenants, required ratios and tests may require that we
take action to reduce debt or to act in a manner contrary to our business
objectives. If we breach any of these restrictions or covenants or suffer a
material adverse change which restricts our borrowing ability under our bank
credit facility, we would be unable to borrow funds thereunder without a waiver.
A breach could cause a default under the exchange notes and our other debt. Our
indebtedness may then become immediately due and payable. We may not have or be
able to obtain sufficient funds to make these accelerated payments, including
payments on the exchange notes. See "Description of Bank Credit Facility" and
"Description of the Notes."
12
<PAGE>
CONCENTRATION OF CUSTOMER BASE; FACTORS RELATING TO CERTAIN CUSTOMERS
A significant portion of our revenue has historically been generated from a
limited number of customers, although not necessarily from the same customers
year to year. For the year ended December 31, 1998, our ten largest customers
collectively accounted for approximately 40% of our pro forma revenues, of which
our four largest customers represented approximately 30% of these revenues. We
estimate that The Boeing Company and Cummins Engine Company (excluding our sales
to subcontractors to each of them) would have accounted for approximately 10%
and 12%, respectively, of our pro forma revenues for the year ended December 31,
1998. Our ability to maintain these relationships is dependent upon our
customers' continued satisfaction with the price and quality of our products and
services. There can be no assurance that we will maintain our relationships with
these or our other customers. The loss of these customers or any other
significant customer for any reason or a reduction in business with a
significant customer for any reason could result in a material loss of revenue
or otherwise have a material adverse effect on our results of operations and
financial condition. In addition, from time to time, certain of our customers
seek to implement competitive bidding and other procedures designed to reduce
prices for fasteners and other small parts, which may lower our gross margins on
sales to these customers. We will seek to mitigate any adverse impact to gross
margins in the future through our own cost reduction initiatives and by
providing additional services to these customers, provided there can be no
assurances as to the timing or the extent to which such mitigating efforts will
offset lower margins.
We expect our 1999 results of operations to be adversely affected by
certain factors relating to The Boeing Company and Cummins Engine Company (as
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Introduction"). We estimate that, in calendar 1998,
Boeing and its subcontractors accounted for approximately 20% of our pro forma
revenues. The Boeing Company's commercial airframe operations and related
subcontractors built up excess fastener inventory in 1998 in anticipation of
production levels for certain aircraft which are now expected not to
materialize. On December 1, 1998, Boeing announced that it will reduce its
planned production rates of certain commercial aircraft in 2000 by 20% in
response to the economic crisis in Asia. As a result of these factors, Boeing
and related subcontractors have reduced their fastener orders compared with
historical periods and we expect such reductions in orders from these factors to
continue through the third quarter of 1999. Our operating results have been and
will be adversely affected by these developments. While we expect our fastener
shipments to reach levels commensurate with Boeing's production levels in the
third quarter of calendar 1999, we expect these levels to be moderately lower
than those experienced in 1998 absent further developments, but there can be no
assurances that such will be the case. In addition, on February 23, 1999, Boeing
announced that a number of its projects and product lines (including certain
commercial airplane programs) were underperforming (i.e., providing negative
returns or breaking even on an economic value added basis). It announced that it
plans to seek to improve the profitability of certain of its underperforming
programs (including through cost cutting and maintaining lower inventory levels)
and that it may abandon or divest itself of those that cannot be satisfactorily
improved. At this time, we do not know Boeing's detailed plans and cannot
determine the impact of this most recent announcement on our business. A
significant loss of business from Boeing and its subcontractors or a significant
reduction in the gross margin percentages earned on sales to them may have a
material adverse effect on our financial condition and results of operations.
See "Business -- Customers" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CUSTOMER INDUSTRY RISKS AND CYCLICALITY
We sell a significant number of our products to customers in industries
that experience significant fluctuations in demand because of changes in
economic conditions, consumer demand and other factors beyond our or their
control. As a result, we may not be able to increase or maintain our level of
sales in periods of economic stagnation or downturn in our customers'
industries. For example, approximately 26% of our pro forma revenues in calendar
1998 was derived from the commercial
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airframe industry. In the past, the commercial airframe industry has been
adversely affected by a number of factors, including increased fuel and labor
costs and intense price competition. We expect that the cyclicality of the
commercial airframe industry could adversely affect our commercial airframe
fastener sales and any economic slowdown could adversely affect our industrial
fastener sales in the future.
LIMITED COMBINED OPERATING HISTORY
Prior to March 10, 1998, we conducted no operations other than in
connection with our initial public offering and the acquisition of the original
five founding companies. Since March 10, 1998, we have acquired four more
companies, which increased our annual pro forma revenues from $168 million to
$285 million for the year ended December 31, 1998. Our senior management group
has been working together for only a short time and there are no assurances that
the management group will be able to effectively manage the combined entity. The
pro forma combined financial data contained in this prospectus cover periods
when our subsidiaries were not under common control and may not be indicative of
our future financial or operating results. Prior to the acquisition of our
businesses, our subsidiaries were each private companies with different
objectives, management information systems and accounting and other standards.
Our subsidiaries have operated separately and on a decentralized basis. We have
begun to centralize a number of administrative functions and to seek uniform
reporting and operating standards among our subsidiaries. Management at our
subsidiaries are still adapting to those standards which are designed to achieve
operating synergies and result in cost savings. There are no assurances that
such integration activities will achieve these results.
RISKS RELATED TO ACQUISITION STRATEGY
A disciplined acquisition program is part of our business strategy. The
success of this program in the future will depend upon finding strategic
acquisition candidates at attractive prices. We expect to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
and lead to higher acquisition prices. We may not be able successfully to
integrate newly acquired businesses without unplanned costs, delays or other
difficulties and we may not be able to achieve our targeted synergies and cost
savings.
We may need to finance our acquisitions with debt and/or equity. Assuming
the issuance of the existing notes and the application of the net proceeds had
occurred on December 31, 1998 or February 28, 1999, we would have had
approximately $32.1 million and $34.1 million, respectively, available for
borrowing under our bank credit facility (based on borrowing base limitations of
$73.5 million and $82.9 million, respectively), all of which would be available
for acquisitions. Any borrowings incurred to finance acquisitions could mature
prior to the exchange notes and could reduce the cash available to make payments
on the exchange notes. We may be limited in our ability to issue equity if our
common stock does not maintain a sufficient market value or if potential
acquisition candidates are unwilling to accept common stock in exchange for the
sale of their businesses. In addition, we may not be able to obtain any
additional financing on terms that are acceptable to us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
INTEGRATION OF COMPUTER SYSTEMS AND RELIANCE ON COMPUTER SYSTEMS
Our subsidiaries operated as independent companies prior to their
acquisition. We intend to coordinate and integrate the management and
information systems (MIS) of our subsidiaries. Our Aerospace Group is in the
process of migrating to an information system developed by DYMAX Products Inc.,
which is expected to be completed by July 1999. This system should facilitate
product ordering, pricing and reporting among the companies in our Aerospace
Group. We are also in the process of planning the integration of MIS systems
within our Industrial Group. Although we may not immediately implement a single
reporting system in our Industrial Group, we have identified various
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integration opportunities which we expect will enable our Industrial Group to
obtain certain operating and reporting efficiencies.
Our MIS systems are used for ordering products, recording and analyzing
financial results, controlling inventory and performing other important
functions. We may not be able to coordinate and integrate these systems
economically. We also may experience delays, disruptions and unanticipated
expenses in so doing. Any such event could have a material adverse effect on our
business, financial condition and results of operations. We will not be able
fully to achieve certain contemplated operating efficiencies and competitive
advantages until we have fully coordinated and integrated these systems. Until
we have done so, which may not occur for several years, we will rely primarily
on the separate systems of our operating subsidiaries. After these systems are
integrated, we will rely heavily on them in our daily operations. As a result,
any interruption in the operation of these systems may have a material adverse
effect on our business.
RELIANCE ON KEY PERSONNEL
We depend heavily upon the continuing efforts of our executive officers,
group managers and the senior management of our operating subsidiaries. In
addition, we may depend on the senior management of any significant business we
acquire in the future. If any key personnel do not continue in their management
roles, our business, financial condition and results of operations could be
materially impaired until we are able to retain a replacement. See
"Management."
DEPENDENCE ON SUPPLIERS
Although no one supplier accounted for more than 5% of total products
purchased in the year ended December 31, 1998, certain types of specialized
fasteners are available from only a limited number of sources. If those sources
became unavailable to us, we would not be able to continue to sell such
fasteners unless we could locate an alternative supplier. Our inability to
supply certain types of fasteners may adversely affect our sales and our
relationship with the customers requiring such fasteners.
COMPETITION
We do business in a highly fragmented and competitive industry. Competition
in our industry is based primarily on breadth of products, quality and breadth
of services, price and geographic proximity. We compete with a large number of
fastener distributors on a regional and local basis. Some of our competitors may
have greater financial resources than we do and/or established customer
relationships with certain customers for whose business we compete. See
"Business -- Competition."
YEAR 2000
We are in the process of evaluating and resolving the potential impact of
the year 2000 problem on our computerized information systems and other
infrastructure that contain 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 our programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures.
We believe that substantially all of our computerized information systems
and other infrastructure that contain embedded technology are already year 2000
ready or will be modified so as to become year 2000 ready by mid-1999. Based on
preliminary information, the incremental costs of addressing potential problems
are not currently expected to have a material adverse impact on our financial
condition or results of operations. However, if we, our customers or our vendors
are unable to resolve such processing issues in a timely manner or have not
identified all of the year 2000 associated issues, our ability to conduct
business may be materially adversely affected and our financial condition and
results of operations could be materially adversely impacted.
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Through December 31, 1998, we had spent $0.1 million in costs that are
directly attributable to addressing year 2000 issues. We estimate that we will
incur $0.3 million in additional costs during calendar 1999 relating to year
2000 issues. We expect to 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 our aerospace group. We believe that
these costs are not, for the most part, directly related to year 2000 issues,
but instead are for a new system needed to integrate our operations in the
aerospace business.
We are developing and evaluating contingency plans in the event that we do
not complete all of our remediation plans in a timely manner or that third
parties who provide us with goods or services 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.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION
Our operations are subject to a number of federal, state and local
regulations relating to the protection of the environment and to work place
health and safety. In addition, the Fastener Quality Act, when implemented, will
impose additional tracking, marking and testing requirements, and may require
accreditation of our laboratories, that could result in operating costs that
could adversely affect our business, financial condition and results of
operations. See "Business -- Government Regulation."
POSSIBLE INABILITY TO PURCHASE THE EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon certain change of control events, each holder of exchange notes may
require us to repurchase all or a portion of its exchange notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued interest. Our
ability to repurchase the exchange notes upon a change of control event could be
limited by the terms of our debt agreements. Upon a change of control event, we
may be required to repay the outstanding principal and any accrued interest on
any other amounts owed by us under our bank credit facility. We cannot assure
you that we would be able to repay amounts outstanding under our bank credit
facility or obtain necessary consents under such facility to repurchase the
exchange notes. Any requirement to offer to purchase any outstanding exchange
notes may result in us having to refinance our outstanding indebtedness, which
we may not be able to do. In addition, even if we were able to refinance such
indebtedness, such financing may be on terms unfavorable to us. The term
"Change of Control" is defined in "Description of the Notes -- Certain
Definitions."
A TRADING MARKET FOR THE EXCHANGE NOTES MAY NOT DEVELOP
There has not been an established trading market for the notes. Although
each initial purchaser has informed us that it currently intends to make a
market in the exchange notes, it has no obligation to do so and may discontinue
making a market at any time without notice.
We do not intend to apply for listing of the exchange notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System.
The liquidity of any market for the exchange notes will depend upon the
number of holders of the exchange notes, our performance, the market for similar
securities, the interest of securities dealers in making a market in the
exchange notes and other factors. As a result, you cannot be sure than an active
trading market will develop for the exchange notes.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The existing notes were sold by the Company on March 30, 1999 to the
initial purchasers, Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities
LLC and Sanders Morris Mundy Inc., pursuant to a purchase agreement. As a
condition to the purchase of the existing notes by the initial purchasers, the
Company and the guarantors entered into a registration rights agreement with the
initial purchasers, which requires, among other things, that promptly following
the issuance and sale of the existing notes, the Company and the guarantors file
with the Commission the registration statement with respect to the exchange
notes, use their reasonable best efforts to cause the registration statement to
become effective under the Securities Act and, upon the effectiveness of the
registration statement, offer to the holders of the existing notes the
opportunity to exchange their existing notes for a like principal amount of
exchange notes, which will be issued without a restrictive legend and may be
reoffered and resold by the holder without restrictions or limitations under the
Securities Act. A copy of the registration rights agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part. The
term "holder" with respect to the exchange offer means any person in whose
name existing notes are registered on the Company's books.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and subject
to the immediately following sentence, the Company believes that the exchange
notes issued pursuant to the exchange offer may be offered for resale, resold
and otherwise transferred by the holders thereof (other than holders who are
broker-dealers or a person that is an "affiliate" (within the meaning of Rule
405 of the Securities Act) of the Company) without further compliance with the
registration and prospectus delivery provisions of the Securities Act. However,
any purchaser of notes who is an affiliate of the Company or who intends to
participate in the exchange offer for the purpose of distributing the exchange
notes, or any broker-dealer who purchased the notes from the Company to resell
pursuant to Rule 144A or any other available exemption under the Securities Act
(1) will not be able to rely on the interpretations by the staff of the
Commission set forth in the above-mentioned no-action letters; (2) will not be
able to tender its notes in the exchange offer; and (3) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the notes unless such sale or transfer
is made pursuant to an exemption from such requirements. The Company does not
intend to seek its own no-action letter, and there is no assurance that the
staff of the Commission would make a similar determination with respect to the
exchange notes as it has in such no-action letters to third parties. See "Plan
of Distribution."
As a result of the filing and effectiveness of the registration statement
of which this prospectus is a part, the Company and the guarantors will not be
required to pay an increased interest rate on the existing notes. Following the
consummation of the exchange offer, holders of existing notes not tendered will
not have any further registration rights except in certain limited circumstances
requiring the filing of a shelf registration statement, and the existing notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for the existing notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, the Company will accept all existing notes
properly tendered and not withdrawn prior to 5:00 p.m. New York City time on the
expiration date. After authentication of the exchange notes by the trustee or an
authenticating agent, the Company will issue $1,000 principal amount of exchange
notes in exchange for each $1,000 principal amount of outstanding existing notes
accepted in the exchange offer. Holders may tender some or all of their existing
notes pursuant to the exchange offer in denominations of $1,000 and integral
multiples thereof.
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Each holder of existing notes (other than certain specified holders) who
wishes to exchange existing notes for exchange notes in the exchange offer will
be required to represent that (1) it is not an affiliate of the Company or any
guarantor of the notes, (2) any exchange notes to be received by it were
acquired in the ordinary course of its business and (3) it has no arrangement
with any person to participate in the distribution (within the meaning of the
Securities Act) of the exchange notes.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. The staff of the SEC has taken the position
that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the exchange notes (other than a resale of an
unsold allotment from the original sale of the notes) with the prospectus
contained in the exchange offer registration statement. The Company will be
required to allow participating broker-dealers to use the prospectus contained
in the exchange offer registration statement (subject to certain "black out"
periods) following the exchange offer, in connection with the resale of exchange
notes received in exchange for notes acquired by such participating
broker-dealers for their own account as a result of market-making or other
trading activities. See "Plan of Distribution."
The form and terms of the exchange notes are identical in all material
respects to the form and terms of the existing notes except that (1) the
exchange notes will be issued in a transaction registered under the Securities
Act, (2) the exchange notes will not be subject to transfer restrictions and (3)
certain provisions relating to an increase in the stated interest rate on the
existing notes provided for in certain circumstances will be eliminated. The
exchange notes will evidence the same debt as the existing notes. The exchange
notes will be issued under and entitled to the benefits of the indenture.
As of the date of this prospectus, $100,000,000 aggregate principal amount
of the existing notes is outstanding. In connection with the issuance of the
existing notes, the Company arranged for the existing notes, which were
initially purchased by qualified institutional buyers as defined pursuant to
Rule 144A under the Securities Act, to be issued and transferable in book-entry
form through the facilities of the depositary, acting as depositary. The
exchange notes will also be issuable and transferable in book-entry form through
the depositary.
This prospectus, together with the accompanying letter of transmittal, is
initially being sent to all registered holders as of the close of business on
, 1999. The Company intends to conduct the
exchange offer in accordance with the applicable requirements of the Exchange
Act, and the rules and regulations of the Commission thereunder, including Rule
14e-1, to the extent applicable. The exchange offer is not conditioned upon any
minimum aggregate principal amount of existing notes being tendered, and holders
of the existing notes do not have any appraisal or dissenters' rights under the
General Corporation Law of the State of Delaware or under the indenture in
connection with the exchange offer. The Company shall be deemed to have accepted
validly tendered existing notes when, as and if the Company has given oral or
written notice thereof to the exchange agent. See "-- Exchange Agent." The
exchange agent will act as agent for the tendering holders for the purpose of
receiving exchange notes from the Company and delivering exchange notes to such
holders.
If any tendered existing notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted existing notes will be returned, at the
Company's cost, to the tendering holder thereof as promptly as practicable after
the expiration date.
Holders who tender existing notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
existing notes pursuant to the exchange offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
exchange offer. See "-- Solicitation of Tenders; Fees and Expenses."
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NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF EXISTING NOTES AS TO WHETHER TO TENDER OR REFRAIN
FROM TENDERING ALL OR ANY PORTION OF THEIR EXISTING NOTES PURSUANT TO THE
EXCHANGE OFFER. MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF EXISTING NOTES MUST MAKE THEIR OWN DECISION WHETHER
TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF
EXISTING NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF
TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN
FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" shall mean 5:00 p.m., New York City time, on
, 1999, unless the Company, in its sole discretion, extends the
exchange offer, in which case the term "expiration date" shall mean the latest
date to which the exchange offer is extended.
The Company expressly reserves the right, in its sole discretion (1) to
delay acceptance of any existing notes, to extend the exchange offer or to
terminate the exchange offer and to refuse to accept existing notes not
previously accepted, if any of the conditions set forth herein under
"-- Termination" shall have occurred and shall not have been waived by the
Company (if permitted to be waived by the Company), by giving oral or written
notice of such delay, extension or termination to the exchange agent and (2) to
amend the terms of the exchange offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof by the Company to the registered
holders of the existing notes. If the exchange offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of such amendment.
Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, the Company shall have no obligation to publish, advise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will bear interest from the date of issuance of the
existing notes that are tendered in exchange for the exchange notes (or the most
recent date on which interest was paid or duly provided for on the existing
notes surrendered in exchange for the exchange notes). Accordingly, holders of
existing notes that are accepted for exchange will not receive interest that is
accrued but unpaid on such existing notes at the time of tender. Interest on the
exchange notes will be payable semi-annually on each April 1 and October 1,
commencing on October 1, 1999.
PROCEDURES FOR TENDERING
Only a holder may tender its existing notes in the exchange offer. To
tender in the exchange offer, a holder must complete, sign and date the letter
of transmittal or a facsimile thereof, have the signatures thereof guaranteed if
required by the letter of transmittal, and mail or otherwise deliver such letter
of transmittal or such facsimile, together with the existing notes (unless such
tender is being effected pursuant to the procedure for book-entry transfer
described below) and any other required documents, to the exchange agent, prior
to 5:00 p.m. New York City time, on the expiration date.
Any financial institution that is a participant in the depositary's
book-entry transfer facility system may make book-entry delivery of the existing
notes by causing the depositary to transfer such existing notes into the
exchange agent's account in accordance with the depositary's procedure for such
transfer. Although delivery of existing notes may be effected through book-entry
transfer into the exchange agent's account at the depositary, the letter of
transmittal (or facsimile thereof), with any
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required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the exchange agent at its address set
forth herein under "-- Exchange Agent" prior to 5:00 p.m., New York City time,
on the expiration date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE
WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder will constitute an agreement between such holder,
the Company and the exchange agent in accordance with the terms and subject to
the conditions set forth herein and in the letter of transmittal.
THE LETTER OF TRANSMITTAL WILL INCLUDE REPRESENTATIONS TO THE COMPANY THAT,
AMONG OTHER THINGS, (1) THE EXCHANGE NOTES RECEIVED PURSUANT TO THE EXCHANGE
OFFER ARE BEING ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE PERSON
RECEIVING SUCH EXCHANGE NOTES (WHETHER OR NOT SUCH PERSON IS THE HOLDER), (2)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON HAS AN ARRANGEMENT OR UNDERSTANDING
WITH ANY PERSON TO PARTICIPATE IN THE DISTRIBUTION OF SUCH EXCHANGE NOTES, (3)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS AN "AFFILIATE," AS DEFINED IN
RULE 405 UNDER THE SECURITIES ACT, OF THE COMPANY OR ANY GUARANTOR, (4) THE
HOLDER IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION OF
THE EXCHANGE NOTES, AND (5) IF THE TENDERING HOLDER IS A BROKER OR DEALER (AS
DEFINED IN THE EXCHANGE ACT) (A) IT ACQUIRED THE EXISTING NOTES FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND
(B) IT HAS NOT ENTERED INTO ANY ARRANGEMENT OR UNDERSTANDING WITH THE COMPANY,
ANY GUARANTOR OR ANY "AFFILIATE" OF THE COMPANY OR ANY GUARANTOR (WITHIN THE
MEANING OF RULE 405 UNDER THE SECURITIES ACT) TO DISTRIBUTE THE EXCHANGE NOTES
TO BE RECEIVED IN THE EXCHANGE OFFER. In the case of a broker-dealer that
receives exchange notes for its own account in exchange for existing notes which
were acquired by it as a result of market-making or other trading activities,
the letter of transmittal will also include an acknowledgment that the
broker-dealer will deliver a copy of this prospectus in connection with the
resale by it of exchange notes received pursuant to the exchange offer. See
"Plan of Distribution."
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR EXISTING NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES EFFECT SUCH TENDER FOR HOLDERS IN EACH CASE
AS SET FORTH HEREIN AND IN THE LETTER OF TRANSMITTAL.
Any beneficial owner whose existing notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the letter of transmittal and delivering his existing notes, either
make appropriate arrangements to register ownership of the existing notes in
such owner's name or obtain a properly completed bond power from the registered
holder. The transfer of record ownership may take considerable time.
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Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act unless the existing notes tendered pursuant
thereto are tendered (1) by a registered holder who has not completed the box
entitled "Special Registration Instructions" or "Special Delivery
Instructions" of the letter of transmittal or (2) for the account of an
eligible institution. If the letter of transmittal is signed by a person other
than the registered holder listed therein, such existing notes must be endorsed
or accompanied by appropriate bond powers which authorize such person to tender
the existing notes on behalf of the registered holder, in either case signed as
the name of the registered holder or holders appears on the existing notes. If
the letter of transmittal or any existing notes or bond powers are signed or
endorsed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with such letter of transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered existing notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
existing notes not properly tendered or any existing notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the absolute right to waive any
irregularities or conditions of tender as to particular existing notes. The
Company's interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of existing notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of existing notes, neither the
Company, the exchange agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of existing
notes nor shall any of them incur any liability for failure to give such
notification. Tenders of existing notes will not be deemed to have been made
until such irregularities have been cured or waived. Any existing notes received
by the exchange agent that the Company determines are not properly tendered or
the tender of which is otherwise rejected by the Company and as to which the
defects or irregularities have not been cured or waived by the Company will be
returned by the exchange agent to the tendering holder unless otherwise provided
in the letter of transmittal, as soon as practicable following the expiration
date.
In addition, the Company reserves the right in its sole discretion to (a)
purchase or make offers for any existing notes that remain outstanding
subsequent to the expiration date, or, as set forth under "-- Termination," to
terminate the exchange offer and (b) to the extent permitted by applicable law,
purchase existing notes in the open market, in privately negotiated transactions
or otherwise. The terms of any such purchases or offers may differ from the
terms of the exchange offer.
BOOK-ENTRY TRANSFER
The Company understands that the exchange agent will make a request
promptly after the date of this prospectus to establish accounts with respect to
the existing notes at the DTC for the purpose of facilitating the exchange
offer, and subject to the establishment thereof, any financial institution that
is a participant in the book-entry transfer facility's system may make
book-entry delivery of existing notes by causing such book-entry transfer
facility to transfer such existing notes into the exchange agent's account with
respect to the existing notes in accordance with the book-entry transfer
facility's procedures for such transfer. Although delivery of existing notes may
be effected through book-entry transfer into the exchange agent's account at the
book-entry transfer facility, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee and all other
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required documents must in each case be transmitted to and received or confirmed
by the exchange agent at its address set forth below on or prior to the
expiration date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to the book-entry transfer facility does not constitute delivery to
the exchange agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their existing notes and (1) whose existing
notes are not immediately available, or (2) who cannot deliver their existing
notes, the letter of transmittal or any other required documents to the exchange
agent prior to the expiration date, or if such holder cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an eligible institution;
(b) prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed notice of
guaranteed delivery (by facsimile transmittal, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number or numbers of such holder's existing notes and the principal
amount of such existing notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within five business days
after the expiration date, the letter of transmittal (or facsimile
thereof), together with the certificate(s) representing the existing
notes to be tendered in proper form for transfer and any other
documents required by the letter of transmittal will be deposited by
the eligible institution with the exchange agent; and
(c) such properly completed and executed letter of transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered existing notes in proper form for transfer (or confirmation
of a book-entry transfer into the exchange agent's account at the
depositary of existing notes delivered electronically) and all other
documents required by the letter of transmittal are received by the
exchange agent within five business days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their existing notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of existing notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
To withdraw a tender of existing notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the expiration date. Any such notice of withdrawal must (1) specify the name of
the person having deposited the existing notes to be withdrawn (the
"Depositor"), (2) identify the existing notes to be withdrawn (including the
certificate number or numbers and principal amount of such existing notes or, in
the case of existing notes transferred by book-entry transfer, the name and
number of the account at the depositary to be credited), (3) be signed
transmittal by which such existing notes were tendered (including any required
signature guarantee) or be accompanied by documents of transfer sufficient to
permit the trustee with respect to the existing notes to register the transfer
of such existing notes into the name of the Depositor withdrawing the tender and
(4) specify the name in which any such existing notes are to be registered, if
different from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any existing notes so withdrawn will be deemed not to have been validly
tendered for purposes of the exchange offer, and no exchange notes will be
issued with respect thereto unless the existing notes so withdrawn are validly
retendered. Any existing notes that have been tendered but are not accepted for
exchange will be returned to the holder thereof without
22
<PAGE>
cost to such holder as soon as practicable after withdrawal, rejection of tender
or termination of the exchange offer. Properly withdrawn existing notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the exchange offer, the Company will not
be required to accept for exchange, or to exchange exchange notes for, any
existing notes, and may terminate or amend the exchange offer as provided herein
before the acceptance of such existing notes if, in the Company's judgment, the
Company's ability to proceed with the exchange offer can reasonably be expected
to be impaired as a result of certain events set forth in the registration
rights agreement. Accordingly, the exchange offer is subject to the following
conditions: (1) that the exchange offer does not violate applicable law or any
applicable interpretation of the staff of the Commission, (2) that no action or
proceeding shall have been instituted or threatened in any court or by or before
any governmental agency or body with respect to the exchange offer, and no
material adverse development shall have occurred in any action or proceeding
existing as of March 30, 1999 with respect to the Company or any of the
subsidiary guarantors, (3) that all governmental approvals shall have been
obtained, which approvals the Company and the subsidiary guarantors deem
necessary for the consummation of the exchange offer and (4) that the existing
notes are tendered in accordance with the terms of the exchange offer.
If the Company determines that it may terminate the exchange offer for any
of the reasons set forth above, the Company may (1) refuse to accept any
existing notes and return any existing notes that have been tendered to the
holders thereof, (2) extend the exchange offer and retain all existing notes
tendered prior to the expiration date of the exchange offer, subject to the
rights of such holders of tendered existing notes to withdraw their tendered
existing notes or (3) waive such termination event with respect to the exchange
offer and accept all properly tendered existing notes that have not been
withdrawn. If such waiver constitutes a material change in the exchange offer,
the Company will disclose such change by means of a supplement to this
prospectus that will be distributed to each registered holder, and the Company
will extend the exchange offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the exchange offer would otherwise expire during such
period.
EXCHANGE AGENT
State Street Bank and Trust Company, the trustee under the indenture, has
been appointed as exchange agent for the exchange offer. In such capacity, the
exchange agent has no fiduciary duties and will be acting solely on the basis of
directions of the Company. Requests for assistance and requests for additional
copies of this prospectus or of the letter of transmittal should be directed to
the exchange agent addressed as follows:
By Mail: State Street Bank and Trust Company
Two International Place
P.O. Box 778
Boston, Massachusetts 02110
By Hand Delivery or Overnight State Street Bank and Trust Company
Courier: Two International Place, 4th Floor
Boston, Massachusetts 02110
Facsimile Transmission: (617) 664-5290
Confirm by Telephone: (617) 664-5587
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
23
<PAGE>
SOLICITATION OF TENDERS; FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the exchange offer will be
borne by the Company. The principal solicitation pursuant to the exchange offer
is being made by mail. Additional solicitations may be made by officers and
regular employees of the Company and its affiliates in person, by telegraph,
telephone or telecopier.
The Company has not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the exchange offer. The Company, however, will
pay the exchange agent reasonable and customary fees for its services and will
reimburse the exchange agent for its reasonable out-of-pocket costs and expenses
in connection therewith and will indemnify the exchange agent for all losses and
claims incurred by it as a result of the exchange offer. The Company may also
pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
prospectus, letters of transmittal and related documents to the beneficial
owners of the existing notes and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the exchange offer,
including fees and expenses of the exchange agent and trustee and accounting and
legal fees and printing costs, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of existing notes pursuant to the exchange offer. If, however, certificates
representing exchange notes or existing notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the
existing notes tendered, or if tendered existing notes are registered in the
name of any person other than the person signing the letter of transmittal, or
if a transfer tax is imposed for any reason other than the exchange of existing
notes pursuant to the exchange offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the letter of transmittal, the amount
of such transfer taxes will be billed by the Company directly to such tendering
holder.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
existing notes, as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the consummation of the exchange offer. The
expenses of the exchange offer will be amortized by the Company over the term of
the exchange notes.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of exchange notes for existing notes pursuant to the exchange
offer should not be treated as an "exchange" for United States federal income
tax purposes because the exchange notes should not be considered to differ
materially in kind or extent from the existing notes. Rather, the exchange notes
received by a United States holder should be treated as a continuation of the
existing notes in the hands of such holder. As a result, there should be no
United States federal income tax consequences to United States holders
exchanging existing notes for exchange notes pursuant to the exchange offer.
OTHER
Participation in the exchange offer is voluntary. Holders of the existing
notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered existing notes pursuant to the terms of, this exchange offer,
the Company will have fulfilled a covenant
24
<PAGE>
contained in the terms of the registration rights agreement. Holders of the
existing notes who do not tender their certificates in the exchange offer will
continue to hold such certificates and will be entitled to all the rights, and
subject to the limitations applicable thereto, under the indenture governing the
notes, except for any such rights under the registration rights agreement that
by their term terminate or cease to have further effect as a result of the
making of this exchange offer. See "Description of the Notes." All untendered
existing notes will continue to be subject to the restrictions on transfer set
forth in the indenture. To the extent that existing notes are tendered and
accepted in the exchange offer, the trading market for untendered existing notes
could be adversely affected.
The Company may in the future seek to acquire untendered existing notes in
the open market or through privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company intends to make any such acquisitions
of existing notes in accordance with the applicable requirements of the Exchange
Act, and the rules and regulations of the Commission thereunder, including Rule
14e-1, to the extent applicable. The Company has no present plan to acquire any
existing notes that are not tendered in the exchange offer or to file a
registration statement to permit resales of any existing notes that may be but
are not tendered pursuant to the exchange offer.
25
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
exchange notes. In consideration for issuing the exchange notes as contemplated
in this prospectus, the Company will receive in exchange existing notes in like
principal amount, the terms of which are identical in all material respects to
the exchange notes except that the exchange notes will be issued in a
transaction registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and certain provisions relating to an increase
in the stated interest rate on the existing notes provided for under certain
circumstances will be eliminated. The existing notes surrendered in exchange for
exchange notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the exchange notes will not result in a change in the indebtedness
of the Company.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1998 on an actual basis, and as adjusted to give effect to the sale
of the existing notes and the application of the net proceeds therefrom. See
"Use of Proceeds." The financial data in the following table should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this prospectus.
AS OF
DECEMBER 31, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(Dollars in thousands)
Current maturities of long-term debt and
capital lease obligations(2).......... $ 31,957 $ 405
-------- --------------
Long-term debt and capital lease
obligations, net of current
portion............................... 106,632 44,468
Notes offered hereby.................... -- 97,216
-------- --------------
Total long-term debt............... 106,632 141,684
Stockholders' equity:
Preferred stock, $0.01 par value,
10,000,000 shares authorized,
no shares issued and outstanding...... -- --
Common stock, $0.01 par value,
51,000,000 shares authorized,
16,668,129 shares issued and
outstanding(3)........................ 167 167
Additional paid-in capital.............. 100,501 100,501
Retained earnings(4).................... 15,942 15,942
-------- --------------
Total stockholders' equity......... 116,610 116,610
-------- --------------
Total capitalization............... $255,199 $258,699
======== ==============
- ------------
(1) As adjusted to reflect the sale of the existing notes and the application of
the net proceeds therefrom. Following the sale of the existing notes and the
application of the net proceeds therefrom, the Company estimates it would
have available under its bank credit facility approximately $32.1 million
and $34.1 million at December 31, 1998 and February 28, 1999, respectively,
for subsequent borrowings (based on borrowing base limitations of $73.5
million and $82.9 million, respectively).
(2) A portion of the Company's borrowings under its bank credit facility has
been classified as current liabilities. See "Description of Bank Credit
Facility."
(3) Includes 667,000 shares of restricted common stock. Excludes (i) outstanding
options to purchase 1,109,105 shares at a weighted average exercise price of
$10.24 and (ii) outstanding warrants to purchase 50,000 shares at $6.00 per
share.
(4) The as adjusted amount does not reflect an approximately $1.4 million, net
of tax, write-off of debt issuance costs on our bank credit facility as a
result of the restructuring and partial extinguishment of the bank credit
facility which has been recorded in the quarter ended March 31, 1999.
27
<PAGE>
SELECTED FINANCIAL DATA
Pentacon was incorporated in March 1997. Simultaneously with the closing of
the initial public offering of its common stock, in March 1998, Pentacon
acquired in separate transactions (the "Initial Acquisitions") five
businesses: 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").
For financial reporting purposes, Alatec has been identified as the accounting
acquiror. Accordingly, the historical financial statements of Alatec have become
the historical financial statements of the Company. The selected historical
financial data as of and for the years ended December 31, 1995 and 1996, nine
months ended September 30, 1997, and year ended September 30, 1998 have been
derived from Pentacon's audited financial statements. The selected historical
financial data as of and for the year ended December 31, 1994, and as of and for
the three months ended December 31, 1997 and 1998 has been derived from
unaudited financial statements of Pentacon which have been prepared on the same
basis as the audited financial statements and, in the opinion of Pentacon,
reflect all adjustments consisting of normal recurring adjustments necessary for
a fair presentation of such data. Since March 1998, Pentacon has acquired in
separate transactions (the "Subsequent Acquisitions" and, together with the
Initial Acquisitions, the "Acquisitions") four additional businesses: Pace
Products, Inc., D-Bolt Company, Inc., Texas International Aviation, Inc. and ASI
Aerospace Group, Inc. The companies acquired in the Acquisitions are referred to
as the "Acquired Businesses."
The pro forma consolidated financial data give effect to all businesses
acquired by Pentacon as if such acquisitions were consummated as of the
beginning of the periods presented, but do not give effect to the offering of
the notes, except where noted below. The pro forma results of operations are not
necessarily indicative of the results that would have occurred had the
acquisitions been consummated as of October 1, 1996 or that might be attained in
the future.
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------------------------------
THREE MONTHS
FISCAL ENDED
YEAR ENDED NINE MONTHS YEAR DECEMBER 31,
--------------------------------- ENDED ENDED --------------------
12/31/94 12/31/95 12/31/96 9/30/97 9/30/98(2) 1997 1998
--------- --------- --------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $33,700 $41,204 $44,726 $ 42,296 $ 141,078 $ 14,502 $ 66,720
Cost of sales........................ 21,926 26,196 26,707 25,114 91,026 8,555 45,021
--------- --------- --------- ------------ ----------- --------- ---------
Gross profit......................... 11,774 15,008 18,019 17,182 50,052 5,947 21,699
Operating expenses................... 10,238 11,285 12,818 11,664 36,524 5,397 14,575
Goodwill amortization................ -- -- -- -- 1,111 20 853
--------- --------- --------- ------------ ----------- --------- ---------
Operating income................. 1,536 3,723 5,201 5,518 12,417 530 6,271
Other (income) expense, net.......... 13 69 (56) (26) (91) (13) (7)
Interest expense..................... 686 1,235 1,118 1,015 2,448 295 3,102
--------- --------- --------- ------------ ----------- --------- ---------
Income before taxes.............. 837 2,419 4,139 4,529 10,060 248 3,176
Income taxes......................... 384 995 1,628 1,860 5,373 103 1,545
--------- --------- --------- ------------ ----------- --------- ---------
Net income....................... $ 453 $ 1,424 $ 2,511 $ 2,669 $ 4,687 $ 145 $ 1,631
========= ========= ========= ============ =========== ========= =========
Earnings per Share --
Basic & Diluted.................... $ 0.85 $ 0.90 $ 0.45 0.05 $ 0.10
OTHER DATA:
EBITDA(3)............................ $ 1,654 $ 3,925 $ 5,437 $ 5,673 $ 14,306 $ 588 $ 7,765
Depreciation and amortization........ 131 271 180 129 1,798 45 1,487
Capital expenditures................. 118 89 114 138 3,097 85 795
SELECTED RATIOS:
Ratio of earnings to fixed charges(4)
Actual........................... 2.0x 2.7x 4.2x 4.9x 4.4x 1.7x 2.0x
Pro forma(5)..................... 3.0x 1.2x
Supplemental pro forma(6)........
PRO FORMA(1)
---------------------------------------
TWELVE THREE MONTHS
MONTHS FISCAL YEAR ENDED
ENDED ENDED DECEMBER 31,
9/30/97 9/30/98 1997
-------- ------------ -------------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $223,673 $283,794 $65,345
Cost of sales........................ 150,652 188,813 43,844
-------- ------------ -------------
Gross profit......................... 73,021 94,981 21,501
Operating expenses................... 49,485 59,746 15,161
Goodwill amortization................ 3,407 3,400 853
-------- ------------ -------------
Operating income................. 20,129 31,835 5,487
Other (income) expense, net.......... (30) (44) 77
Interest expense..................... 10,248 10,467 2,555
-------- ------------ -------------
Income before taxes.............. 9,911 21,412 2,855
Income taxes......................... 5,461 10,172 1,520
-------- ------------ -------------
Net income....................... $ 4,450 $ 11,240 1,335
======== ============ =============
Earnings per Share --
Basic & Diluted.................... $ 0.27 $ 0.67 $ 0.08
OTHER DATA:
EBITDA(3)............................ $ 25,369 $ 36,862 $ 6,743
Depreciation and amortization........ 5,210 4,983 1,333
Capital expenditures................. 952 4,296 355
SELECTED RATIOS:
Ratio of earnings to fixed charges(4)
Actual...........................
Pro forma(5).....................
Supplemental pro forma(6)........ 1.9x
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------------------------
AS OF DECEMBER 31, AS OF SEPTEMBER 30, AS OF
------------------------------- -------------------- DECEMBER 31,
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
BALANCE SHEET DATA:
Total assets............................ $ 19,902 $ 23,226 $ 28,519 $ 34,911 $ 304,391 $301,353
Long-term debt (including current
maturities)........................... 9,671 10,698 11,588 14,050 149,894 138,589
Stockholders' equity.................... 3,695 5,119 7,630 8,384 114,914 116,610
</TABLE>
- ------------
(1) The pro forma income statement data assumes that the Acquisitions and our
initial public offering occurred at the beginning of the period presented
(except for Capitol, whose historical results for twelve months from
September 1, 1996 to August 31, 1997 were used for the twelve months ended
September 30, 1997 pro forma information). These pro forma results are not
necessarily indicative of the results we would have obtained had these
events actually then occurred or of our future results. During the periods
presented above, the Acquired Businesses were not under common control or
management and, therefore, the data presented may not be comparable to or
indicative of post-Acquisition results to be achieved by the Company. The
pro forma income statement data is based on available information and
certain assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this prospectus. Neither the potential cost savings from
consolidating certain operational and administrative functions nor the costs
of corporate overhead, other than salaries of executive officers, nor those
other costs and savings actually experienced after the acquisitions have
been included in the pro forma financial information. In addition, the pro
forma information may not be indicative of actual 1999 results of
operations. See "Risk Factors -- Concentration of Customer Base; Factors
Relating to Certain Customers" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Introduction."
(2) On October 28, 1998, we changed our fiscal year end from September 30 to
December 31.
(3) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is not intended to represent cash flow in accordance with generally accepted
accounting principles and does not represent the measure of cash available
for distribution. EBITDA is commonly used to analyze companies on the basis
of operating performance, leverage and liquidity, and provides additional
information for evaluating our ability to make payments on the notes. EBITDA
is not intended as an alternative to earnings from continuing operations or
net income.
(4) For purposes of this ratio, "earnings" consist of earnings before income
taxes and fixed charges, and "fixed charges" consist of interest expense,
the interest portion of rental expense and amortization of debt issuance
costs.
(5) Gives effect to the refinancing of a portion of our historical debt with the
net proceeds received from the offering of the existing notes.
(6) Gives effect to the businesses we have acquired as if such Acquisitions were
consummated as of the beginning of the periods presented and to the
refinancing of a portion of our historical debt with the net proceeds
received from the offering of the existing notes.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
FINANCIAL DATA" APPEARING ELSEWHERE IN THIS PROSPECTUS.
INTRODUCTION
Pentacon was incorporated in March 1997. Simultaneously with the closing of
the initial public offering of its common stock, on March 10, 1998, Pentacon
acquired in separate transactions five businesses: Alatec Products, Inc.
(Alatec), AXS Solutions Inc. (AXS), Capitol Bolt & Supply, Inc. (Capitol),
Maumee Industries, Inc. (Maumee) and Sales Systems, Limited (SSL). For financial
reporting purposes, Alatec has been identified as the accounting acquiror.
Accordingly, the historical financial statements of Alatec have become the
historical financial statements of Pentacon. Since March 10, 1998, Pentacon has
acquired in separate transactions four additional businesses: Pace Products,
Inc., D-Bolt Company, Inc., Texas International Aviation, Inc. and ASI Aerospace
Group, Inc.
Pentacon adopted a fiscal year-end of September 30, and the accounting
acquiror, Alatec, changed its fiscal year-end to September 30 to conform to
Pentacon's fiscal year-end. The nine-month period ended September 30, 1997 is
therefore used for comparison purposes to the years ended September 30, 1998 and
December 31, 1996. On October 28, 1998, the Company changed its fiscal year end
from September 30 to December 31.
All Acquisitions of the Company have been accounted for under the purchase
method of accounting. Accordingly, the Historical Consolidated Financial
Statements of the Company include the operating results of the Acquired
Businesses from the date of their acquisition. Because the Company's historical
consolidated operating results have been significantly affected by the number,
timing and size of the Acquisitions, pro forma financial data are provided
herein for a more meaningful period-to-period comparison of the Company's
operating results. The pro forma financial data for the quarters ended December
31, 1997 and 1998 and the years ended September 30, 1997 and 1998 have been
prepared assuming all of the Acquisitions were consummated as of the beginning
of such periods, but do not give effect to the offering of the notes. The pro
forma results of operations are not necessarily indicative of the results that
would have occurred had the Acquisitions been consummated as of the beginning of
the periods presented or that might be attained in the future. Our pro forma
1998 results may not be indicative of our 1999 results, as discussed below.
The Company's revenues are derived from the sale of fasteners and other
small parts with associated inventory management services. Revenues are
recognized upon shipment of the product to the customer. Cost of goods and
services consists primarily of materials, cost of products sold, costs for
product processing and modification, freight and obsolescence. Operating
expenses consist primarily of compensation and related benefits, advertising,
facility rent and utilities, communications and professional fees.
The Company's future results of operations will be affected by a variety of
factors, including, by way of example, its ability to compete for new customers
and maintain or increase levels of business with existing customers, its ability
to source fastener products desired by its customers at costs resulting in
favorable margins to the Company, the extent to which it pursues acquisitions
and its ability to integrate those acquisitions, inventory levels and events and
trends involving significant customers. The Company has a number of customers
that account for a significant portion of its revenues and a change in some of
the factors described above with respect to a particular customer could have a
material adverse effect on the Company's results of operations and prospects. In
1999, the Company expects to focus on a number of opportunities to further
penetrate existing customers and to further integrate its Acquired Businesses.
However, we expect our 1999 results of operations to be adversely affected by
certain factors relating to our two largest customers, The Boeing Company and
Cummins Engine Company.
30
<PAGE>
In the case of Boeing, we expect to continue to be impacted by the excess
fastener inventory position of Boeing and its subcontractors through the third
quarter of 1999 and by Boeing's plans to reduce production levels in 2000.
However, we cannot determine the impact of Boeing's most recent announcement
that it may divest or eliminate certain businesses and seek to improve
profitability at others (including through cost reductions and lower inventory
levels). In addition, in February 1999, one of the Company's two largest
customers completed a reengineering effort designed to reduce the number of its
parts distributors and reduce its product and procurement costs. As the result
of a competitive process, the Company has been selected as the primary fastener
and small parts distributor to supply this customer, which is expected to lead
to additional future revenues, although sales to such customer will be at lower
gross margin percentages than in the periods ended December 31, 1998. To offset
such lower margins, the Company expects to reduce certain costs associated with
supplying this customer over time, provided there can be no assurance that such
cost reductions will fully offset such lower margins. The Company believes these
factors will cause reported results of operations (including EBITDA) for the
first three quarters of 1999 to be lower than the comparable pro forma periods
of 1998, which is expected to lead to lower operating results for 1999 as
compared with pro forma 1998. See "Risk Factors -- Concentration of Customer
Base; Factors Relating to Certain Customers" and "Business -- Customers."
The Company currently operates under a decentralized management structure
with each subsidiary utilizing its existing management information system and is
in the process of consolidating its management and management information
systems. In addition, the Company anticipates that it will realize savings from
(i) greater volume discounts from suppliers, (ii) consolidation of insurance
programs and other general and administrative expenses and (iii) synergies among
the subsidiaries which will generate cost reductions and cross selling benefits.
However, there will be certain costs related to the Company's new corporate
management, costs associated with being a public company and integration costs.
None of these savings and only a portion of the costs are reflected in the Pro
Forma or Historical Combined Statement of Operations.
HISTORICAL THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE PRO FORMA
THREE MONTHS ENDED DECEMBER 31, 1997
The following table sets forth the historical results of operations for the
three months ended December 31, 1998 and the results of operations of the
Acquired Businesses on a pro forma basis and such results as a percentage of
revenues. The pro forma financial data have been prepared assuming all
Acquisitions were consummated as of the beginning of such periods.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
-------------------- --------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Revenues............................. $ 65,345 100.0% $ 66,720 100.0%
Cost of sales........................ 43,844 67.1 45,021 67.5
--------- --------- --------- ---------
Gross profit......................... 21,501 32.9 21,699 32.5
Operating expenses................... 15,161 23.2 14,575 21.8
Goodwill amortization................ 853 1.3 853 1.3
--------- --------- --------- ---------
Operating income..................... $ 5,487 8.4% $ 6,271 9.4%
========= ========= ========= =========
</TABLE>
REVENUES. Revenues increased 2.1% to $66.7 million for the three months
ended December 31, 1998 from $65.3 million for the three months ended December
31, 1997. The increase in revenues in the industrial sector of $0.8 million or
2.8% was primarily due to increases in sales to existing customers partially
offset by reduced sales to one of the Company's two largest customers. The
increase in revenues in the aerospace sector of $0.6 million or 1.6% resulted
primarily from the sale of inventory management services to new and existing
customers partially offset by lower sales to a large aerospace customer.
31
<PAGE>
COST OF SALES. Cost of sales increased $1.2 million, or 2.7%, to $45.0
million for the three months ended December 31, 1998 from $43.8 million for the
three months ended December 31, 1997. As a percentage of revenues, cost of sales
increased from 67.1% in the three months ended December 31, 1997 to 67.5% in the
three months ended December 31, 1998. The decline in margins as a percentage of
sales was a result of reduced margins in the industrial sector primarily from a
decrease in margins with one of the Company's two largest customers and lower
margins experienced with a new customer. This decline was partially offset by an
increase in aerospace sector margins resulting primarily from increased sales of
inventory management services.
OPERATING EXPENSES. Operating expenses decreased $0.6 million, or 3.9%, to
$14.6 million for the three months ended December 31, 1998 from $15.2 million
for the three months ended December 31, 1997. As a percentage of revenues,
operating expenses decreased to 21.8% for the three months ended December 31,
1998 from 23.2% for the three months ended December 31, 1997. The decrease was
primarily attributable to reductions in personnel and related costs while
maintaining a level volume of sales and lower sales commissions resulting from
decreased international sales.
OPERATING INCOME. Due to the factors discussed above, operating income
increased $0.8 million to $6.3 million for the three months ended December 31,
1998 from $5.5 million for the three months ended December 31, 1997. As a
percentage of revenues, operating income increased to 9.4% for the three months
ended December 31, 1998 from 8.4% for the three months ended December 31, 1997.
PRO FORMA YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH THE PRO FORMA YEAR
ENDED SEPTEMBER 30, 1997
The following table sets forth the results of operations of the Acquired
Businesses on a pro forma basis and such results as a percentage of revenues.
The pro forma financial data have been prepared assuming all Acquisitions were
consummated as of the beginning of such periods.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Revenues............................. $ 223,673 100.0% $ 283,794 100.0%
Cost of sales........................ 150,652 67.4 188,813 66.5
---------- --------- ---------- ---------
Gross profit......................... 73,021 32.6 94,981 33.5
Operating expenses................... 49,485 22.1 59,746 21.1
Goodwill amortization................ 3,407 1.5 3,400 1.2
---------- --------- ---------- ---------
Operating income..................... $ 20,129 9.0% $ 31,835 11.2%
========== ========= ========== =========
</TABLE>
REVENUES. Revenues increased by $60.1 million, or 26.9%, from $223.7
million for the year ended September 30, 1997 to $283.8 million for the twelve
months ended September 30, 1998. Approximately 74.7% of the increase in revenues
was due to an increase in revenues of companies in the aerospace sector of $44.9
million which primarily related to increases in sales to existing customers. The
increase in revenues of companies in the industrial sector of $15.2 million was
primarily attributable to increases in sales to existing customers.
COST OF SALES. Cost of sales increased by $38.1 million, or 25.3%, from
$150.7 million for the year ended September 30, 1997 to $188.8 million for the
year ended September 30, 1998. As a percentage of revenues, cost of sales
decreased from 67.4% in the year ended September 30, 1997 to 66.5% for the year
ended September 30, 1998. The decrease was primarily due to a combination of a
1.2 percentage point decrease at companies in the industrial sector and a 0.2
percentage point decrease at companies in the aerospace sector. The decrease in
cost of sales as a percentage of revenues at industrial sector companies was the
result of the ability to implement selective price increases and improvement in
product mix.
OPERATING EXPENSES. Operating expenses increased by $10.2 million, or
20.6%, from $49.5 million in the year ended September 30, 1997 to $59.7 million
in the year ended September 30, 1998.
32
<PAGE>
As a percentage of revenues, operating expenses decreased from 22.1% for the
year ended September 30, 1997 to 21.1% for the year ended September 30, 1998.
The decrease in operating expenses as a percentage of revenues was the result of
an increase in revenues without a commensurate increase in operating expenses.
This result was partially offset by an increase in expenses relating to the
establishment of a corporate office.
OPERATING INCOME. Due to the factors discussed above, operating income
increased by $11.7 million from $20.1 million for the year ended September 30,
1997 to $31.8 million for the year ended September 30, 1998. As a percentage of
revenues, operating income increased from 9.0% for the year ended September 30,
1997 to 11.2% for the year ended September 30, 1998.
COMBINED PRO FORMA DATA
The Company also reports combined pro forma results of operations in press
releases and on Form 10-K. The combined pro forma results of operations assumes
that the Initial Acquisitions and the Company's initial public offering were
closed at the beginning of the period presented and the Subsequent Acquisitions
are only included from each acquisition date. On this basis, the Company
reported revenues of $39.0 million and $66.7 million, gross profit of $13.7
million and $21.7 million and operating income of $2.5 million and $6.3 million
for the quarters ended December 31, 1997 and 1998, respectively. Additionally,
the Company reported revenues of $146.1 million and $187.1 million, gross profit
of $49.5 million and $64.4 million and operating income of $12.5 million and
$18.2 million for the years ended September 30, 1997 and 1998, respectively. The
combined pro forma results of operations and management's discussion and
analysis of financial condition and results of operations of such combined pro
forma data are not included in this prospectus.
HISTORICAL THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE THREE
MONTHS ENDED DECEMBER 31, 1997
The historical financial information represents the information of Alatec
prior to the Initial Acquisitions and the initial public offering and the
consolidated results of Pentacon subsequent to the Initial Acquisitions and the
initial public offering on March 10, 1998. The following table sets forth
certain selected historical financial data as a percentage of historical
revenues for the periods indicated:
<TABLE>
<CAPTION>
HISTORICAL
THREE MONTH PERIOD ENDED
DECEMBER 31,
------------------------------------------
1997 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Revenues................................ $ 14,502 100.0% $ 66,720 100.0%
Cost of sales........................... 8,555 59.0 45,021 67.5
--------- --------- --------- ---------
Gross profit............................ 5,947 41.0 21,699 32.5
Operating expenses...................... 5,397 37.2 14,575 21.8
Goodwill amortization................... 20 0.1 853 1.3
--------- --------- --------- ---------
Operating income........................ $ 530 3.7% $ 6,271 9.4%
========= ========= ========= =========
</TABLE>
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 Acquisitions (See Note 2 to Consolidated Pentacon, Inc. Financial
Statements).
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 Acquisitions (See Note 2 to Consolidated Pentacon, Inc.
Financial Statements).
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
33
<PAGE>
December 31, 1998. The increase in operating expenses primarily results from the
Acquisitions (See Note 2 to Consolidated Pentacon, Inc. Financial Statements).
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 EXPENSE. 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 Acquisitions (See Note 2 to Consolidated Pentacon, Inc.
Financial Statements).
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 results from expenses of $3.8 million recorded for
goodwill amortization and stock-based compensation, which are not deductible for
income tax purposes.
HISTORICAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
The following table sets forth the results of operations of Alatec for the
nine months ended September 30, 1997 and the Acquired Businesses for periods
subsequent to the respective acquisitions on a historical basis for the year
ended September 30, 1998 and such results as a percentage of revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Revenues................................ $ 42,296 100.0% $ 141,078 100.0%
Cost of sales........................... 25,114 59.4 91,026 64.5
--------- --------- ---------- ---------
Gross profit............................ 17,182 40.6 50,052 35.5
Operating expenses...................... 11,664 27.6 36,524 25.9
Goodwill amortization................... -- -- 1,111 0.8
--------- --------- ---------- ---------
Operating income........................ $ 5,518 13.0% $ 12,417 8.8%
========= ========= ========== =========
</TABLE>
REVENUES. Revenues increased by $98.8 million, or 233.6%, from $42.3
million for the nine months ended September 30, 1997 to $141.1 million for the
year ended September 30, 1998. The increase in revenues primarily results from
the Acquisitions during the year ended September 30, 1998. (See Note 2 to
Consolidated Pentacon, Inc. Financial Statements).
COST OF SALES. Cost of sales increased by $65.9 million, or 262.5%, from
$25.1 million for the nine months ended September 30, 1997 to $91.0 million for
the year ended September 30, 1998. The increase in cost of sales primarily
results from the Acquisitions during the year ended September 30, 1998. (See
Note 2 to Consolidated Pentacon, Inc. Financial Statements).
OPERATING EXPENSES. Operating expenses increased by $24.8 million, or
212.0%, from $11.7 million for the nine months ended September 30, 1997 to $36.5
million for the year ended September 30, 1998. The increase in operating
expenses primarily results from the Acquisitions during the year ended September
30, 1998. (See Note 2 to Consolidated Pentacon, Inc. Financial Statements).
OPERATING INCOME. Operating income increased by $6.9 million, or 125.5%,
from $5.5 million for the nine months ended September 30, 1997 to $12.4 million
for the year ended September 30, 1998 due to the factors noted above.
NON OPERATING COSTS AND EXPENSES. Interest expense for the year ended
September 30, 1998 totaled $2.4 million compared with $1.0 million for the nine
months ended September 30, 1997. The
34
<PAGE>
increase in interest expense related to the higher level of borrowings
outstanding during the period primarily as a result of the Acquisitions.
PROVISION FOR INCOME TAXES. The provision for income taxes for the year
ended September 30, 1998 was $5.4 million (an effective tax rate of 53.4%),
compared with $1.9 million (an effective tax rate of 41.1%) for the nine months
ended September 30, 1997. The higher effective tax rate in 1998 primarily
related to expenses totaling $2.9 million recorded in 1998 for goodwill
amortization and stock-based compensation which are not deductible for income
tax purposes.
HISTORICAL NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THE YEAR
ENDED DECEMBER 31, 1996
The following table sets forth the results of operations of Alatec for the
nine months ended September 30, 1997 and the Acquired Businesses for periods
subsequent to the respective acquisitions on a historical basis for the year
ended December 31, 1996 and such results as a percentage of revenues.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Revenues................................ $ 44,726 100.0% $ 42,296 100.0%
Cost of sales........................... 26,707 59.7 25,114 59.4
--------- --------- --------- ---------
Gross profit............................ 18,019 40.3 17,182 40.6
Operating expenses...................... 12,818 28.7 11,664 27.6
--------- --------- --------- ---------
Operating income........................ $ 5,201 11.6% $ 5,518 13.0%
========= ========= ========= =========
</TABLE>
REVENUES. Revenues for the year ended December 31, 1996 were $44.7 million
compared to revenues for the nine months ended September 30, 1997 of $42.3
million, a decrease of 5.4%. The decrease was a result of non-comparability of
periods. Revenues increased by $9.0 million, or 27.0%, from $33.3 million for
the nine months ended September 30, 1996 to $42.3 million for the nine months
ended September 30, 1997. Approximately $1.0 million of this increase was
attributable to new customers and approximately $8.0 million was due to an
increase in net sales to existing customers.
COST OF SALES. As a percentage of revenues, cost of sales remained
relatively constant at 59.4% in the nine months ended September 30, 1997
compared to 59.7% in the year ended December 31, 1996.
OPERATING EXPENSES. As a percentage of revenues, operating expenses
decreased from 28.7% in the year ended December 31, 1996 to 27.6% in the nine
months ended September 30, 1997. This percentage decrease was a result of an
increase in revenues without a commensurate increase in administrative costs.
OPERATING INCOME. As a percentage of revenues, operating income increased
from 11.6% in the year ended December 31, 1996 to 13.0% in the nine months ended
September 30, 1997 as a result of the factors discussed above.
NON OPERATING COSTS AND EXPENSES. Interest expense for the nine months
ended September 30, 1997 totaled $1.0 million compared to $1.1 million for the
year ended December 31, 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended September 30, 1997 was $1.9 million (an effective tax rate of
41.1%), compared with $1.6 million (an effective tax rate of 39.3%) for the year
ended December 31, 1996. The higher effective tax rate in 1997 primarily related
to an increase in nondeductible expenses.
35
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $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 $0.8 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 working capital of $78.7 million and total
debt of $138.6 million.
The Company used $18.7 million of net cash from operating activities during
the year ended September 30, 1998, primarily for working capital requirements.
Net cash used in investing activities was $102.1 million, $21.9 million of which
represents the cash paid for the Founding Companies, net of cash acquired, and
$77.0 million of which represents cash paid in the Subsequent Acquisitions, net
of cash acquired. Net cash provided by financing activities was $121.0 million
for the year ended September 30, 1998 and primarily consisted of $50.8 million
of net proceeds of the Company's initial public offering and $171.6 million of
borrowings on long-term debt partially offset by $99.9 million of repayment of
long-term debt.
Currently, Pentacon has in effect a credit agreement (the "Bank Credit
Facility") which provides Pentacon with a revolving line of credit of up to $85
million for general corporate purposes, future acquisitions, capital
expenditures and working capital, subject to a borrowing base limitation.
Assuming the issuance of the existing notes and the application of the net
proceeds had occurred on December 31, 1998 or February 28, 1999, on such dates,
the Company estimates that it would have had the ability to borrow up to an
additional $32.1 million and $34.1 million, respectively, under the bank credit
facility (based on borrowing base limitations of $73.5 million and $82.9
million, respectively). The Bank Credit Facility is secured by the stock of the
Company's subsidiaries and the Company's assets. The Bank Credit Facility, among
other things, 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 maximum total debt to
Adjusted EBITDA ratio, a maximum senior debt to Adjusted EBITDA ratio, a minimum
fixed charge ratio, a minimum net worth test and a maximum capital expenditures
test. The Bank Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable December 31, 2001. See "Description
of Bank Credit Facility."
Based upon the Company's projections of the ensuing year's pro forma
trailing EBITDA, a portion of the borrowings under the Bank Credit Facility was
classified as a current liability at December 31, 1998. (See Note 2 to the
Consolidated Financial Statements.)
On March 10, 1998, the Company completed its initial public offering of
5,980,000 shares of the Company's common stock at a price to the public of
$10.00 per share. The net proceeds to the Company from the initial public
offering (after deducting underwriting discounts, commissions and expenses) were
approximately $50.8 million. Of this amount, $21.9 million (net of cash
acquired) was used to pay the cash portion of the purchase price relating to the
Initial Acquisitions, with the remainder being used to pay certain indebtedness
of the Founding Companies, make capital expenditures and fund working capital
requirements. On April 20, 1998, the Company's registration statement covering
3,350,000 additional shares of common stock for use in connection with future
acquisitions was declared effective. During the year ended September 30, 1998,
an additional 1,134,010 shares of the Company's common stock were issued in
connection with acquisitions (See Note 2 to the Consolidated Pentacon, Inc.
Financial Statements).
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
Bank Credit Facility or offerings of debt and/or equity securities of the
Company. The Bank Credit Facility anticipates certain reductions in the line of
credit made available under the Bank 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
36
<PAGE>
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.
The Company's liquidity requirements consist of working capital needs,
ongoing capital expenditures, scheduled debt service obligations and its
acquisition program. The Company's primary requirements for working capital have
been directly related to increased inventory as a result of revenue growth. The
Company's capital expenditures were $3.8 million for the year ended December 31,
1998. The Company expects capital expenditures to be approximately $5.1 million
over the next twelve months, including information system related expenditures
as discussed below.
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 subsidiaries 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 these companies.
This migration is expected to be completed by July 1999. 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 Bank Credit
Facility as necessary.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company experiences modest seasonal declines in the fourth calendar
quarter due to declines in its customers' activities in that quarter. Quarterly
results may also be materially affected by the timing of acquisitions and the
timing and magnitude of acquisition integration costs. Accordingly, the
operating results for any three-month period are not necessarily indicative of
the results that may be achieved for any subsequent fiscal quarter or for a full
fiscal year.
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 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.
Based on preliminary information, 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.
Through December 31, 1998, the Company had 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
37
<PAGE>
the Company's Aerospace Group. 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 Aerospace Group.
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.
INFLATION
Inflation has not had a material impact on the Company's results of
operations for the last three years.
38
<PAGE>
BUSINESS
THE COMPANY
The Company is the second largest distributor of fasteners and small parts
to original equipment manufacturers ("OEMs") in the United States. Fasteners
and small parts are incorporated into a wide variety of end use applications
across a broad spectrum of industries and include screws, bolts, nuts, washers,
pins, rings, fittings, springs, electrical connectors and similar small parts,
many of which are specialized or highly engineered for particular applications.
The Company is also an industry leader in the provision of advanced inventory
management services for fasteners and small parts, including procurement,
just-in-time delivery, quality assurance testing, advisory engineering services,
component kit production, small component assembly and electronic data
interchange to OEMs. The Company offers its customers comprehensive supply chain
management solutions designed to reduce their procurement and management costs
and enhance their production efficiencies. The Company believes that the
fastener distribution industry is in the early stages of consolidation. The
Company attributes this consolidation primarily to OEMs focusing on their core
competencies, streamlining their production processes and reducing their overall
production costs by reducing the number of their suppliers and by outsourcing
certain inventory management functions to more efficient providers. The
Company's objective is to differentiate itself from its competitors and to
benefit from the consolidation of the fastener industry by leveraging its
nationwide distribution network, critical mass, breadth of product line and
sophisticated supply chain management capabilities.
The Company has two principal operating groups: the Aerospace Group and the
Industrial Group. The Aerospace Group serves the aerospace and aeronautics
industries and the Industrial Group serves a broad base of industrial
manufacturers, which produce items such as diesel engines, locomotives, power
turbines, motorcycles, telecommunications equipment and refrigeration equipment.
The Company's largest customers include The Boeing Company, Cummins Engine
Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes
Aircraft subsidiary of General Motors Corporation, Lockheed Martin Corporation
and The Trane Company. The Company's relationships with these large customers
have been built over a period of 8 to 30 years.
INDUSTRY OVERVIEW
Companies operating in the fastener distribution business can generally be
characterized by the end users they serve, which are comprised broadly of OEMs,
maintenance and repair operations ("MROs") and construction companies. The
traditional fastener distribution market is similar to most industrial
distribution markets. Fasteners are purchased from both domestic and overseas
manufacturers and sold to both domestic and overseas customers. The majority of
these fasteners are sold to OEM and MRO clients on a purchase order basis. Some
smaller distributors specialize along industry lines because of the uniqueness
of manufacturer requirements. Other smaller distributors provide a wide range of
fasteners used for general assembly. Larger distributors, such as the Company,
generally provide a wide range of fasteners as well as fasteners which meet
certain specialized industry needs.
U.S. sales by fastener manufacturers were estimated to be approximately
$8.0 billion in 1996; the global market for fasteners is estimated to be $25.0
billion. The fastener distribution market can reasonably be expected to be
larger than this because resales by fastener distributors include a markup on
the manufacturer's cost and include additional revenues for related value added
inventory management services. The OEM market represents approximately 80% of
the total U.S. fastener market, while the MRO market accounts for approximately
13%. Construction and other markets account for the remaining 7%. There are over
2,000 fastener distributors in the United States, none of which is responsible
for more than 5% of the market's sales. The Company believes that there are
currently only four other public companies whose primary business is fastener
distribution. The industry data provided herein were derived from several
sources, including Dun & Bradstreet and The
39
<PAGE>
Freedonia Group, Inc. The following table lists by sales volume the approximate
number of privately owned fastener companies in the U.S. as of December 7, 1998:
NUMBER OF PRIVATELY OWNED FASTENER DISTRIBUTION COMPANIES BY SALES VOLUME
NUMBER OF PRIVATE
SALES VOLUME COMPANIES
- ---------------------- ------------------
(Dollars in millions)
$100+ ..................................... 5
$50 - $100 ..................................... 5
$25 - $50 ..................................... 10
$10 - $25 ..................................... 52
$5 - $10 ..................................... 92
$2.5 - $5 ..................................... 164
< $2.5 ..................................... 1,734
Many customers are seeking to reduce their operating costs by decreasing
the number of their fastener distributors by often eliminating those suppliers
offering limited ranges of products and services. The Company believes that
these trends have placed some small, owner-operated fastener distributors at a
competitive disadvantage because of their limited product lines and inability to
provide value-added services. In addition, small distributors have limited
access to the capital resources necessary to modernize and expand their
capabilities, automate their inventory processes, offer component kit assembly
and install quality control laboratories. The owners of these businesses often
have not had an exit strategy, leaving them with few attractive liquidity
options.
BUSINESS STRATEGY
The Company's objective is to further its market position as a leading
distributor of fasteners and small parts and to enhance shareholder value. Key
elements of the Company's business strategy include:
CONTINUE TO DELIVER SUPERIOR CUSTOMER SERVICE. The Company's customers
choose fastener suppliers based, in significant part, on the quality and
reliability of service. The Company believes that superior customer
service includes (i) meeting just-in-time delivery schedules which are
critical to its customers' production processes and (ii) providing
innovative supply chain management services, which can help its
customers improve their operating efficiencies and reduce their costs.
By providing these services, the Company becomes more integrated into
its customers' internal manufacturing and decision making processes. The
Company believes such integration leads to higher customer sales to
existing customers and improves customer retention. In connection with
its strategy to continuously improve customer service, the Company
continues to identify and adopt "best practices" of each of its
subsidiaries that can be successfully implemented throughout the
Company. Some of our customers have recognized our superior customer
service. For example, we received Cummins' awards for 100% On-Time
Delivery and for Outstanding Performance for Cost Reduction and
Partnership in Continuous Improvement, in each of the last four years
(1995-1998).
GROW SALES REVENUE. The Company seeks to grow internally generated
revenues by (i) capturing market share from smaller competitors who
cannot match its product breadth, services or geographic coverage, (ii)
pursuing the expanding opportunities to deliver a wide range of
inventory management services which less sophisticated distributors are
unable to provide, (iii) expanding the number of sites to which it
provides services for its existing multi-site customers and (iv)
pursuing new multi-site customers. To leverage its breadth of products
and services and its broad geographic presence, the Company has
developed a
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national marketing and sales effort to focus on penetrating existing and
new multi-site OEM accounts.
CAPITALIZE ON INTEGRATION OPPORTUNITIES. The Company believes there are
significant opportunities to leverage the capabilities of its
subsidiaries to further increase its revenues and operating
efficiencies. The Company is initiating its revenue enhancement strategy
by implementing a cross-selling program to existing customers. The
Company's national footprint is an integral component of its strategy to
sell more integrated inventory management services and products to
multi-site customers nationwide. The Company will seek to expand
operating margins by realizing purchasing economies and exploiting
operational efficiencies. The Company believes that centralizing
purchasing activities will allow it to realize volume discounts.
Further, as the Company integrates its operations it is beginning to
realize further efficiencies through (i) the elimination of redundant
facilities, (ii) headcount reductions, (iii) plant reconfigurations,
(iv) the implementation of common information systems in its Aerospace
Group, (v) administrative savings and (vi) reductions in working
capital.
PURSUE STRATEGIC ACQUISITIONS. The Company has a disciplined
acquisition program, which targets companies that will help it increase
its presence in markets it currently serves, develop new customer
relationships and expand its range of products and services. Since the
Company's initial public offering in March 1998, it has increased its
annual pro forma revenues from $168 million to $285 million for the year
ended December 31, 1998 through the acquisition of four additional
companies: Pace Products, Inc., D-Bolt Company, Inc., Texas
International Aviation, Inc. and ASI Aerospace Group Inc. The addition
of Texas International Aviation, Inc. and ASI Aerospace Group Inc. added
significant product depth and market share in the aerospace fastener
distribution industry and resulted in the Company's Aerospace Group
becoming one of the premier aerospace fastener distribution and related
service companies in the United States. The Company believes there are a
significant number of acquisition candidates and that it is regarded as
an attractive acquiror because of its position as an industry leader and
the potential for its targets to realize improved growth and
profitability as part of the Company. All of the Company's acquisitions
have been immediately accretive to earnings and the Company expects
future acquisitions also will be immediately accretive.
PRODUCTS
The Company distributes over 100,000 different types of fasteners and other
small parts.
FASTENERS. Fasteners sold by the Company include screws, bolts, nuts,
washers, rings, pins, rivets and staples. These items come in a variety of
materials, sizes, platings and shapes. The variety and degree of engineering is
driven by the end-use requirement or specification of the fastener, such as
strength, resistance to corrosion, reusability and many other factors. The
Company's sales and purchasing departments have extensive knowledge of the
available products offered by fastener manufacturers and can assist OEMs in
selecting the appropriate fastener for a given application. Some of the more
common variable characteristics of the fasteners sold by the Company include:
o Materials -- The materials used in the manufacture of fasteners
include steel, brass, aluminum, nylon, bronze, stainless steel,
titanium, copper, polypropylene, alloys and other materials. Most of
these materials come in different grades with each having a unique set
of properties.
o Sizes -- The sizes vary by length, outside diameter, depth of the
threads, threads per inch or centimeter and pitch, or angle, of the
threads.
o Platings -- Platings may be applied to enhance the properties of a
given metal, and include zinc, cadmium, chrome, nickel, organic and
other materials.
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o Shapes -- The range of shapes is broad, including hex head, U-bolt,
L-bolt, shouldered, eye bolt, external tooth, internal tooth and many
others.
OTHER SMALL PARTS. The Company also distributes other small parts used by
OEMs to assemble their products. These items include standoffs, inserts, clamps,
spacers, springs, brackets, electrical connectors, small molded parts, cable
ties, plugs, hoses, fittings and other small parts. Like fasteners, these parts
come in many shapes, sizes and materials depending upon the designated end use.
OEMs are increasingly requesting that the Company provide these parts because
they are often used during the manufacturing or assembly process in conjunction
with the fasteners supplied by the Company.
SERVICES
In connection with its sale of fasteners and other small parts, the Company
also provides a wide range of value-added supply chain services to OEMs,
designed to reduce their parts procurement and management costs, enhance their
production efficiency and reduce their overall production costs. These
value-added services also benefit the Company by further integrating the Company
into its customers' manufacturing, planning and decision-making processes. The
Company's services include:
INVENTORY PROCUREMENT AND MANAGEMENT SYSTEMS. Increasingly,
manufacturers are outsourcing their inventory management needs to
distributors. These services range from installing a simple inventory
bin card system to developing a complete turn-key inventory management
system with full-time staff, which may be located on the customer's
site. These inventory systems are designed to meet the specific needs of
the Company's customers. They range in sophistication from helping the
OEM set appropriate order quantities and frequencies to delivering the
correct fastener or small part to the assembly floor on a just-in-time
basis. In some cases, the Company utilizes computer systems deployed at
the OEM's sites to facilitate the management of its fastener and parts
inventories. Inventory replenishment services and product consolidation
services decrease the number of invoices which the customer has to
process, decrease the number of vendors with whom the customer has to
process transactions, lower the customer's inventory carrying cost and
allow customers to focus on their core manufacturing business.
KIT AND SUB-ASSEMBLY SERVICES. OEMs often request that the Company
package several fasteners or parts into a package or "kit." A common
use of this service is to supply fastener kits included with products
the consumer is required to assemble such as lawn mowers, bicycles and
furniture. The use of kits has also expanded into the manufacturing
environment. Manufacturers frequently desire to have several related
fasteners or components arrive at the assembly line in a single package;
this ensures that all of the parts arrive at the same time and that no
part will be missed in the installation process. The kit process aids
the manufacturer by decreasing the number of distributors needed and
improves productivity by having the fasteners delivered to the assembly
line with the other related parts. Kit services improve the efficiency
and effectiveness of the manufacturing line and decrease the number of
"stock outs" and subsequent manufacturing line stoppages.
Customers may request that two or more parts in a kit be pre-assembled
into a single unit prior to being placed in the kit. These services are
closely related to the kit services offered by the Company. Similar to
kits, sub-assembly services performed by the Company improve the
productivity of the OEM's manufacturing line.
QUALITY ASSURANCE TESTING. These services involve the testing of
fasteners to ensure they meet the specifications stated by the
manufacturer. Although fasteners are not a significant part of the cost
of a product, they are often critical components whose failure can cause
the entire product to fail. As a result, many OEMs require strict
quality control with respect to the fasteners. The Company has installed
specialized equipment and laboratories and hired trained technicians to
perform quality control tests on some of their fastener products.
Quality assurance services lower the warranty costs of the OEMs. The
Company operates
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four laboratories to test fasteners. The laboratories can test
metallurgy, size consistency, corrosion and strength as well as other
properties. Additionally, two of its subsidiaries' locations are
ISO-9002 certified.
PRODUCT ENHANCEMENT SERVICES. In order to meet the exacting
requirements of customers, the Company maintains relationships with
suppliers that provide plating, galvanizing and coating services. These
services are used to enhance in-stock fasteners in order to meet the
specific requirements of OEMs. The ability of the Company to manage the
process and to respond quickly to small orders enhances the Company's
relationship with its customers.
ENGINEERING SERVICES. The Company also provides advice regarding the
types of fasteners to use in a product. These services are often used by
customers during early product development or re-engineering to decrease
the production cost, improve the assembly process or enhance the product
quality. The Company works with its customers' engineering departments
to select the appropriate fasteners and components based upon the
customer's specifications. These services often lower the customers'
cost by reducing the number of fasteners required to assemble the
product, replacing expensive special fasteners with less expensive
standard fasteners, reducing cycle times for new product development or
identifying different coatings to improve quality.
EDI SERVICES. The Company offers a wide range of EDI services to its
customers. In addition to offering invoice and payment options, the
Company can also offer its customers direct access to its current
inventory and the ability to enter an order directly into the Company's
system.
CUSTOMERS
The Company's subsidiaries have been in business for an average of 25 years
and have developed strong customer relationships. The Company serves
approximately 7,500 customers which manufacture a wide variety of products
including diesel engines, locomotives, power turbines, motorcycles,
telecommunications equipment, refrigeration equipment and aerospace equipment.
The Company's largest customers include The Boeing Company, Cummins Engine
Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes
Aircraft subsidiary of General Motors Corporation, Lockheed Martin Corporation
and The Trane Company. Revenues for the year ended December 31, 1998 from The
Boeing Company and Cummins Engine Company, our two largest customers,
represented 10% and 12% of total revenues (on a pro forma basis), respectively.
The Company's relationships with The Boeing Company and Cummins Engine Company
have been built over the last 30 and 8 years, respectively. On December 1, 1998,
The Boeing Company announced that it will reduce its production rates of certain
commercial aircraft in response to the economic crisis in Asia. This reduction,
in conjunction with a buildup of fastener inventory at The Boeing Company, has
recently led to reduced demand by The Boeing Company for the Company's products.
See "Risk Factors -- Concentration of Customer Base; Factors Relating to
Certain Customers" and "Risk Factors -- Customer Industry Risks and
Cyclicality."
Several of Pentacon's customers have international operations and some have
requested that the Company provide products and services to them in their
foreign locations. Approximately 13% of the Company's revenues (on a pro forma
basis) during the year ended December 31, 1998 were to customer locations
outside of the United States. Prior to the formation of Pentacon, resource
constraints had limited the Company's subsidiaries' ability to expand
internationally. In the future, the Company intends to selectively pursue these
opportunities.
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The following table sets forth information with respect to the Company's
approximate combined pro forma revenues by customer industry base for the year
ended December 31, 1998:
PERCENTAGE OF THE COMPANY'S PRO FORMA REVENUES BY INDUSTRY
YEAR ENDED
DECEMBER 31, 1998
-----------------
AEROSPACE
Airframe........................... 26%
Defense............................ 17
Space and Communications........... 4
Other Aerospace.................... 10
---
Subtotal........................... 57
---
INDUSTRIAL
Industrial Machinery............... 17
Electrical Machinery &
Electronics...................... 9
Motor Vehicles..................... 3
Other Industrial................... 14
---
Subtotal........................... 43
---
TOTAL......................... 100%
===
CUSTOMER CONTRACTS
The Company often enters into contracts with certain of its customers which
identify the package of products and services to be provided by the Company to
its customers. Although the contracts generally are written to establish a
relationship for a period of several years, the agreements usually may be
canceled by either party without cause upon 30 to 90 days' notice. In certain
instances where limited use or unique fasteners are required to serve a customer
account, the agreement will include a provision that obligates the customer to
acquire the Company's accumulated inventory of fasteners if the contract is
terminated prematurely.
BACKLOG
The Company does not have any significant backlog of orders.
SALES AND MARKETING
The Company currently employs approximately 230 people in sales and
marketing. Within sales and marketing, the Company employs 49 direct sales
personnel, with the remaining being product specialists and indirect customer
service personnel. The Company's sales efforts are focused on developing new
business with mid-size and large-size OEMs which are likely to benefit from cost
savings and operating efficiencies from the products and services offered by the
Company, as well as expanding business with existing customers by serving
additional sites and/or expanding the breadth of products and services provided
to that customer. Prior to the formation of Pentacon, the Company's marketing
efforts were primarily directed at customers on a site-by-site basis. To
capitalize on the Company's national presence and the trend by OEMs to decrease
their number of suppliers, the Company recently developed a national sales,
marketing and service effort targeted at multi-site customers. The national
sales effort is focused on developing a coordinated marketing effort to maximize
customer penetration and provide multi-site OEMs with company-wide procurement
and inventory management solutions which maximize cost savings and operating
efficiencies.
An important element in the Company's overall marketing strategy is to
provide superior customer service. The Company believes superior customer
service includes providing breadth of
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products, advanced services, innovative supply chain management solutions and
timely delivery of products. To implement this strategy, customer accounts are
typically serviced by a Pentacon team, which, depending on the size of the
account, will be comprised of the direct sales representative and certain
specialists in operations, procurement and advanced services such as quality
assurance testing. A critical component of the Company's strategy is
continuously monitoring the quality of customer service through both qualitative
and quantitative methods. For larger customers, such monitoring may include
providing on-site customer service representatives and daily tracking of
just-in-time deliveries, production efficiencies and quality of fasteners and
parts.
DELIVERY
The Company utilizes several forms of transportation to deliver its
products to its customers depending upon the urgency and frequency of delivery,
the customer's preference and cost. The Company utilizes common carriers,
Company-owned trucks, and overnight delivery services to deliver products to its
customers. The cost of transportation generally is paid by the customer. The
Company does not believe that it is materially dependent on any single
transportation service or carrier and believes that it currently maintains good
relationships with all of its common carriers.
SUPPLIERS AND OPERATIONS
The Company sells fasteners and small parts manufactured by over 2,000
suppliers located in more than 15 countries. The Company purchases fasteners and
small parts directly from the manufacturers and, to a lesser degree, from
authorized distributors. During the year ended December 31, 1998, no one
supplier accounted for more than 5% of the total products purchased.
The Company's decision to purchase from a specific supplier is based on
product specifications, quality, reliability of delivery, production lead times
and price. The Company has established itself as a partner of choice with some
of its suppliers, and management believes that because of the Company's size,
national presence and top tier customers it will continue to attract premier
supplier relationships. The Company believes it can realize further synergies by
consolidating some of its purchasing activities at the corporate level in order
to achieve price concessions for large volume orders.
The Company maintains 32 distribution facilities in 14 states. The Company
has ongoing facilities rationalization initiatives to close or combine redundant
facilities. To date, the Company has identified three of five distribution
centers in the Aerospace Group and one in the Industrial Group to be closed.
Pentacon will continue to evaluate existing and future facilities to determine
whether further reductions can be made.
Pentacon's materials management and distribution operations begin when
suppliers deliver products to the Company. Once delivered, the products are
taken into inventory and receive various service additions depending on customer
requests. Service additions include product enhancement (such as plating,
galvanizing or coating), quality assurance testing, kitting and sub-assembly.
Once an order is received from the customer, products are picked from inventory,
counted, packaged and shipped by the Company. Depending on the customer's
service program, the products may receive further handling by the Company at the
customer location. For a just-in-time customer, the Company often has an
employee at the customer's location to receive the inventory, deliver the
products to the work areas, and reorder and replenish products as needed.
COMPETITION
The Company is engaged in a highly fragmented and competitive industry.
Competition is based primarily on breadth of products, quality and breadth of
services, price and geographic proximity. The Company competes with a large
number of fastener distributors on a regional and local basis. Some of the
Company's competitors have greater financial resources than the Company and/or
established customer relationships with certain customers for whose business we
compete. The Company may also face competition for acquisition candidates from
these companies.
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MANAGEMENT INFORMATION SYSTEMS
Each of the acquired companies operates a management and information system
("MIS") that is used to purchase, monitor and allocate inventory throughout
its facilities. All of these systems include computerized order entry, sales
analysis, inventory status, invoicing and payment, and all but one include
bar-code tracking. These systems are designed to improve productivity for both
the Company and its customers. Most of the subsidiaries use EDI, through which
they offer their customers a paperless electronic process for order entry,
shipment tracking, customer billing, remittance processing and other routine
matters.
The Company's subsidiaries operated as independent companies prior to their
acquisition. The Company intends to coordinate and integrate the MIS systems of
its subsidiaries. The Aerospace Group is in the process of migrating to an
information system developed by DYMAX Products Inc., which process is expected
to be completed by July 1999. This system should facilitate product ordering,
pricing and reporting among the companies in the Aerospace Group. The Company is
also in the process of planning the integration of MIS systems within the
Industrial Group. Although the Company may not immediately implement a single
reporting system in the Industrial Group, the Company has identified various
integration opportunities which the Company expects will enable the Industrial
Group to obtain certain operating and reporting efficiencies.
GOVERNMENT REGULATION
The Fastener Quality Act (the "Fastener Act") was enacted on November 16,
1990 and was subsequently amended in March 1996 and August 1998. The
implementation date has been delayed several times. Currently the Fastener Act
is scheduled to be implemented in June 1999. The Fastener Act is intended to
protect the public safety by deterring the introduction of non-conforming
fasteners into commerce and by improving the traceability of fasteners.
Generally, the Fastener Act covers fasteners including screws, nuts, bolts or
studs with internal or external threads and load indicating washers with nominal
diameters of greater than approximately one quarter inch, which contain metal or
are held out as meeting a standard or specification that requires
through-hardening. The Fastener Act also covers fasteners and washers that are
marked with a grade identification required by a specification or standard. An
estimated 25% to 55% of currently available fasteners meet this definition and
would therefore be subject to the Fastener Act's requirements.
Fastener distributors such as the Company would be subject to the Fastener
Act with respect to certain of its products, once the Fastener Act is
implemented. The Fastener Act places responsibility on fastener manufacturers
and distributors to ensure that fasteners conform to the standards and
specifications to which the manufacturer represents it has been manufactured by
having them tested in a laboratory accredited under the Fastener Act. Persons
who significantly alter fasteners must mark the fasteners so as to permit
identification of the source of the alteration. Further, the Fastener Act
prohibits manufacturers and distributors from commingling like fasteners from
more than two different lots in the same container during packaging.
The Company currently operates four quality control laboratories at its
facilities and believes it will not be obligated to make any significant
investment to comply with the Fastener Act. One of the Company's laboratories
has been accredited under the Fastener Act. The Company anticipates that the
majority of any additional costs resulting from compliance with the Fastener Act
will be included in the prices to its customers. Some small fastener
distributors that perform quality control testing may be unable to invest in the
quality control equipment or services required to comply with the Fastener Act
and may be forced to discontinue or reduce the portions of their business that
become subject to the Fastener Act.
The Company's operations are subject to various federal, state and local
laws and regulations, including those relating to worker safety and protection
of the environment. The Company is a distributor and does not generally engage
in manufacturing. As a result, environmental laws generally
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have a minimal effect on its operations. The Company believes it is in
substantial compliance with all applicable regulatory requirements.
EMPLOYEES
At December 31, 1998, the Company had approximately 850 employees. The
Company believes that its relationship with its employees is good.
PROPERTIES
The Company operates 32 distribution and sales facilities throughout the
United States. The Company also maintains offices in Europe and Australia to
service its aerospace customers. These facilities range in size from 1,000
square feet to 74,000 square feet, and generally consist of warehouse space with
a small amount of associated office space. Four of the facilities include
laboratory space for quality testing. All of the facilities are leased. The
Company's leases expire between 1999 and 2012. The Company believes that
suitable replacement space will be available as required. See "Certain
Transactions -- Transactions Involving Certain Officers, Directors and
Stockholders -- Leases of Real Property." The Company believes that its current
facilities are adequate for its expected needs over the next several years.
However, the Company may add new facilities as a result of acquisitions or due
to a customer's request for an on-site or local facility.
The Company's corporate headquarters are located at 10375 Richmond Avenue,
Suite 700, Houston, Texas 77042, telephone number: 713-860-1000.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, other than
ordinary routine litigation incidental to its business that management believes
would not have a material adverse effect on its business, financial condition or
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ---- ---------------------------------------------------
<S> <C> <C>
Mark E. Baldwin...................... 45 Chairman of the Board and Chief Executive Officer
Jack L. Fatica....................... 54 President, Chief Operating Officer and Director
Brian Fontana........................ 41 Senior Vice President and Chief Financial Officer
Bruce M. Taten....................... 43 Senior Vice President, Chief Administrative
Officer, Corporate Secretary and General Counsel
Robert M. Chiste..................... 51 Director
Cary M. Grossman..................... 45 Director
Donald B. List....................... 43 Director
Mary E. McClure...................... 58 Director
Michael W. Peters.................... 40 Director
Benjamin E. Spence, Jr............... 45 Director
Clayton K. Trier..................... 47 Director
</TABLE>
MARK E. BALDWIN became Chief Executive Officer of the Company in September
1997 and became Chairman of the Board in November 1997. Mr. Baldwin has been
involved in the organization of the Company and the Company's initial public
offering. From 1980 through August 1997, Mr. Baldwin was employed by Keystone
International, Inc., a publicly traded manufacturer of industrial valves and
controls, serving most recently as President of the Industrial Valves & Controls
Group, a division with 17 manufacturing locations and multiple company-owned
sales and distribution locations in 15 countries.
JACK L. FATICA became President, Chief Operating Officer and director of
the Company in March 1998. Mr. Fatica has over 30 years of experience in the
fastener distribution business. He has been employed by AXS or its predecessors
since 1967 and currently serves as its Chief Executive Officer.
BRIAN FONTANA joined the Company in October 1997. From 1996 to 1997, Mr.
Fontana served as Executive Vice President and Chief Financial Officer of Prime
Service, Inc., one of the largest rental equipment companies in the United
States. From 1990 to 1996, he was employed by National Convenience Stores
Incorporated, most recently as Vice President and Chief Financial Officer. From
1985 to 1990, Mr. Fontana was employed by NationsBank as a Vice President of
Corporate Banking and earlier by Allied Bank of Texas as Assistant Vice
President.
BRUCE M. TATEN joined the Company in October 1997. From 1993 to 1997, Mr.
Taten was employed by Keystone International, Inc., most recently as Vice
President and General Counsel. From 1988 to 1993, Mr. Taten practiced law with
Sutherland Asbill & Brennan, a law firm based in Atlanta, Georgia. From 1983 to
1986, Mr. Taten practiced law with the New York firm of Simpson, Thacher &
Bartlett. Mr. Taten is a C.P.A. and an attorney.
ROBERT M. CHISTE became a director of the Company in March 1998. Mr. Chiste
is Chairman and Chief Executive Officer of TriActive Technologies, Inc. From
August 1997 to June 1998, Mr. Chiste was President of the Industrial Services
Group of Philip Services Corp. He served as Vice Chairman of Allwaste, Inc.
("Allwaste"), a provider of industrial and environmental services, from May
1997 through July 1997, President and Chief Executive Officer of Allwaste from
November 1994 through July 1997 and director of Allwaste from January 1995
through August 1997. Philip Services Corp. acquired Allwaste effective July 31,
1997. Mr. Chiste served as Chief Executive Officer and President of America
National Power, Inc., a successor company of Transco Energy Ventures Company,
from its creation in 1986 until August 1994. During the same period, he served
as Senior Vice President of Transco Energy Company. From 1980 to 1986, Mr.
Chiste served in various executive roles with
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Enron Oil & Gas and its predecessor companies. Mr. Chiste also serves as a
director of Innovative Valve Technology, Inc. and of Franklin Credit Management
Corp., a New York-based financial services company.
CARY M. GROSSMAN has been a director of the Company since March 1997. Mr.
Grossman co-founded McFarland, Grossman & Company, Inc. ("MGCO"), an
investment banking firm, in 1991, and serves as its Chief Executive Officer.
MGCO formed the Company in 1997 and sponsored the Company through its initial
public offering. From 1977 until 1991, Mr. Grossman was engaged in the practice
of public accounting. Mr. Grossman is a C.P.A. Mr. Grossman also is a director
of Omniplex Communications Group, Inc.
DONALD B. LIST became a director of the Company in March 1998 and is
President of Pentacon Aerospace Group, Inc. Mr. List has over 20 years of
experience in the fastener distribution business and has served as President of
Alatec Products, Inc. since 1981.
MARY E. MCCLURE became a director of the Company in March 1998. Ms. McClure
co-founded Capitol Bolt & Supply, Inc. in 1966 and has served as Capitol's
President since 1981. Ms. McClure has served as Chairman of the Southwest
Fastener Association and as Chairman/President of the National Fastener
Distributor Association. Ms. McClure has also been inducted into the Fastener
Hall of Fame.
MICHAEL W. PETERS became a director of the Company in March 1998 and is
President of Pentacon Industrial Group, Inc. Mr. Peters has over 13 years of
experience in the fastener distribution business. He joined Maumee Industries,
Inc. in 1986 and has served as its Chief Executive Officer since July 1995.
BENJAMIN E. SPENCE, JR. became a director of the Company in March 1998. Mr.
Spence has over 22 years of experience in the fastener distribution business and
has served as President of Sales Systems, Limited since 1986.
CLAYTON K. TRIER became a director of the Company in March 1998. Mr. Trier
has served as Chairman, Chief Executive Officer and President of RV Centers,
Inc., a company created to consolidate the highly fragmented recreational
vehicle retail industry, since October 1998. From April 1997 to October 1998,
Mr. Trier was a private investor. In 1993, he was a founder of U.S. Delivery
Systems, Inc. ("U.S. Delivery"), a company created to consolidate the highly
fragmented local delivery industry, and Mr. Trier served as Chairman and Chief
Executive Officer of U.S. Delivery from its inception until April 1997. In March
1996, U.S. Delivery, a NYSE-listed company at that time, was acquired by
Corporate Express, Inc., a large publicly owned office products company, and Mr.
Trier served as a director of Corporate Express, Inc. from the acquisition date
until January 1997. From 1991 to 1993, Mr. Trier was President of Trier &
Partners, Inc., a consulting firm. From 1987 through 1990, Mr. Trier served as
President and Co-Chief Executive Officer of Allwaste, a provider of industrial
and environmental services listed on the NYSE. From 1974 to 1987, Mr. Trier was
at the international accounting firm of Arthur Andersen & Co., in which he was a
partner from 1983 to 1987. Mr. Trier also serves as a director of Creative
Master International, Inc. (Nasdaq: CMST), a manufacturer and distributor of
collectible-quality, die-cast replicas of cars, trucks and other items.
Directors are elected at each annual meeting of stockholders. The Board of
Directors is divided into three classes of directors, with directors serving
staggered three-year terms, expiring at the annual meeting of stockholders for
fiscal years 1999, 2000 and 2001, respectively. At each annual meeting of
stockholders, one class of directors will be elected for a full term of three
years to succeed to that class of directors whose terms are expiring. Messrs.
List's, Fatica's and Chiste's terms expire in 2001; Messrs. Spence's, Peters'
and Trier's terms expire in 2000 and Ms. McClure's, Mr. Baldwin's and Mr.
Grossman's terms expire in 1999. Mr. Grossman is the director elected by the
holders of the restricted common stock. The Company has agreed to nominate each
of the Directors from the Founding Companies for re-election upon any expiration
of their terms occurring prior to March, 2003.
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All officers serve at the discretion of the Board of Directors, subject to the
terms of their respective employment agreements. See "-- Employment
Agreements."
The Board of Directors has established an Audit Committee, a Compensation
Committee and a Committee on Director Affairs. The Audit Committee recommends
the appointment of auditors and oversees the accounting and audit functions of
the Company. The Compensation Committee determines executive officers' and key
employees' salaries and bonuses and administers the Pentacon, Inc. 1998 Stock
Plan. Messrs. Chiste and Trier serve as members of the Company's Compensation
Committee and Messrs. Chiste, Trier and Grossman comprise the Company's Audit
Committee. The Committee on Director Affairs administers the Company's corporate
governance program, recommends individuals to serve on the Company's Board of
Directors, and reviews transactions between the Company and its directors to
ensure fairness. Messrs. Trier, Grossman, Fatica and Baldwin serve as members of
the Committee on Director Affairs.
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives an annual fee of $16,000 paid in equal quarterly amounts.
Directors of the Company are reimbursed for out-of-pocket expenses incurred in
attending meetings of the Board of Directors or committees thereof, and for
other expenses incurred in their capacity as directors of the Company. Each
non-employee director receives stock options to purchase 15,000 shares of common
stock upon election to the Board of Directors and an annual grant of 5,000
options. Mr. Grossman was appointed lead director for fiscal 1999 for which he
is to receive an additional $10,000 and options to purchase 10,000 shares of
common stock. In March 1998, Messrs. Chiste and Trier each purchased 10,000
shares of common stock at $10.00 per share and the Company granted each of
Messrs. Chiste and Trier 10,000 shares of common stock pursuant to restricted
stock grants under the 1998 Stock Plan.
EXECUTIVE COMPENSATION
The following table presents compensation information for the Company's
Chief Executive Officer and five additional most highly compensated executive
officers (the "Named Executive Officers") for the year ended December 31,
1998. The Company was incorporated in March 1997 but did not conduct any
business operations until March 1998. As a result, none of the Named Executive
Officers received any compensation from the Company prior to March 1998.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
AWARDS
------------------------
ANNUAL COMPENSATION SECURITIES PAYOUTS
------------------------------------ RESTRICTED UNDERLYING -------
OTHER ANNUAL STOCK OPTION LTIP ALL OTHER
NAME SALARY(1) BONUS COMPENSATION AWARD(S) PLANS/SARS PAYOUTS COMPENSATION
- ---------------------------------------- --------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark E. Baldwin......................... $ 121,500 -- -- -- 185,000 -- --
Jack L. Fatica.......................... 121,500 -- -- -- -- -- $ 13,700
Donald B. List.......................... 121,500 -- -- -- -- -- 14,000
Michael W. Peters....................... 121,500 -- -- -- -- -- 14,500
Bruce M. Taten.......................... 121,500 -- -- -- 100,000 -- --
Brian Fontana........................... 121,500 -- -- -- 85,000 -- --
</TABLE>
- ------------
(1) Each of the Named Executive Officers' salaries are based on annual salaries
of $150,000.
50
<PAGE>
OPTION GRANTS
The following table sets forth information with respect to stock options
granted in 1998 under the Company's 1998 Stock Plan to the Named Executive
Officers.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------- AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE OPTION TERM(1)
GRANTED IN FISCAL PER EXPIRATION --------------------------
NAME (#) YEAR SHARE DATE 5% 10%
- ------------------------------------- ---------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mark E. Baldwin(2)................... 185,500 16.76% $ 10.00 3/10/08 $ 1,163,446 $ 2,948,419
Jack L. Fatica....................... -0- -- -- -- -- --
Donald B. List....................... -0- -- -- -- -- --
Michael W. Peters.................... -0- -- -- -- -- --
Bruce M. Taten(2).................... 100,000 9.06% 10.00 3/10/08 628,890 1,593,740
Brian Fontana(2)..................... 85,000 7.70% 10.00 3/10/08 534,556 1,354,679
</TABLE>
- ------------
(1) The SEC requires disclosure of the potential realizable value or present
value of each grant. This disclosure assumes the options will be held for
the full term prior to exercise. These options may be exercised prior to the
end of the term. The actual value, if any, an executive officer may realize
will depend upon the excess of the stock price over the exercise price or
the date the option is exercised. There can be no assurance that the stock
price will appreciate at the rates shown in the table.
(2) The options awarded to Messrs. Baldwin, Taten and Fontana were issued in
connection with the initial public offering of the Company and vest
one-third on March 10, 2000 and the remainder on March 10, 2001.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth information with respect to the value of
unexercised options held by Named Executive Officers of the Company. No options
were exercised by the Named Executive Officers of the Company during the year
ended December 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS HELD AT OPTIONS HELD AT
DECEMBER 31, 1998 DECEMBER 31, 1998
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark E. Baldwin...................... -0- 185,000 -0- -0-
Jack L. Fatica....................... -0- -0- -0- -0-
Donald B. List....................... -0- -0- -0- -0-
Michael W. Peters.................... -0- -0- -0- -0-
Bruce M. Taten....................... -0- 100,000 -0- -0-
Brian Fontana........................ -0- 85,000 -0- -0-
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each Named
Executive Officer of the Company that prohibit such officers from disclosing the
Company's confidential information and trade secrets and generally restrict
these individuals from competing with the Company for a period of two years
after the termination of their respective employment agreements. Messrs.
Baldwin's, Fatica's, Peters' and List's employment agreements have an initial
term of five years commencing March 10, 1998. The agreements for Messrs. Taten
and Fontana have an initial term of three years
51
<PAGE>
commencing March 10, 1998. All of the employment agreements are terminable by
the Company for "good cause" upon ten days' written notice and without
"cause" or for "good reason" by the officer upon thirty days' written
notice. All employment agreements provide that if the officer's employment is
terminated by the Company without "good cause," such officer will be entitled
to receive a lump-sum severance payment at the effective time of termination.
All of the employment agreements contain certain provisions concerning a
change-in-control of the Company, including the following: (i) in the event that
the executive is not notified by the acquiring company that it will assume the
Company's obligations under the employment agreement at least five days in
advance of the transaction giving rise to the change-in-control, the
change-in-control will be deemed a termination of the employment agreement by
the Company without "cause," and the provisions of the employment agreement
governing the same will apply, except that the severance amount otherwise
payable shall be tripled and the provisions which restrict competition with the
Company shall not apply; and (ii) in any change-in-control situation, such
officer may elect to terminate his employment by giving ten days' written notice
prior to the anticipated closing of the transaction giving rise to the
change-in-control, which will be deemed a termination of the employment
agreement by the Company without "cause," and the provisions of the employment
agreement governing the same will apply, except that the severance amount
otherwise payable shall be doubled and the time period during which such officer
is restricted from competing with the Company will be eliminated.
1998 STOCK PLAN
The Board of Directors has adopted, and the stockholders of the Company
have approved, the Pentacon, Inc. 1998 Stock Plan (the "1998 Stock Plan"). The
purpose of the 1998 Stock Plan is to provide directors, officers, key employees
and certain other persons who will be instrumental in the success of the Company
or its subsidiaries with additional incentives by increasing their proprietary
interest in the Company. The aggregate amount of common stock with respect to
which options or other awards may be granted may not exceed 1,700,000 shares
(subject to adjustment to reflect stock splits). As of December 31, 1998, the
Company had granted options and other awards for a total of 1,103,730 shares
under the 1998 Stock Plan.
52
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Simultaneously with the closing of its initial public offering in March
1998, the Company acquired by merger all of the issued and outstanding capital
stock of the Founding Companies, at which time each Founding Company became a
wholly owned subsidiary of the Company. The aggregate consideration paid by the
Company to acquire the Founding Companies consisted of (i) approximately $21.9
million in cash (net of cash acquired) and (ii) 6,720,000 shares of common
stock. In addition, certain indebtedness of the Founding Companies, which was
personally guaranteed by Founding Company stockholders, was repaid in connection
with the Initial Acquisitions.
In connection with the Initial Acquisitions, certain officers, directors
and holders of more than 5% of the outstanding shares of the Company, together
with trusts for which they act as trustees, received cash and shares of common
stock of the Company described in the following table. These amounts do not
include any S-corporation distributions which were made by certain of the
Founding Companies to their stockholders prior to the Initial Acquisitions.
<TABLE>
<CAPTION>
SHARES OF
CASH COMMON STOCK
--------- ------------
<S> <C> <C>
(In thousands of dollars,
except share amounts)
Donald B. List....................... $ 12,666 2,969,493
Jack L. Fatica....................... 3,423 802,656
Michael Black........................ 3,844 901,321
Benjamin E. Spence, Jr. ............. 1,170 232,132
Mary E. McClure...................... 661 154,898
--------- ------------
Total........................... $ 21,764 5,060,500
========= ============
</TABLE>
On November 18, 1997, and in connection with the initial formation of the
Company, the Company sold 200,000, 125,000 and 125,000 shares of common stock of
the Company to Messrs. Baldwin, Taten and Fontana, respectively, for $0.01 per
share.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
LEASES OF REAL PROPERTY
Alatec leases certain of its facilities located in Chatsworth, California
from Mr. List, a director of the Company. The leases provide for a total annual
rent of $462,840 with the terms of the leases expiring in March 2012. Alatec
also pays taxes and utilities on the leased premises. The rent will be adjusted
in accordance with the Consumer Price Index ("CPI"), subject to a minimum of
4% and a maximum of 8%. In addition, Alatec leases its warehouse in Fremont,
California from FDR Properties, an entity controlled and partially owned by Mr.
List. This lease expires August 31, 2003 and provides for an annual rent of
$126,000. Alatec also pays taxes and utilities on those premises. The Company
leases from the List Family Trust an office and warehouse in Chatsworth,
California. The lease provides for an annual rental of $170,832 and terminates
in October 2012. Alatec also pays utilities and taxes on the premises. The
Company believes that the rent for each of these properties does not exceed fair
market value.
AXS leases certain real property located in Erie, Pennsylvania from JFJ
Realty Company, an entity owned in part by Mr. Fatica, a director and officer of
the Company. The lease for the property runs through August 2006 and provides
for an annual rent of $240,000 through August 30, 2001. Beginning September 1,
2001, the rent will be adjusted to fair market value as determined on February
1, 2001. Furthermore, AXS pays taxes and utilities on the leased premises. The
Company believes that the rent for this property does not exceed fair market
value.
53
<PAGE>
SSL leases certain real properties located in Chester, South Carolina from
Chester Associates, LLC, an entity owned in part by Mr. Spence, a director of
the Company. One facility in Chester, South Carolina is leased for an initial
five year term expiring December 31, 2002, with an option to extend the lease
for an additional five year term. The annual rent for the first year of this
lease is $61,250. The rent will increase each subsequent year of the lease based
on the CPI, not to increase more than 4%. SSL is responsible for utilities.
Also, certain warehouse space in South Carolina is leased to SSL by Chester
Associates, LLC. This warehouse is leased for an initial five year term expiring
December 31, 2002, with an option to extend for an additional five year term.
The annual rent for the first year of this lease is $55,000, with subsequent
rental rates to increase per the CPI, not to exceed 4% in any one year. SSL is
responsible for utilities. The Company believes that the rent for these
properties does not exceed fair market value.
OTHER TRANSACTIONS
Mr. List owns approximately 50% of a supplier from which the Company
purchased approximately $1.8 million of products during the fiscal year ended
September 30, 1998. The Company believes all such purchases have been at fair
market prices. The Company anticipates continuing to purchase products from the
supplier in the future so long as the prices and terms remain competitive with
those of alternative suppliers.
In March 1998 Mr. Fatica acquired certain life insurance policies from AXS
for the cash surrender value of the policy.
Mr. Grossman is a principal in McFarland, Grossman & Company ("MG&C"), an
investment banking and advisory firm. The Company engaged the services of an
employee of MG&C from March 10, 1998 until July 10, 1998 to assist the Company
with the development of its mergers and acquisition activities until the Company
could employ an individual to assume that function. Pursuant to this agreement,
the Company paid MG&C fees in the amount of $300,000 during the year ended
December 31, 1998. The Company also paid MG&C fees for the year ended December
31, 1998 in the amount of $600,000 in connection with the placement of the
Company's initial credit facility and $12,500 for consulting services rendered
in connection with the Company's high-yield offering (which was completed in
1999). The Company has entered into an indemnity agreement with certain
principals of MG&C in connection with the initial public offering and the
conduct of audit procedures at certain of the Founding Companies.
All of the directors of Pentacon, other than Messrs. Grossman, Chiste and
Trier, are employees of Pentacon or one of its subsidiaries and as such receive
employment-based compensation and benefits from the Company.
COMPANY POLICY
Any future transactions with directors, officers, employees or affiliates
of the Company must be approved in advance by a majority of disinterested
members of the Board of Directors.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
common stock as of February 28, 1999, by (i) all persons known to the Company to
be the beneficial owner of 5% or more thereof, (ii) each director and nominee
for director, (iii) each executive officer and (iv) all officers and directors
as a group. Unless otherwise indicated, the address of each such person is c/o
Pentacon, Inc., 10375 Richmond Avenue, Suite 700, Houston, Texas 77042. All
persons listed have sole voting and investment power with respect to their
shares unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-----------------------
NUMBER PERCENT
----------- -------
<S> <C> <C>
Donald B. List(1).................... 2,979,493 17.9%
Jack L. Fatica(2).................... 1,043,220 6.3
Generations Family Limited
Partnership(3)....................... 901,321 5.4
Wellington Management Company,
LLP(4)............................... 835,000 5.0
Cary M. Grossman(5).................. 358,615 2.2
Michael W. Peters.................... 297,441 1.8
Benjamin E. Spence, Jr.(6)........... 253,332 1.5
Mark E. Baldwin...................... 207,100 1.2
Mary E. McClure(7)................... 184,470 1.1
Brian Fontana........................ 133,000 *
Bruce M. Taten....................... 132,000 *
Clayton K. Trier(8)(9)............... 45,000 *
Robert M. Chiste(8).................. 20,000 *
All officers and directors as a group
(14 persons)....................... 5,735,476 34.4%
</TABLE>
- ------------
* Less than one percent.
(1) Includes an aggregate of 76,248 shares of common stock held by three trusts
for the benefit of Mr. List's minor children. Mr. List disclaims any
beneficial ownership of the shares owned by the trusts.
(2) Includes 92,782 shares of common stock owned by the Jason P. Fatica Trust
and 92,782 shares of common stock owned by the Ryan A. Fatica Trust of which
Mr. Fatica is co-trustee.
(3) Represents shares of common stock owned by the Generations Family Limited
Partnership of which Mr. Michael Black is General Partner. The Partnership
address is 4648 Craftsbury Circle, Fort Wayne, Indiana, 46818.
(4) Wellington Management Company, LLP ("WMC") in its capacity as investment
adviser may be deemed to beneficially own 835,000 shares of common stock
which are held of record by clients of WMC. WMC's address is 75 State
Street, Boston, Massachusetts, 02109.
(5) Consists of 152,000 shares owned directly by Mr. Grossman; 193,304 shares
owned by a family limited partnership of which Mr. Grossman is a general
partner; 12,875 shares owned by McFarland, Grossman & Company, Inc.; and 436
shares owned by Mr. Grossman's children. Mr. Grossman disclaims beneficial
ownership of shares held by the family limited partnership, McFarland,
Grossman & Company, and his children.
(6) Includes 4,350 shares of common stock owned by the Morgan E. Spence Trust
and 4,350 shares of common stock owned by the Alison R. Spence Trust of
which Mr. Spence is the trustee.
(7) Includes 84,243 shares of common stock owned by the Earl Milton McClure, Jr.
Residuary Trust of which Ms. McClure is trustee.
(8) Includes 10,000 shares granted as a restricted stock grant under the 1998
Stock Plan.
(9) Includes 2,000 shares of common stock owned by the KKT Trust and 2,000
shares of common stock owned by the JCT Trust of which Mr. Trier is trustee.
55
<PAGE>
DESCRIPTION OF BANK CREDIT FACILITY
The Company has entered into the Bank Credit Facility dated as of September
3, 1998, and amended as of December 31, 1998, as of February 12, 1999, as of
March 9, 1999 and as of March 29, 1999, with NationsBank, N.A. as the
administrative agent. The following is a summary description of the principal
terms of the Bank Credit Facility. The description set forth below does not
purport to be complete and is qualified in its entirety by reference to the
agreements setting forth the principal terms and conditions of the Bank Credit
Facility, which are available upon request from the Company. Capitalized terms
used herein without definition have the meanings ascribed to them in the Bank
Credit Facility.
STRUCTURE. Prior to the issuance of the existing notes, the Bank Credit
Facility consisted of (i) a revolving term loan of up to $40.0 million and (ii)
a revolving credit facility providing for revolving loans and letters of credit
in an aggregate principal amount at any time not to exceed $110.0 million. Upon
the closing of the offering of the existing notes and the use of the proceeds
therefrom, the revolving line of credit under the Bank Credit Facility was
reduced to $85.0 million, subject to a borrowing base limitation, and the
revolving term loan was fully repaid and canceled. Subject to certain
conditions, Pentacon may at any time irrevocably reduce the availability under
the revolving credit facility.
AMOUNTS OUTSTANDING; AVAILABILITY. At December 31, 1998, indebtedness
under the Bank Credit Facility consisted of outstanding borrowings under the
revolving term loan and revolving credit facility of $40.0 million and $95.1
million, respectively. Assuming the issuance of the existing notes had occurred
on December 31, 1998 or February 28, 1999 (including Pentacon's use of the net
proceeds and the changes to the structure of the Bank Credit Facility as
described above) the Company would have had $32.1 million and $34.1 million
available under the Bank Credit Facility as of December 31, 1998 and February
28, 1999, respectively. See "Use of Proceeds."
MATURITY; PREPAYMENTS. The revolving credit facility will mature on
December 31, 2001. Pentacon is required to use the proceeds from certain
issuances of capital stock and the proceeds from the incurrence of debt to repay
outstanding amounts under the Bank Credit Facility. Subject to certain
exceptions, amounts repaid under the revolving credit facility may be
reborrowed. The Bank Credit Facility permits optional prepayments with notice
and reimbursement for certain costs and requires prepayments in the event of the
sale of obsolete or no longer useful property of the Company.
SECURITY; GUARANTEE. Pentacon's obligations under the Bank Credit Facility
are unconditionally guaranteed by each existing and subsequently acquired or
organized subsidiary of Pentacon, subject to certain exceptions. The Bank Credit
Facility and the guarantees thereof are collateralized by Pentacon's and the
guarantors' accounts receivable, inventories, general intangibles and by
substantially all of their other personal property and the proceeds of the
foregoing, subject to certain limited exceptions. In addition, Pentacon has
pledged the stock of its subsidiaries as security for the Bank Credit Facility.
INTEREST. Borrowings under the Bank Credit Facility bear interest at
either (i) the higher of (a) the Federal Funds Rate plus 0.5% or (b) the Prime
Rate, plus, in each case, a margin of 0.25% to 1.50% or (ii) the London
interbank offered rate (LIBOR) plus a margin of 1.75% to 3.25%. The margin in
either case is determined based on the Company's debt to Adjusted EBITDA ratio
(the "Leverage Ratio"). Interest on the Bank Credit Facility is payable
quarterly, except that interest on loans based on LIBOR rates for periods of
less than three months is payable at such shorter intervals (i.e. one month).
FEES. Pentacon is required to pay the lenders, on a quarterly basis,
commitment fees which range from 0.25% to 0.50% on the unused portion of the
revolving credit facility determined based on the Leverage Ratio. Pentacon is
also obligated to pay: (i) a quarterly letter of credit fee equal to the margin
for LIBOR loans on the aggregate amount of outstanding letters of credit, (ii) a
fronting bank fee for the letter of credit issuing bank equal to 0.125% per
annum and (iii) certain other fees.
56
<PAGE>
COVENANTS. The Bank Credit Facility contains a number of covenants that,
among other things, restrict the ability of Pentacon and its subsidiaries to
dispose of assets, incur additional indebtedness, create encumbrances on assets,
enter into sale and leaseback transactions, make investments, loans,
distributions or advances, engage in mergers or consolidations, make capital
redemptions or repurchases, change the business conducted by Pentacon or its
subsidiaries or engage in certain transactions with affiliates, and certain
other corporate activities. In addition, the Bank Credit Facility requires that
the Company comply with specified financial ratios and financial tests,
including a maximum total debt to Adjusted EBITDA ratio, a maximum senior debt
to Adjusted EBITDA ratio, a minimum fixed charge coverage ratio, a minimum net
worth test and a maximum capital expenditures test. The permitted total debt to
Adjusted EBITDA ratio steps down over the period of the Bank Credit Facility,
with the step downs to the total debt to Adjusted EBITDA ratio being on March
31, 2000 and June 30, 2000.
EVENTS OF DEFAULT. The Bank Credit Facility contains customary events of
default, including non-payment of principal, interest or fees, inaccuracy of
representations or warranties, default in the payment of other debt, violation
of covenants, insolvency, certain judgments, invalidity of any of the security
instruments required by the Bank Credit Facility, certain change of control
events, change in usual business and the occurrence of certain other events that
could be expected to have a material adverse affect on the Company as described
therein.
57
<PAGE>
DESCRIPTION OF THE NOTES
The exchange notes will be issued, and the existing notes were issued,
under an indenture among the Company, each of the guarantors of the notes (the
"guarantors") and State Street Bank and Trust Company, as trustee. The
indenture is qualified under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), upon effectiveness of this registration statement for
the exchange offer. By its terms, however, the indenture incorporates certain
provisions of the Trust Indenture Act and, upon consummation of this exchange
offer, the indenture is subject to and governed by the Trust Indenture Act.
References to the "notes" include the exchange notes unless the context
otherwise requires. The following summary of the material provisions of the
indenture and the notes does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the indenture and
the notes, including the definitions of certain terms contained therein and
those terms made part of the indenture by reference to the Trust Indenture Act.
The definitions of certain capitalized terms used in the following summary are
set forth below under "-- Certain Definitions." As used in this "Description
of the Notes," the term "Company" refers only to Pentacon, Inc. and not to
any of its subsidiaries.
GENERAL
The notes will be unsecured senior subordinated obligations of the Company
limited to $100,000,000 aggregate principal amount. The notes will be issued
only in fully registered form without coupons, in denominations of $1,000 and
integral multiples thereof. Principal of, premium, if any, and interest on the
notes are payable, and the notes are exchangeable and transferable, at the
office or agency of the Company in The City of New York maintained for such
purposes (which initially will be the corporate trust office of the trustee);
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the Person entitled thereto as shown on the security
register. No service charge will be made for any registration of transfer,
exchange or redemption of the notes, except in certain circumstances for any tax
or other governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The notes will mature on April 1, 2009. Interest on the notes will accrue
at the rate of 12 1/4% per annum from the Issue Date through maturity; provided
that in the event either (x) EBITDA (as defined below) of the Company and the
Restricted Subsidiaries does not equal or exceed $7.25 million (the "EBITDA
Target") for the quarter ended March 31, 1999, the interest rate on the notes
will increase by 0.50% per annum to a rate of 12 3/4% per annum and the notes
would begin accruing interest at such higher rate on April 1, 1999, or (y)
EBITDA of the Company and the Restricted Subsidiaries does not equal or exceed
the EBITDA Target for the quarter ended June 30, 1999, the interest rate on the
notes will increase by 0.50% per annum to a rate of 12 3/4% per annum and the
notes would begin accruing interest at such higher rate on July 1, 1999;
provided, further, that the interest rate on the notes will not exceed 12 3/4%
per annum. Following any increase in interest rate as stated above, no further
adjustment (upward or downward) shall be made to the interest rate on the notes.
In the event the Company and the Restricted Subsidiaries meet the EBITDA Target
for each of the quarters ended March 31, 1999 and June 30, 1999, no adjustment
(upward or downward) will be made to the interest rate. In the event the
interest rate is increased pursuant to this paragraph, such event shall be
referred to as an "Interest Payment Triggering Event." The EBITDA Target is
not intended to be a projection and there can be no assurance that the Company
and the Restricted Subsidiaries will meet the EBITDA Target. If the Company
fails to file a quarterly report on Form 10-Q for a quarter when it would
otherwise be required by the Commission's rules, whether or not it is so
obligated to do so, for which the EBITDA Target is being determined, EBITDA for
such quarter shall be deemed to be less than the EBITDA Target.
As used in the preceding paragraph, "EBITDA" means "Consolidated Cash
Flow Available for Fixed Charges" as defined under "-- Certain Definitions"
below; provided that all Consolidated Cash
58
<PAGE>
Flow Available for Fixed Charges attributable to any Persons, assets or property
that were the subject of any Asset Acquisition or Investment (without giving
effect to the last sentence of the definition of Investment) made during the
quarters ended March 31, 1999 and June 30, 1999 shall be excluded from EBITDA.
EBITDA shall be derived from the applicable unaudited interim consolidated
financial statements of the Company and shall be determined in good faith by the
Company, consistent with the audited financial statements of the Company
included in this Prospectus, with all necessary normal recurring adjustments,
and shall be communicated to the trustee by officer's certificate signed by two
officers of the Company on or prior to the date such financial statements are
filed with the Commission.
Interest on the notes will be payable semi-annually on each April 1 and
October 1, commencing October 1, 1999, to the holders of record of notes at the
close of business on the March 15 and September 15, respectively, immediately
preceding such interest payment date. Interest on the notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the Issue Date. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
As discussed under "Registration Rights," pursuant to the registration
rights agreement, the Company has agreed to file with the Commission the
exchange offer registration statement, of which this prospectus is a part, and
to offer to the holders of notes who make certain representations the
opportunity to exchange their existing notes for exchange notes. In the event
that the Company is not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or Commission policy or, in
certain other circumstances, including if for any other reason the exchange
offer is not consummated within 150 days after the Issue Date, the Company will
file with the Commission the shelf registration statement with respect to
resales of the existing notes by the holders thereof. The interest rate on the
notes is subject to increase under certain circumstances if the Company is not
in compliance with its obligations under the registration rights agreement. See
"Registration Rights."
OPTIONAL REDEMPTION
OPTIONAL REDEMPTION. The notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after April 1, 2004, at the
redemption prices (expressed as percentages of the principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the date of
redemption, if redeemed during the 12-month period beginning on April 1 of the
years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------------------------- ----------
<S> <C>
2004................................. 106.125%
2005................................. 104.083%
2006................................. 102.041%
2007 and thereafter.................. 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON QUALIFIED EQUITY OFFERING. On or prior to April
1, 2002, the Company may, at its option, use the net proceeds of one or more
Qualified Equity Offerings (as defined below) to redeem up to 35% of the
originally issued aggregate principal amount of the notes, at a redemption price
in cash equal to 112.25% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption; provided that at
least 65% of the aggregate principal amount of notes is outstanding following
such redemption. Notice of any such redemption must be given not later than 60
days after the consummation of any such Qualified Equity Offering.
As used in the preceding paragraph, a "Qualified Equity Offering" means
(i) any underwritten public offering of Capital Stock (other than Redeemable
Capital Stock) of the Company made on a primary basis by the Company pursuant to
a registration statement filed with and declared effective by the Commission in
accordance with the Securities Act or (ii) any sale of Capital Stock (other than
59
<PAGE>
Redeemable Capital Stock) for gross cash proceeds of at least $20.0 million to
one or more Persons, provided that such Persons are not Affiliates of the
Company at the time of such sale.
SELECTION AND NOTICE. In the event that less than all of the notes are to
be redeemed at any time, selection of notes for redemption shall be made by the
trustee in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed or, if the notes are not listed
on a national securities exchange, on a pro rata basis, by lot or by such method
as the trustee will deem fair and appropriate; provided, however, that no notes
of a principal amount of $1,000 or less shall be redeemed in part; provided,
further, however, that any such redemption made with the net proceeds of a
Qualified Equity Offering shall be made on a pro rata basis or on as nearly a
pro rata basis as practicable (subject to the procedures of The Depository Trust
Company or any other depositary). Notice of redemption will be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of notes to be redeemed at its registered address. If any note is to
be redeemed in part only, the notice of redemption that relates to such note
will state the portion of the principal amount thereof to be redeemed. A new
note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original note.
On and after the redemption date, interest will cease to accrue on notes or
portions thereof called for redemption so long as the Company has deposited with
the paying agent for the notes funds in satisfaction of the applicable
redemption price pursuant to the indenture.
CHANGE OF CONTROL
The indenture provides that, following the occurrence of a Change of
Control (the date of such occurrence being the "Change of Control Date"), the
Company will be obligated, within 60 days after the Change of Control Date, to
make and consummate an offer to purchase (a "Change of Control Offer") all of
the then outstanding notes at a purchase price (the "Change of Control Purchase
Price") in cash equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the purchase date. The Company will be
required to purchase all notes properly tendered in the Change of Control Offer
and not withdrawn.
In order to effect such Change of Control Offer, the Company will, not
later than the 30th day after the Change of Control Date, be obligated to mail
to each holder of notes a notice of the Change of Control Offer, which notice
will govern the terms of the Change of Control Offer and will state, among other
things, the procedures that holders must follow to accept the Change of Control
Offer. The Change of Control Offer will be required to be kept open for a period
of at least 20 business days.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the notes that might be tendered by holders of notes seeking to accept the
Change of Control Offer. The Credit Facility prohibits the purchase of the notes
by the Company prior to full repayment of the indebtedness under the Credit
Facility. In addition, the Company may incur additional indebtedness in the
future, subject to certain limitations, which may have similar restrictions.
There can be no assurance that in the event of a Change of Control, the Company
will be able to obtain the necessary consents from lenders under the Credit
Facility or lenders under other indebtedness to consummate the Change of Control
Offer. If the Company fails to repurchase all of the notes tendered for
purchase, such failure will constitute an Event of Default under the indenture.
See "-- Events of Default" below.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act, and any other applicable securities laws
or regulations and any applicable requirements of any securities exchange on
which the notes are listed, in connection with the repurchase of notes pursuant
to a Change of Control Offer, and any violation of the provisions of the
indenture relating to such Change of Control Offer occurring as a result of such
compliance shall not be deemed a Default.
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SUBORDINATION
The payment of the Indebtedness evidenced by the notes, including, without
limitation, principal, premium, if any, and interest, will be subordinated in
right of payment, as set forth in the indenture, to the prior payment in full of
all Senior Indebtedness of the Company, whether outstanding at the Issue Date or
incurred thereafter. The indenture permits the Company and the Restricted
Subsidiaries to incur additional Indebtedness, including Senior Indebtedness.
See "-- Certain Covenants -- Limitation on Indebtedness."
The indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company, or
any liquidation, dissolution or other winding-up of the Company, whether
voluntary or involuntary, or any assignment for the benefit of creditors or
other marshalling of assets or liabilities of the Company, all Senior
Indebtedness of the Company must be paid in full in cash before any payment,
distribution, repurchase or redemption (excluding any payment, distribution,
repurchase or redemption from trusts previously created pursuant to the
provisions described under "-- Defeasance or Covenant Defeasance of
Indenture," and excluding any payment, distribution, repurchase or redemption
of, or repurchase or redemption in exchange for, Permitted Junior Securities) is
made on account of any of the indebtedness represented by the notes. If any
payment is made to holders of the notes or the trustee on behalf of such
holders, that due to the subordination provisions of the indenture, should not
have been made to them, such holders or the trustee, as applicable, will be
required to pay such amount over to or for the benefit of holders of Senior
Indebtedness.
During the continuance of any default in the payment of any Designated
Senior Indebtedness pursuant to which the maturity thereof may immediately be
accelerated beyond any applicable grace period and after receipt by the trustee
from representatives of holders of such Designated Senior Indebtedness of
written notice of such default, no payment or distribution of any assets of the
Company of any kind or character (excluding any payment, distribution,
redemption or repurchase from trusts previously created pursuant to the
provisions described under "-- Defeasance or Covenant Defeasance of Indenture"
and excluding any payment or distribution of Permitted Junior Securities) shall
be made on account of any of the Indebtedness represented by, or the purchase,
redemption or other acquisition of, the notes unless and until such default has
been cured or waived or has ceased to exist or such Designated Senior
Indebtedness shall have been discharged or paid in full.
During the continuance of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated (a "Non-payment Default") and upon the earlier to
occur of (a) the receipt by the trustee from the representatives of holders of
such Designated Senior Indebtedness of a written notice of such Non-payment
Default or (b) if such Non-payment Default results from the acceleration of the
notes, the date of such acceleration, no payment or distribution of any assets
of the Company of any kind or character (excluding any payment or distribution
from trusts previously created pursuant to the provisions described under
"-- Defeasance or Covenant Defeasance of Indenture" and excluding any payment
or distribution of Permitted Junior Securities) may be made by the Company on
account of any of the Indebtedness represented by, or the purchase, redemption
or other acquisition of, the notes for the period specified below (the "Payment
Blockage Period").
The Payment Blockage Period will commence upon the earlier of the receipt
of notice of a Non-payment Default by the trustee from the representatives of
holders of Designated Senior Indebtedness or the date of acceleration referred
to in clause (b) of the preceding paragraph, as the case may be, and will end on
the earlier to occur of the following events: (i) 179 days shall have elapsed
since the receipt of such notice of a Non-payment Default or the date of
acceleration referred to in clause (b) of the preceding paragraph (provided that
such Designated Senior Indebtedness shall not theretofore have been accelerated
and the Company has not defaulted with respect to the payment of such Designated
Senior Indebtedness), (ii) such default is cured or waived or ceases to exist or
such Designated Senior
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Indebtedness is discharged or (iii) such Payment Blockage Period shall have been
terminated by written notice to the Company or the trustee from the
representatives of holders of Designated Senior Indebtedness initiating such
Payment Blockage Period. After the end of any Payment Blockage Period the
Company shall promptly resume making any and all required payments in respect of
the notes, including any missed payments. Notwithstanding anything in the
subordination provisions of the indenture or the notes to the contrary, unless
the provisions of the second preceding paragraph apply, (x) in no event shall a
Payment Blockage Period extend beyond 179 days from the date of the receipt by
the trustee of the notice initiating such Payment Blockage Period, (y) there
shall be a period of at least 186 consecutive days in each 365-day period when
no Payment Blockage Period is in effect and (z) not more than one Payment
Blockage Period with respect to the notes may be commenced within any period of
365 consecutive days. A Non-payment Default with respect to Designated Senior
Indebtedness that existed or was continuing on the date of the commencement of
any Payment Blockage Period with respect to the Designated Senior Indebtedness
initiating such Payment Blockage Period cannot be made the basis for the
commencement of a second Payment Blockage Period, whether or not within a period
of 365 consecutive days, unless such default has been cured or waived for a
period of not less than 90 consecutive days and subsequently recurs. If,
notwithstanding the foregoing, the Company makes any payment or distribution to
the trustee or holders of the notes prohibited by the subordination provisions
of the indenture, then such payment or distribution will be required to be paid
over to or for the benefit of holders of Designated Senior Indebtedness.
If the Company fails to make any payment on the notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the indenture and would enable the holders of the notes to accelerate the
maturity thereof. See "-- Events of Default."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the notes and funds which would be otherwise
payable to the holders of the notes will be paid to the holders of Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full in
cash, and the Company may be unable to meet its obligations fully with respect
to the notes.
As of December 31, 1998 on a pro forma basis after giving effect to the
sale of the notes and the application of the net proceeds therefrom, the Company
would have had outstanding $41.4 million of Senior Indebtedness and the
guarantors would have had outstanding $3.5 million of Senior Indebtedness,
excluding their guarantee of $41.4 million of Senior Indebtedness of the
Company. The indenture limits, but does not prohibit, the incurrence by the
Company of additional Indebtedness which is senior to the notes, but prohibits
the incurrence of any Indebtedness contractually subordinated in right of
payment to any other Indebtedness of the Company and senior in right of payment
to the notes. See "Risk Factors -- Subordination of the Notes and the
Guarantees; Unsecured Status of the Notes and the Guarantees."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the notes are jointly and severally
guaranteed by the guarantors. The obligations of each guarantor under its
guarantee is unconditional and absolute, irrespective of any invalidity,
illegality or unenforceability of any note or the indenture or any extension,
compromise, waiver or release in respect of any obligation of the Company or any
other guarantor under any note or the indenture, or any modification or
amendment of or supplement to the indenture. In order to incur Indebtedness
under the "Limitation on Indebtedness" covenant or to comply with any
requirements of any other debt instrument, the Company may cause future
Restricted Subsidiaries to become guarantors.
The obligations of any guarantor under its guarantee is subordinated, to
the same extent as the obligations of the Company in respect of the notes, to
the prior payment in full of all Senior Indebtedness of such guarantor, which
will include any guarantee issued by such guarantor of any
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Senior Indebtedness; provided that payment blockage periods in respect of the
guarantees may only be instituted by a holder of Designated Senior Indebtedness
of the Company entitled to the benefit of a guarantee from the applicable
guarantor at the same time as instituted in respect of Senior Indebtedness of
the Company and for a contemporaneous period. The obligations of each guarantor
under its guarantee are limited to the extent necessary to provide that such
guarantee does not constitute a fraudulent conveyance under applicable law. Each
guarantor that makes a payment or distribution under its guarantee shall be
entitled to a contribution from each other guarantor so long as the exercise of
such right does not impair the rights of holders of notes under any guarantee.
See "Risk Factors -- Holding Company Structure; Guarantees May be Unenforceable
due to Fraudulent Conveyance Statutes." A guarantor shall be released and
discharged from its obligations under its guarantee under certain limited
circumstances. See "-- Consolidation, Merger, Sale of Assets, Etc."
Notwithstanding the foregoing, but subject to the requirements described
under "-- Consolidation, Merger, Sale of Assets, Etc.," any guarantee by a
Restricted Subsidiary of the notes shall provide by its terms that it (and all
Liens securing the same) shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary, which transaction
is in compliance with the terms of the indenture (including, but not limited to,
the covenant described under "-- Limitation on Sale of Assets") and such
Restricted Subsidiary is simultaneously unconditionally released from all
guarantees, if any, by it of other Indebtedness of the Company or any Restricted
Subsidiaries or (ii) (with respect to any guarantees created after the date of
the indenture) the release by the holders of the Indebtedness of the Company
described above of their security interest or their guarantee by such Restricted
Subsidiary (including any deemed release upon payment in full of all obligations
under such Indebtedness), at a time when (A) no other Indebtedness of the
Company has been secured or guaranteed by such Restricted Subsidiary, as the
case may be, or (B) the holders of all such other Indebtedness which is secured
or guaranteed by such Restricted Subsidiary also release their security interest
in, or guarantee by such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness). The Company
may, at any time, cause a Subsidiary to become a guarantor by executing and
delivering a supplemental indenture providing for the guarantee of payment of
the notes by such Subsidiary on the basis provided in the indenture.
CERTAIN COVENANTS
The indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. The indenture provides that the Company will
not, and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, issue, guarantee or in any manner become
liable for or with respect to, contingently or otherwise (in each case, to
"incur"), the payment of any Indebtedness (including any Acquired
Indebtedness); provided, however, that (i) the Company or a guarantor may incur
Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary
(which is not a guarantor) may incur Acquired Indebtedness, if, in either case,
immediately after giving pro forma effect thereto, the Consolidated Fixed Charge
Coverage Ratio of the Company is at least equal to 2.0:1.0.
Notwithstanding the foregoing, the Company and, to the extent set forth
below, the guarantors and the Restricted Subsidiaries may incur each and all of
the following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company or any guarantor under the Credit
Facility in an aggregate principal amount at any one time outstanding not
to exceed the greater of (x) $100.0 million or (y) the sum of (A) 85% of
the book value of the accounts receivable of the Company and the Restricted
Subsidiaries on a consolidated basis in accordance with GAAP and (B) 60% of
the book value of the inventory of the Company and the Restricted
Subsidiaries on a consolidated
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basis in accordance with GAAP, less any voluntary or mandatory prepayments
actually made thereunder (to the extent that the corresponding commitments
have been permanently reduced);
(ii) Indebtedness of the Company pursuant to the notes and
Indebtedness of any guarantor pursuant to a guarantee of the notes;
(iii) Indebtedness of the Company owing to a Restricted Subsidiary;
provided that any Indebtedness for borrowed money of the Company owing to a
Restricted Subsidiary is subordinated in accordance with provisions set
forth in the indenture; provided, further, that any disposition, pledge or
transfer of any such Indebtedness to a Person (other than a disposition,
pledge or transfer to a Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by the Company not permitted by this clause
(iii);
(iv) Indebtedness of a Restricted Subsidiary owing to and held by the
Company or another Restricted Subsidiary which is unsecured; provided that
(a) any disposition, pledge or transfer of any such Indebtedness to a
Person (other than the Company or a Restricted Subsidiary) shall be deemed
to be an incurrence of such Indebtedness by the obligor not permitted by
this clause (iv), and (b) any transaction pursuant to which any Restricted
Subsidiary, which has Indebtedness owing to the Company or any other
Restricted Subsidiary, ceases to be a Restricted Subsidiary shall be deemed
to be the incurrence of Indebtedness by such Restricted Subsidiary that is
not permitted by this clause (iv);
(v) Indebtedness of the Company or any Restricted Subsidiary under
Interest Rate Agreements not entered into for speculative purposes and
covering Indebtedness of the Company or such Restricted Subsidiary (which
Indebtedness (a) bears interest at fluctuating interest rates and (b) is
otherwise permitted to be incurred under this covenant);
(vi) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements relating to (a) Indebtedness of the Company or such
Restricted Subsidiary and/or (b) obligations to purchase or sell assets or
properties, in each case, incurred in the ordinary course of business of
the Company; provided, however, that such Currency Agreements do not
increase the Indebtedness or other obligations of the Company outstanding
other than as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities and compensation payable thereunder;
(vii) Indebtedness of the Company or any guarantor represented by
Capitalized Lease Obligations or Purchase Money Obligations or other
Indebtedness incurred or assumed in connection with the acquisition or
development of real or personal movable or immovable property in each case
incurred for the purpose of financing or refinancing all or any part of the
purchase price or cost of construction or improvement of property used in
the business of the Company or such guarantor, in an aggregate principal
amount pursuant to this clause (vii) not to exceed $20.0 million per year;
provided, that the principal amount of any Indebtedness permitted under
this clause (vii) did not in each case at the time of incurrence exceed the
Fair Market Value, as determined by the Company or such guarantor in good
faith, of the acquired or constructed asset or improvement so financed;
(viii) reimbursement obligations under letters of credit and letters
of credit, in each case, to support workers compensation obligations and
bankers acceptances and performance bonds, surety bonds and performance
guarantees, of the Company or any guarantor, in each case, in the ordinary
course of business consistent with past practice;
(ix) any renewals, extensions, substitutions, refundings,
refinancings or replacements (collectively, a "refinancing") of any
Indebtedness outstanding on the Issue Date or incurred under the first
paragraph of this covenant or clause (ii) above, including any successive
refinancings so long as the aggregate principal amount of Indebtedness
represented thereby is not increased by such refinancing plus the amount of
any stated or reasonably determined prepayment premium paid in connection
with such a refinancing, plus, the amount of expenses of the
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Company or a Restricted Subsidiary incurred in connection with such
refinancing and (A) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, such new Indebtedness is subordinated to the
notes at least to the same extent as the Indebtedness being refinanced and
(B) such new Indebtedness has an Average Life to Stated Maturity equal to
or greater than the Average Life to Stated Maturity of the Subordinated
Indebtedness being repurchased, redeemed, defeased, retired, acquired or
paid; and
(x) Indebtedness of the Company or any Restricted Subsidiary in
addition to that described in clauses (i) through (ix) above, so long as
the aggregate principal amount of all such additional Indebtedness shall
not exceed $25.0 million outstanding at any one time in the aggregate.
LIMITATION ON RESTRICTED PAYMENTS. The indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly:
(i) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any payment to
the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company (other than dividends or distributions to the extent
payable in shares of Qualified Capital Stock of the Company or in options,
warrants or other rights to acquire shares of such Qualified Capital
Stock); or
(ii) purchase, redeem, defease or otherwise acquire or retire for
value, directly or indirectly, the Company's Capital Stock or any Capital
Stock of any Restricted Subsidiary (other than any such Capital Stock owned
by the Company or any Restricted Subsidiary); or
(iii) make any principal payment on, or purchase, repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any Subordinated
Indebtedness owed to and held by the Company or a Restricted Subsidiary);
or
(iv) declare or pay any dividend or make any distribution or payment
on or in respect of any Capital Stock of any Restricted Subsidiary or any
payment to the direct or indirect holders (in their capacities as such) of
any Capital Stock of any Restricted Subsidiary (other than to the Company
or any Restricted Subsidiary and other than to minority stockholders of any
Restricted Subsidiary, provided that such dividends, payments or
distributions are made on a pro rata basis to the stockholders of such
Restricted Subsidiary; or
(v) make any Investment (other than any Permitted Investment) in any
Person any of the foregoing actions described in clauses (i) through (v),
other than any such action that is a Permitted Payment (as defined below),
collectively, "Restricted Payments") (the amount of any such Restricted
Payment, if other than cash, shall be the Fair Market Value of the asset(s)
proposed to be transferred by the Company or such Restricted Subsidiary, as
the case may be, in each case, as determined by the board of directors of
the Company, whose determination shall be conclusive and evidenced by a
board resolution), unless (1) immediately before and immediately after
giving effect to such Restricted Payment on a pro forma basis, no Default
shall have occurred and be continuing; (2) immediately before and
immediately after giving effect to such Restricted Payment on a pro forma
basis, the Company could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the provisions described under
"-- Limitation on Indebtedness," and (3) immediately after giving effect
to the proposed Restricted Payment, the aggregate amount of all such
Restricted Payments (including any Designation Amounts) declared or made
after the Issue Date, does not exceed an amount equal to the sum of,
without duplication:
(A) 50% of the cumulative Consolidated Net Income of the Company
during the period (treated as one accounting period) beginning on
January 1, 1999 and ending on the last day of the Company's last fiscal
quarter ending prior to the date of the Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income shall be a deficit, minus
100% of such deficit); plus
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(B) the aggregate Net Cash Proceeds received after the Issue Date
by the Company from the issuance or sale (other than to any of the
Restricted Subsidiaries) of Qualified Capital Stock of the Company or
from the exercise of any options, warrants or rights to purchase such
Qualified Capital Stock of the Company (except, in each case, to the
extent such proceeds are used to purchase, redeem or otherwise retire
Capital Stock or Subordinated Indebtedness as set forth in clause (ii)
or (iii) of the following paragraph and excluding the net cash proceeds
from any issuance and sale of Capital Stock or from any such exercises,
in each case, financed, directly or indirectly, using funds borrowed
from the Company or any Restricted Subsidiary until and to the extent
such borrowing is repaid); plus
(C) the aggregate Net Cash Proceeds received after the Issue Date
by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its
Subsidiaries into or for Qualified Capital Stock of the Company plus,
whether or not such debt securities or Redeemable Capital Stock were
issued prior to or after the Issue Date, the aggregate Net Cash Proceeds
from their original issuance, less any principal and sinking fund
payments made thereon; plus
(D) in the case of the disposition or repayment of any Investment
(in whole or in part) constituting a Restricted Payment made after the
Issue Date (other than an Investment made under clause (vi) of the
following paragraph), an amount (to the extent not included in
Consolidated Net Income) equal to the lesser of the return of capital
with respect to such Investment and the initial amount of such
Investment which was treated as a Restricted Payment, in either case,
less the cost of disposition of such Investment; plus
(E) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after
the Issue Date in accordance with "-- Limitations on Unrestricted
Subsidiaries" below, the Fair Market Value of the Capital Stock of such
Subsidiary owned by the Company and the Restricted Subsidiaries,
provided that such amount shall not in any case exceed the Designation
Amount with respect to such Restricted Subsidiary upon its Designation.
Notwithstanding the foregoing, and in the case of clauses (ii) through (v)
below, so long as no Default shall have occurred and be continuing or would
arise therefrom, the foregoing provisions shall not prohibit the following
actions (each of clauses (i) through (vii) being referred to as a "Permitted
Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of the indenture;
(ii) the repurchase, redemption, or other acquisition or retirement
of any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion right
or privilege in connection with which cash is paid in lieu of the issuance
of fractional shares or scrip), or out of the Net Cash Proceeds of a
substantially concurrent issue and sale for cash to any Person (other than
to a Restricted Subsidiary) of, shares of Qualified Capital Stock of the
Company; provided that the Net Cash Proceeds from the issuance of such
shares of Qualified Capital Stock are excluded from clause (B) of the first
paragraph of this covenant;
(iii) the repurchase, redemption, defeasance, retirement or
acquisition for value or payment of principal of any Subordinated
Indebtedness in exchange for, or out of the Net Cash Proceeds of a
substantially concurrent issuance and sale for cash to any Person (other
than to the Company or any Restricted Subsidiary) of, any Qualified Capital
Stock of the Company, provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (B) of
the first paragraph (a) of this covenant;
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(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) of the Company in
exchange for, or out of the Net Cash Proceeds of a substantially concurrent
issuance and sale for cash to any Person (other than to a Restricted
Subsidiary) of, new Subordinated Indebtedness of the Company (which may be
guaranteed by a guarantor on a basis such that it constitutes Subordinated
Indebtedness), provided that any such new Subordinated Indebtedness (1)
shall be in a principal amount that does not exceed the principal amount so
repurchased, redeemed, defeased, retired, acquired or paid (or, if such
Subordinated Indebtedness provides for an amount less than the principal
amount thereof to be due and payable upon a declaration of acceleration
thereof, then such lesser amount as of the date of determination), plus the
amount of any stated or reasonably determined prepayment premium paid in
connection with such repurchase, redemption, defeasance, retirement,
acquisition or payment, plus the amount of expenses of the Company and the
Restricted Subsidiaries incurred in connection with such repurchase,
redemption, defeasance, retirement, acquisition or payment; (2) has an
Average Life to Stated Maturity equal to or greater than the Average Life
to Stated Maturity of the Subordinated Indebtedness being repurchased,
redeemed, defeased, retired, acquired or paid; and (3) is expressly
subordinated in right of payment to the notes at least to the same extent
as the Subordinated Indebtedness to be repurchased, redeemed, defeased,
retired, acquired or paid;
(v) the repurchase, redemption or other acquisition, cancellation or
retirement for value of any Capital Stock of the Company or similar
securities, held by (a) officers, directors or employees or former
officers, directors or employees of the Company or any of its Subsidiaries
(or their estates or beneficiaries under their estates) pursuant to any
management, stock option agreement or stock option plan, not to exceed $2.0
million in any fiscal year of the Company and (b) the repurchase,
redemption or other acquisition, cancellation or retirement for value of
any Capital Stock of the Company held by former owners of Subsidiaries of
the Company, that was, as of the date of acquisition of such stock by such
Persons subject to a lock-up agreement or other similar agreement with the
Company restricting the resale of such Capital Stock, so long as the
aggregate amount utilized under this clause (v) does not exceed $7.0
million during the term of the notes;
(vi) cash payments in lieu of fractional shares issuable as dividends
on preferred securities of the Company, not to exceed $250,000 in any
fiscal year of the Company; and
(vii) Investments (in addition to Permitted Investments) not to
exceed $10.0 million at any time outstanding.
In computing the amount of Restricted Payments previously made for purposes
of clause (3) of the first paragraph of this covenant, Restricted Payments under
the immediately preceding clause (i) of the immediately preceding paragraph
shall be included. If the Company makes a Restricted Payment which, at the time
of the making of such Restricted Payment would in the good faith determination
of the Company be permitted under the provisions of the indenture, such
Restricted Payment shall be deemed to have been made in compliance with the
indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not cause or permit any of the Restricted Subsidiaries to, directly or
indirectly, conduct any business or enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with, or
for the benefit of, any Affiliate of the Company or of a Restricted Subsidiary
(other than the Company or a Restricted Subsidiary) or any officer or director
of the Company or any Restricted Subsidiary unless such transaction or series of
related transactions is entered into in good faith and in writing and
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(a) such transaction is on terms that are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those that
would be available in a comparable transaction in arm's-length dealings
with an unrelated third party, and
(b) with respect to any transaction or series of related transactions
involving aggregate value in excess of $5.0 million, the Company delivers
an officers' certificate to the trustee certifying that such transaction or
series of related transactions complies with the requirements of this
covenant and, with respect to any transaction or series of related
transactions involving aggregate value in excess of $10.0 million, either
(i) such transaction or series of transactions has been approved by a
majority of the Board of Directors of the Company, including a majority of
the Disinterested Directors of the Company, or in the event there is only
one Disinterested Director, by such Disinterested Director, or (ii) the
Company delivers to the trustee a written opinion of an Independent
Financial Advisor stating that the transaction or series of related
transactions is fair to the Company or such Restricted Subsidiary from a
financial point of view.
The requirements of this covenant shall not apply to (i) any transaction
with an officer, director or employee of the Company entered into in the
ordinary course of business (including compensation and employee benefit
arrangements with any officer or director of the Company, including under any
stock option or stock incentive plans); provided that such transaction has been
approved in the manner described in clause (b) above if such transaction would,
pursuant to clause (b) above, require such approval, (ii) the payment of
reasonable and customary compensation and fees to directors of the Company or
any Restricted Subsidiary who are not employees of the Company or any Restricted
Subsidiary, (iii) the payment of dividends otherwise in compliance with the
covenant "-- Limitation on Restricted Payments," (iv) indemnification
agreements for the benefit of officers, directors and employees, (v)
transactions with or among the Company and any Restricted Subsidiary or between
or among Restricted Subsidiaries, so long as no Person (other than a Restricted
Subsidiary) which would otherwise be an Affiliate, officer or director of the
Company or a Restricted Subsidiary has any direct or indirect interest in any
such Restricted Subsidiary, (vi) any transaction with Affiliates in existence on
the Issue Date as in effect on the Issue Date, and (vii) leases of property or
equipment or other agreements entered into in connection with an Asset
Acquisition with Persons that were not Affiliates, officers or directors of the
Company or a Restricted Subsidiary immediately prior to such Asset Acquisition.
LIMITATION ON LIENS. The indenture provides that the Company will not, and
will not cause or permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume, suffer to exist or affirm any Lien of any kind securing
any Pari Passu Indebtedness or Subordinated Indebtedness (including any
assumption, guarantee or other liability with respect thereto by any Restricted
Subsidiary) upon any of its property or assets (including any intercompany
notes), whether owned on the Issue Date or acquired after the Issue Date, or any
proceeds, income or profits therefrom, or assign or convey any right to receive
proceeds, income or profits therefrom, unless the notes are directly secured
equally and ratably with (or, in the case of Subordinated Indebtedness, prior or
senior to, with the same relative priority as the notes shall have with respect
to such Subordinated Indebtedness) the obligation or liability secured by such
Lien, except for Liens
(A) securing Acquired Indebtedness which were created prior to (and
not created in connection with, or in contemplation of) the incurrence of
such Pari Passu Indebtedness or Subordinated Indebtedness (including any
assumption, guarantee or other liability with respect thereto by any
Restricted Subsidiary) and which Indebtedness is permitted under the
provisions of the covenant described under "-- Limitation on
Indebtedness;" or
(B) securing any Indebtedness incurred in connection with any
refinancing, renewal, substitution or replacement of any such Indebtedness
described in clause (A), so long as the aggregate principal amount of
Indebtedness represented thereby is not increased by such refinancing by an
amount greater than the amount of any stated or reasonably determined
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prepayment premium paid in connection with such a refinancing plus the
amount of expenses of the Company and the Restricted Subsidiaries incurred
in connection with such refinancing;
PROVIDED, HOWEVER, that in the case of clauses (A) and (B) any such Lien only
extends to the assets that were subject to such Lien securing such Indebtedness
prior to the related acquisition by the Company or the Restricted Subsidiaries.
LIMITATION ON INCURRENCE OF SENIOR SUBORDINATED INDEBTEDNESS. The
indenture provides that the Company will not, and will not permit any guarantor
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
in any manner become directly or indirectly liable for or with respect to or
otherwise permit to exist any Indebtedness that is subordinate or junior in
right of payment to any Indebtedness of the Company or such guarantor, as the
case may be, unless such Indebtedness is also pari passu with the notes or the
guarantee of such guarantor or subordinate or junior, in right of payment to the
notes or such guarantee at least to the same extent as the notes or such
guarantee are subordinate or junior in right of payment to Senior Indebtedness
or Senior Indebtedness of such guarantor, as the case may be.
The indenture provides further that the Company will not cause or permit
any Restricted Subsidiary, other than the guarantors, directly or indirectly, to
secure the payment of any Senior Indebtedness of the Company and the Company
will not, and will not permit any Restricted Subsidiary to, pledge any
intercompany notes representing obligations of any Restricted Subsidiary (other
than the guarantors) to secure the payment of any Senior Indebtedness unless in
each case such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a guarantee of payment of
the notes by such Restricted Subsidiary, which guarantee shall be on the same
terms as the guarantee of the Senior Indebtedness (if a guarantee of Senior
Indebtedness is granted by any such Restricted Subsidiary) except that the
guarantee of the notes need not be secured and shall be subordinated to the
claims against such Restricted Subsidiary in respect of Senior Indebtedness to
the same extent as the notes are subordinated to Senior Indebtedness of the
Company under the indenture.
LIMITATION ON SALE OF ASSETS. The indenture provides that the Company will
not, and will not cause or permit any Restricted Subsidiary to, directly or
indirectly, consummate an Asset Sale unless (i)at least 75% of the consideration
from such Asset Sale is received in cash or Cash Equivalents and (ii)the Company
or such Subsidiary receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the shares or assets subject to such
Asset Sale.
If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness outstanding
as required by the terms thereof, or the Company determines not to apply such
Net Cash Proceeds to the permanent repayment of the Senior Indebtedness which is
required to be prepaid, or if no such Indebtedness under the Senior Indebtedness
is outstanding then, the Company or such Restricted Subsidiary may within 365
days of such Asset Sale, invest the Net Cash Proceeds in capital expenditures,
properties and other assets or inventories that (as determined by the board of
directors of the Company) replace the properties and assets that were the
subject of the Asset Sale or in properties and assets that will be used in the
businesses of the Company or its Subsidiaries existing on the Issue Date or in
businesses reasonably related thereto.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are
not applied, or the Company determines not to so apply such Net Cash Proceeds,
within 365 days of such Asset Sale as described in the immediately preceding
paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the
Company shall, within 20 days after such 365th day or at any earlier time after
such Asset Sale, make an offer to purchase (the "Asset Sale Offer") all
outstanding notes up to a maximum principal amount (expressed as a multiple of
$1,000) of notes equal to such Unutilized Net Cash Proceeds, at a purchase price
in cash equal to 100% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the purchase date; PROVIDED, HOWEVER, that the
Asset Sale Offer may be deferred until there are aggregate Unutilized Net Cash
Proceeds equal to or in
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excess of $10.0 million, at which time the entire amount of such Unutilized Net
Cash Proceeds, and not just the amount in excess of $10.0 million, shall be
applied as required pursuant to this paragraph. An Asset Sale Offer will be
required to be kept open for a period of at least 20 business days.
With respect to any Asset Sale Offer effected pursuant to this covenant,
among the notes, to the extent the aggregate principal amount of notes tendered
pursuant to such Asset Sale Offer exceeds the Unutilized Net Cash Proceeds to be
applied to the repurchase thereof, such notes shall be purchased pro rata based
on the aggregate principal amount of such notes tendered by each Holder. To the
extent the Unutilized Net Cash Proceeds exceed the aggregate amount of notes
tendered by the Holders of the notes pursuant to such Asset Sale Offer, the
Company may retain and utilize any portion of the Unutilized Net Cash Proceeds
not applied to repurchase the notes for any purpose consistent with the other
terms of the indenture.
In the event that the Company makes an Asset Sale Offer, the Company shall
comply, to the extent applicable, with the requirements of Section 14(e) of the
Exchange Act, and any other applicable securities laws or regulations and any
applicable requirements of any securities exchange on which the notes are
listed, and any violation of the provisions of the indenture relating to such
Asset Sale Offer occurring as a result of such compliance shall not be deemed a
Default.
LIMITATION ON SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The
indenture provides that the Company will not sell and will not cause or permit
any Restricted Subsidiary of the Company to issue, sell or transfer any
Preferred Stock of any Restricted Subsidiary (other than to the Company or to a
Wholly-Owned Restricted Subsidiary) or permit any Person (other than the Company
or a Wholly-Owned Restricted Subsidiary) to own any Preferred Stock of any
Restricted Subsidiary. In addition, the Company will not sell or otherwise
dispose of any Capital Stock of a Restricted Subsidiary, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any of its Capital Stock except, subject to compliance with the other
covenants herein, (i) to the Company or a Restricted Subsidiary, (ii) directors'
qualifying shares, (iii) if, immediately after giving effect to such issuance,
sale or other disposition, either (x) neither the Company nor any of its
Subsidiaries own any Capital Stock of such Restricted Subsidiary or (y) such
Restricted Subsidiary would remain a Restricted Subsidiary, and (iv) if,
immediately after giving effect to such issuance, sale or other disposition,
such Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect thereto would
have been permitted to be made (and shall be deemed to have been made) under the
covenant described under "-- Limitation on Restricted Payments" on the date of
such issuance, sale or other disposition.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The indenture provides that the Company will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective or enter into any
agreement with any Person that would cause to become effective, any consensual
encumbrance or restriction of any kind, on the ability of any Restricted
Subsidiary to (i) pay dividends, in cash or otherwise, or make any other
distribution on or in respect of its Capital Stock or any other interest or
participation in, or measured by, its profits, to the Company or any other
Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any
other Restricted Subsidiary, (iii) make any Investment in the Company or any
other Restricted Subsidiary or (iv) transfer any of its properties or assets to
the Company or any other Restricted Subsidiary, except for:
(a) any encumbrance or restriction existing under any agreement in
effect on the Issue Date;
(b) any encumbrance or restriction, with respect to a Subsidiary that
is not a Restricted Subsidiary of the Company on the Issue Date, in
existence at the time such Person becomes a Restricted Subsidiary of the
Company and not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary; provided, however, that such
encumbrances
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and restrictions are not applicable to the Company or any other Restricted
Subsidiary, or the properties or assets of the Company or any other
Restricted Subsidiary;
(c) any encumbrance or restriction existing under any agreement that
extends, renews, refinances or replaces the agreements containing the
encumbrances or restrictions in the foregoing clauses (a) and (b), or in
this clause (c), provided that the terms and conditions of any such
encumbrances or restrictions are no more restrictive in any material
respect than those under or pursuant to the agreement evidencing the
Indebtedness so extended, renewed, refinanced or replaced; and
(d) with respect to (iv) above, any restriction in any customary
non-assignment provision in any contract or lease governing any leasehold
interest entered into in the ordinary course of business.
LIMITATIONS ON UNRESTRICTED SUBSIDIARIES. The indenture provides that the
Company will not make, and will not permit the Restricted Subsidiaries to make,
any Investment in Unrestricted Subsidiaries if, at the time thereof, the
aggregate amount of such Investments would exceed the amount of Restricted
Payments then permitted to be made pursuant to the covenant described under
"-- Limitation on Restricted Payments." Any Investments in Unrestricted
Subsidiaries permitted to be made pursuant to this covenant (i) will be treated
as a Restricted Payment in calculating the amount of Restricted Payments made by
the Company and (ii) may be made in cash or property.
The Company may designate after the Issue Date any Subsidiary (other than a
guarantor) as an "Unrestricted Subsidiary" under the indenture (a
"Designation") only if:
(i) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment at the time
of Designation (assuming the effectiveness of such Designation) pursuant to
the provision described under the first paragraph of "-- Limitation on
Restricted Payments" above in an amount (the "Designation Amount") equal
to the Fair Market Value of the interest of the Company or any Restricted
Subsidiary in such Subsidiary on such date calculated in accordance with
GAAP; and
(iii) the Company would be permitted under the indenture to incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described under "-- Limitation on Indebtedness"
at the time of such Designation (assuming the effectiveness of such
Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-- Limitation on Restricted Payments" for all purposes of the
indenture in the Designation Amount.
The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, at any time (x) provide credit support for or subject any of its
property or assets (other than the Capital Stock of any Unrestricted Subsidiary)
to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary
(including any right to take enforcement action against such Unrestricted
Subsidiary), except any non-recourse guarantee given solely to support the
pledge by the Company or any Restricted Subsidiary of the Capital Stock of an
Unrestricted Subsidiary. No Unrestricted Subsidiary shall at any time guarantee
or otherwise provide credit support for any obligation of the Company or any
Restricted Subsidiary. All Subsidiaries of Unrestricted Subsidiaries shall
automatically be deemed to be Unrestricted Subsidiaries.
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The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
indenture; and
(iii) any transaction (or series of related transactions) between
such Subsidiary and any of its Affiliates that occurred while such
Subsidiary was an Unrestricted Subsidiary would be permitted by the
covenant described under "-- Limitation on Transactions with Affiliates"
above as if such transaction (or series of related transactions) had
occurred at the time of such Revocation.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the trustee certifying compliance with the foregoing
provisions.
PROVISION OF FINANCIAL STATEMENTS. The indenture requires that for so long
as the notes are outstanding, whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, or any successor provision thereto, the
Company will, to the extent permitted by Commission practice and applicable law
and regulations, file with the Commission the annual reports, quarterly reports
and other documents which the Company would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d), or any successor provision
thereto, if the Company was so subject, such documents to be filed with the
Commission on or prior to the date (the "Required Filing Dates") by which the
Company would have been required so to file such documents if the Company was so
subject. The Company will also in any event (x) within 15 days of each Required
Filing Date, whether or not permitted or required to be filed with the
Commission, (i) transmit or cause to be transmitted by mail to all holders of
notes, as their names and addresses appear in the security register, without
cost to such holders and (ii) file with the trustee, copies of the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, if the Company was subject to
either of such Sections and (y) if filing such documents by the Company with the
Commission is not permitted under the Exchange Act, promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective holder at the Company's cost.
In addition, for so long as any notes remain outstanding, the Company will
furnish to the holders of notes and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act, and, to any beneficial holder of
notes, if not obtainable from the Commission, information of the type that would
be filed with the Commission pursuant to the foregoing provisions, upon the
request of any such holder.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The indenture provides that the Company shall not, in any transaction or
series of related transactions, merge or consolidate with or into, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets as an entirety to, any Person or Persons, and the
Company shall not permit any of the Restricted Subsidiaries to enter into any
such transaction or series of related transactions if such transaction or series
of related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries (taken
as a whole), to any Person or Persons, unless at the time and after giving
effect thereto
(i) either (A)(1) if the transaction or transactions is a merger or
consolidation involving the Company, the Company shall be the Surviving
Person of such merger or consolidation or (2) if
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the transaction or transactions is a merger or consolidation involving a
Restricted Subsidiary, such Restricted Subsidiary shall be the Surviving
Person of such merger or consolidation, or (B)(1) the Surviving Person
shall be a corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and (2)(x)
in the case of a transaction involving the Company, the Surviving Person
shall expressly assume by a supplemental indenture executed and delivered
to the trustee, in form satisfactory to the trustee, all the obligations of
the Company under the notes and the indenture and the registration rights
agreement, and in each case, the indenture, the notes and the registration
rights agreement shall remain in full force and effect, or (y) in the case
of a transaction involving a Restricted Subsidiary that is a guarantor, the
Surviving Person shall expressly assume by a supplemental indenture
executed and delivered to the trustee, in form satisfactory to the trustee,
all the obligations of such Restricted Subsidiary under its guarantee and
the indenture and the registration rights agreement, and in each case, such
indenture, guarantee and the registration rights agreement shall remain in
full force and effect;
(ii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis, no Default or Event of Default
shall have occurred and be continuing; and
(iii) the Company, or the Surviving Person, as the case may be,
immediately after giving effect to such transaction or series of related
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under
the covenant described above under "-- Certain Covenants -- Limitation on
Indebtedness."
No guarantor (other than a guarantor whose guarantee is to be released in
accordance with the terms of its guarantee and the indenture as provided under
"-- Subsidiary Guarantees" above) shall, in any transaction or series of
related transactions, consolidate with or merge with or into another Person,
whether or not such Person is affiliated with such guarantor and whether or not
such guarantor is the Surviving Person, unless
(i) the Surviving Person (if other than such guarantor) is a
corporation organized and validly existing under the laws of the United
States, any State thereof or the District of Columbia;
(ii) the Surviving Person (if other than such guarantor) expressly
assumes by a supplemental indenture all the obligations of such guarantor
under its guarantee and the performance and observance of every covenant of
the indenture and the registration rights agreement to be performed or
observed by such guarantor; and
(iii) immediately after giving effect to such transaction or series
of related transactions on a pro forma basis, no Default shall have
occurred and be continuing.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the trustee, in form and substance reasonably satisfactory to the
trustee, an officers' certificate and an opinion of counsel, each stating that
such consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the requirements under the
indenture. In addition, each guarantor, in the case of a transaction described
in the first paragraph hereunder, unless it is the other party to the
transaction or unless its guarantee will be released and discharged in
accordance with its terms as a result of the transaction, will be required to
confirm, by supplemental indenture, that its guarantee will continue to apply to
the obligations of the Company or the Surviving Person under the indenture.
Upon any consolidation or merger of the Company or any guarantor or any
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, in which the Company or a guarantor is not the Surviving
Person, the Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under the indenture, the
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notes and the registration rights agreement or such guarantor under the
indenture, the guarantee of such guarantor and the registration rights
agreement, as the case may be, with the same effect as if such successor
corporation had been named as the Company or such guarantor, as the case may be,
therein; and thereafter, except in the case of (a) a lease or (b) any sale,
assignment, conveyance, transfer, lease or other disposition to a Restricted
Subsidiary of the Company or such guarantor, the Company shall be discharged
from all obligations and covenants under the indenture, the notes and the
registration rights agreement and such guarantor shall be discharged from all
obligations and covenants under the indenture, the registration rights agreement
and the guarantee of such guarantor, as the case may be.
The indenture provides that for all purposes of the indenture and the notes
(including the provision of this covenant and the covenants described under
"-- Certain Covenants -- Limitation on Indebtedness", "-- Certain
Covenants -- Limitation on Restricted Payments" and "-- Certain
Covenants -- Limitation on Liens"), Subsidiaries of any Surviving Person shall,
upon such transaction or series of related transactions, become Restricted
Subsidiaries unless and until designated as Unrestricted Subsidiaries pursuant
to and in accordance with the provisions described under "-- Certain
Covenants -- Limitations on Unrestricted Subsidiaries" and all Indebtedness,
and all Liens on property or assets, of the Company and the Restricted
Subsidiaries in existence immediately prior to such transaction or series of
related transactions will be deemed to have been incurred upon such transaction
or series of related transactions.
EVENTS OF DEFAULT
The following are "Events of Default" under the indenture:
(i) default in the payment of the principal of or premium, if any,
when due and payable, on any of the notes (at its Stated Maturity, upon
optional redemption, acceleration, required purchase, sinking fund,
scheduled principal payment or otherwise) (without regard to the
subordination provisions contained in the indenture); or
(ii) default in the payment of an installment of interest on any of
the notes, when due and payable, continued for 30 days or more (without
regard to the subordination provisions contained in the indenture); or
(iii) the Company or any guarantor fails to comply with any of its
obligations described under "-- Consolidation, Merger, Sale of Assets,
Etc.," "-- Change of Control" or "-- Certain Covenants -- Limitation on
Sale of Asset Sales;" or
(iv) the Company or any guarantor fails to perform or observe any
other term, covenant or agreement contained in the notes, the guarantees or
the indenture (other than a default specified in (i), (ii) or (iii) above)
for a period of 30 days after written notice of such failure requiring the
Company to remedy the same shall have been given (x) to the Company by the
trustee or (y) to the Company and the trustee by the holders of at least
25% in aggregate principal amount of the notes then outstanding; or
(v) default or defaults under one or more agreements, indentures or
instruments under which the Company, any guarantor or any Restricted
Subsidiary then has outstanding Indebtedness in excess of $10.0 million
individually or in the aggregate and either (a) such Indebtedness is
already due and payable in full or (b) such default or defaults results in
the acceleration of the maturity of such Indebtedness; or
(vi) (a) any guarantee ceases to be in full force and effect or is
declared null and void or (b) any guarantor denies that it has any further
liability under any guarantee, or gives notice to such effect (other than,
in each case, by reason of the termination of the indenture or the release
of any such guarantee in accordance with "-- Subsidiary Guarantees"),
provided, with respect to any guarantor that is not a Material Subsidiary,
if an event described under subclause (a) or (b) shall occur such event
shall not be an Event of Default unless such event shall have continued
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for a period of 30 days after (x) in the case of subclause (a) of this
clause (vi), written notice of such condition shall have been given to the
Company and the guarantor by the trustee or to the Company, the guarantor
and the trustee by the holders of 25% in the aggregate principal amount of
the notes then outstanding or (y) in the case of subclause (b) of this
clause (vi), the date of such denial or notice by the guarantor; or
(vii) one or more judgments, orders or decrees of any court or
regulatory or administrative agency for the payment of money in excess of
$10.0 million either individually or in the aggregate, not covered by
insurance (provided that, to the extent covered by insurance, the insurer
has not disclaimed or indicated an intent to disclaim responsibility for
the payment thereof) shall have been rendered against the Company, any
guarantor or any Restricted Subsidiary or any of their respective
properties and shall not have been discharged and either (a) any creditor
shall have commenced an enforcement proceeding upon such judgment, order or
decree or (b) there shall have been a period of 60 consecutive days during
which a stay of enforcement of such judgment, order or decree, by reason of
a pending appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency or reorganization
with respect to the Company, any guarantor or any Material Subsidiary of
the Company shall have occurred; or
(ix) any holder of at least $10.0 million in aggregate principal
amount of Indebtedness of the Company, any guarantor or any Restricted
Subsidiary shall commence judicial proceedings to foreclose upon assets of
the Company, any guarantor or any of its Restricted Subsidiaries having an
aggregate Fair Market Value, individually or in the aggregate, in excess of
$10.0 million or shall have exercised any right under applicable law or
applicable security documents to take ownership of any such assets in lieu
of foreclosure.
If an Event of Default (other than as specified in clause (viii) with
respect to the Company) shall occur and be continuing, the trustee, by notice to
the Company, or the holders of at least 25% in aggregate principal amount of the
notes then outstanding, by notice to the trustee and the Company, may declare
the principal of, premium, if any, and accrued interest on all of the
outstanding notes due and payable immediately, upon which declaration all such
amounts payable in respect of the notes will become and be immediately due and
payable; provided that so long as the Credit Facility shall be in force and
effect, if an Event of Default shall have occurred and be continuing (other than
an Event of Default under clause (viii) with respect to the Company), any such
acceleration shall not be effective until the earlier to occur of (x) five
business days following delivery of a notice of such acceleration to the
representative under the Credit Facility and (y) the acceleration of any
Indebtedness under the Credit Facility. If an Event of Default specified in
clause (viii) above with respect to the Company occurs and is continuing, then
the principal of, premium, if any, and accrued interest on all of the
outstanding notes will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the trustee or any holder of
notes.
Notwithstanding the preceding paragraph, in the event of a declaration of
acceleration in respect of the notes because an Event of Default specified in
clause (v) shall have occurred and be continuing, such declaration of
acceleration will be automatically annulled if the Indebtedness that is the
subject of such Event of Default has been discharged or paid (if permitted by
the terms thereof) or the requisite holders thereof have rescinded their
declaration of acceleration in respect of such Indebtedness, and written notice
of such discharge or rescission, as the case may be, shall have been given to
the trustee by the Company, within 45 days after such acceleration in respect of
the notes and no other Event of Default has occurred which has not been cured or
waived during such 45-day period.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the trustee, the holders of a
majority in aggregate principal amount of the outstanding notes, by written
notice to the Company and the trustee, may rescind such declaration if (a) the
Company has paid or deposited with the trustee a sum sufficient to pay (i) all
sums paid or advanced by the trustee under the indenture and the reasonable
compensation, expenses, disbursements
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and advances of the trustee, its agents and counsel, (ii) all overdue interest
on all notes, (iii) the principal of and premium, if any, on any notes which
have become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the notes, and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest at the rate borne by the
notes, and (b) all Events of Default, other than the non-payment of principal
of, premium, if any, and interest on the notes that has become due solely by
such declaration of acceleration, have been cured or waived as provided in the
indenture.
No holder of any of the notes has any right to institute any proceeding
with respect to the indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding notes have made
written request, and offered reasonable indemnity, to the trustee to institute
such proceeding as trustee under the notes and the indenture, the trustee has
failed to institute such proceeding within 60 days after receipt of such notice
and the trustee, within such 60-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding notes. Such limitations do not apply,
however, to a suit instituted by a holder of a note for the enforcement of the
payment of the principal of, premium, if any, or interest on such note on or
after the respective due dates expressed in such note.
During the existence of an Event of Default, the trustee is required to
exercise such rights and powers vested in it under the indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an Event of Default shall occur and be continuing, the trustee
under the indenture is not under any obligation to exercise any of its rights or
powers under the indenture at the request or direction of any of the holders
unless such holders shall have offered to the trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the trustee,
the holders of a majority in aggregate principal amount of the outstanding notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or exercising any trust or power
conferred on the trustee under the indenture.
The Company is required to furnish to the trustee annual and quarterly
statements as to the performance by the Company and the guarantors of their
respective obligations under the indenture and as to any default in such
performance. The Company is also required to notify the trustee within five
business days of any event which is, or after notice or lapse of time or both
would become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company and the guarantors with respect to the outstanding notes
("defeasance"). Such defeasance means that the Company will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
notes, except for (i) the rights of holders of outstanding notes to receive
payment in respect of the principal of, premium, if any, and interest on such
notes when such payments are due, (ii) the Company's obligations to issue
temporary notes, register the transfer or exchange of any notes, replace
mutilated, destroyed, lost or stolen notes and maintain an office or agency for
payments in respect of the notes, (iii) the rights, powers, trusts, duties and
immunities of the trustee, and (iv) the defeasance provisions of the indenture.
In addition, the Company may, at its option and at any time, elect to terminate
the obligations of the Company and any guarantor with respect to certain
covenants that are set forth in the indenture, some of which are described under
"-- Certain Covenants" above, and any omission to comply with such obligations
will not constitute a Default or an Event of Default with respect to the notes
("covenant defeasance"). In the event covenant defeasance occurs, certain
events (not including non-payment, bankruptcy and insolvency events) described
under "-- Events of Default" will no longer constitute an Event of Default
with respect to the notes.
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In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the trustee, in trust, for the benefit of
the holders of the notes, cash in United States dollars, U.S. Government
Obligations (as defined in the indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of, premium,
if any, and interest on the outstanding notes to redemption or at maturity; (ii)
the Company shall have delivered to the trustee an opinion of independent
counsel in the United States to the effect that the holders of the outstanding
notes will not recognize income, gain or loss for federal income tax purposes as
a result of such defeasance or covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance had not
occurred (in the case of defeasance, such opinion must refer to and be based
upon a ruling of the Internal Revenue Service or a change in applicable federal
income tax laws); (iii) no Default shall have occurred and be continuing on the
date of such deposit or insofar as clause (viii) under the first paragraph under
"-- Events of Default" is concerned; (iv) such defeasance or covenant
defeasance shall not cause the trustee to have a conflicting interest with
respect to any securities of the Company or any guarantor; (v) such defeasance
or covenant defeasance shall not result in a breach or violation of, or
constitute a default under, any material agreement or instrument to which the
Company or any guarantor is a party or by which it is bound; (vi) such
defeasance or covenant defeasance shall not result in the trust arising from
such deposit constituting an investment company within the meaning of the
Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder; (vii) the
Company shall have delivered to the trustee an opinion of independent counsel in
the United States to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (viii) the Company shall have delivered to the trustee an officers'
certificate stating that the deposit was not made by the Company with the intent
of preferring the holders of the notes or any guarantee over the other creditors
of the Company or any guarantor with the intent of defeating, hindering,
delaying or defrauding creditors of the Company, any guarantor or others; (ix)
no event or condition shall exist that would prevent the Company from making
payments of the principal of, premium, if any, and interest on the notes on the
date of such deposit; and (x) the Company shall have delivered to the trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent under the indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture) as to all outstanding notes
when (i) either (a) all the notes theretofore authenticated and delivered
(except lost, stolen or destroyed notes which have been replaced or paid and
notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the trustee for
cancellation or (b) all notes not theretofore delivered to the trustee for
cancellation have become due and payable and the Company or any guarantor has
irrevocably deposited or caused to be deposited with the trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on the notes not
theretofore delivered to the trustee for cancellation, for principal of,
premium, if any, and interest on the notes to the date of deposit together with
irrevocable instructions from the Company directing the trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company or any guarantor has paid all other sums payable under the indenture
by the Company and the guarantors; and (iii) the Company and each of the
guarantors have delivered to the trustee an officers' certificate and an opinion
of independent counsel each stating that (a) all conditions precedent under the
indenture relating to the satisfaction and discharge of the indenture have been
complied with and (b) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the indenture or any
other material agreement or instrument
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to which the Company, any guarantor or any Subsidiary is a party or by which the
Company, any guarantor or any Subsidiary is bound.
AMENDMENTS AND WAIVERS
From time to time, the Company and the guarantors, when authorized by
resolutions of their boards of directors, and the trustee may, without the
consent of the holders of any outstanding notes, amend, waive or supplement the
indenture or the notes for certain specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, qualifying, or
maintaining the qualification of, the indenture under the Trust Indenture Act,
or making any change that does not materially adversely affect the rights of any
holder. Other amendments and modifications of the indenture or the notes may be
made by the Company, the guarantors and the trustee with the consent of the
holders of not less than a majority of the aggregate principal amount of the
outstanding notes; provided that no such modification or amendment may, without
the consent of the holder of each outstanding note affected thereby,
(i) change the maturity of the principal of, or any installment of
interest on, any such note or alter the optional redemption or repurchase
provisions of any such note or the indenture in a manner adverse to the
Holders of the notes;
(ii) reduce the principal amount of (or the premium of) any such
note;
(iii) reduce the rate of or extend the time for payment of interest
on any such note;
(iv) change the place or currency of payment of principal of (or
premium) or interest on any such note;
(v) modify any provisions of the indenture relating to the waiver of
past defaults (other than to add sections of the indenture or the notes
subject thereto) or the right of the holders of notes to institute suit for
the enforcement of any payment on or with respect to any such note or any
guarantee or the modification and amendment provisions of the indenture and
the notes (other than to add sections of the indenture or the notes which
may not be amended, supplemented or waived without the consent of each
Holder therein affected);
(vi) reduce the percentage of the principal amount of outstanding
notes necessary for amendment to or waiver of compliance with any provision
of the indenture or the notes or for waiver of any Default in respect
thereof;
(vii) waive a default in the payment of principal of, premium, if
any, or interest on, or redemption payment with respect to, the notes
(except a rescission of acceleration of the notes by the holders thereof as
provided in the indenture and a waiver of the payment default that resulted
from such acceleration);
(viii) modify the ranking or priority of any note or the guarantee of
any guarantor in any adverse manner;
(ix) following the occurrence of a Change of Control or an Asset
Sale, modify the provisions of any covenant (or the related definitions) in
the indenture requiring the Company to make and consummate a Change of
Control Offer with respect to such Change of Control or an Asset Sale Offer
with respect to such Asset Sale or modify any of the provisions or
definitions with respect thereto in a manner materially adverse to the
Holders of notes affected thereby otherwise than in accordance with the
indenture; or
(x) release any guarantor from any of its obligations under its
guarantee or the indenture otherwise than in accordance with the indenture.
The holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all holders of notes, may waive compliance by the Company
and the guarantors with certain restrictive provisions of the indenture. Subject
to certain rights of the trustee, as provided in the indenture, the holders of a
majority in aggregate principal amount of the notes, on behalf of all holders of
the notes,
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may waive any past default under the indenture (including any such waiver
obtained in connection with a tender offer or exchange offer for the notes),
except a default in the payment of principal, premium or interest or a default
arising from failure to purchase any notes tendered pursuant to an offer to
purchase pursuant thereto, or a default in respect of a provision that under the
indenture cannot be modified or amended without the consent of the Holder of
each note that is affected.
GOVERNING LAW
The indenture and the notes and the guarantees are governed by the laws of
the State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person becomes a Restricted Subsidiary of any other Person (other than
any Indebtedness incurred in connection with, or in contemplation of, such Asset
Acquisition or such Person becoming such a Restricted Subsidiary). Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary, as the case may be.
"AFFILIATE" means with respect to any specified Person: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; or (ii) any other Person
that owns, directly or indirectly, 10% or more of such specified Person's
Capital Stock. For the purposes of this definition, "control" when used with
respect to any specified Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through ownership of
voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"ASSET ACQUISITION" means (i) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person will
become a Restricted Subsidiary or will be merged or consolidated with or into
the Company or any Restricted Subsidiary or (ii) the acquisition by the Company
or any Restricted Subsidiary of the assets of any Person which constitute
substantially all of the assets of such Person, or any division or line of
business of such Person, or which is otherwise outside of the ordinary course of
business.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease or
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, for purpose of
this definition, a "transfer"), directly or indirectly, in one or a series of
related transactions, of: (i) any Capital Stock of any Restricted Subsidiary;
(ii) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary; or (iii) any other
properties or assets of the Company or any Restricted Subsidiary other than in
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include any transfer of properties and assets (a) that
is governed by the provisions described under "-- Consolidation, Merger, Sale
of Assets, Etc.," (b) that is by the Company to any Restricted Subsidiary, or
by any Subsidiary to the Company or any Restricted Subsidiary in accordance with
the terms of the indenture, (c) that is obsolete, damaged or used equipment or
inventory in the ordinary course of business, (d) that constitutes a sale, lease
or other disposition of inventory, accounts receivable or other assets in the
ordinary course of business including for purposes of financing, (e) that
constitutes a Capitalized Lease Obligation, (f) having a fair market value that
does not exceed $500,000 or (g) that is made the subject of an Investment
consummated in compliance with "Certain Covenants -- Limitation on Restricted
Payments" above.
"ASSET SALE OFFER" has the meaning set forth under "-- Limitation on
Sale of Assets."
"AVERAGE LIFE TO STATED MATURITY" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by dividing
(i) the sum of the products of (a) the number of years from such date to the
date or dates of each successive scheduled principal payment (including, without
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limitation, any sinking fund requirements) of such Indebtedness multiplied by
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such Person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants, options or rights exchangeable or
exercisable for or convertible into such capital stock, whether now outstanding
or issued after the date of the indenture.
"CAPITALIZED LEASE OBLIGATION" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP, and, for the purpose of
the indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP
consistently applied.
"CASH EQUIVALENTS" means, at any time, (i) any evidence of Indebtedness
with a maturity of not more than one year issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) demand or time deposits,
certificates of deposit or acceptances with a maturity of not more than one year
of any financial institution that is a member of the Federal Reserve System
having combined capital and surplus and undivided profits of not less than
$250.0 million; (iii) commercial paper with a maturity of not more than one year
issued by a corporation that is not an Affiliate of the Company organized under
the laws of any state of the United States or the District of Columbia and rated
at least A-1 by Standard & Poor's Corporation or at least P-1 by Moody's
Investors Service, Inc.; and (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (i)
and (ii) above entered into with any financial institution meeting the
qualifications specified in clause (ii) above.
"CHANGE OF CONTROL" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (i) any
"person" or "group" (as such terms are used in Section 13(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of 50% or more of the total voting power of
the then outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with or merges with or into any Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any corporation consolidates
with or merges into or with the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the Company is not changed or
exchanged at all (except to the extent necessary solely to reflect a change in
the jurisdiction of incorporation of the Company or where (A) the outstanding
Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of
the surviving corporation which is not Redeemable Capital Stock or (y) cash,
securities and other property (other than Capital Stock of the surviving
corporation) in an amount which could be paid by the Company as a Restricted
Payment as described under "-- Certain Covenants -- Limitation on Restricted
Payments" (and such amount shall be treated as a Restricted Payment subject to
the provisions in the indenture described under "-- Certain Covenants --
Limitation on Restricted Payments"), (B) no "person" or "group" owns
immediately after such
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transaction, directly or indirectly, 50% or more of the total outstanding Voting
Stock of the surviving corporation and (C) the holders of the Voting Stock of
the Company immediately prior to such transaction own, directly or indirectly,
not less than a majority of the total voting power of the then outstanding
Voting Stock of the surviving or transferee corporation immediately after such
transaction; or (iv) any order, judgment or decree shall be entered against the
Company decreeing the dissolution or split up of the Company and such order
shall remain undischarged or unstayed for a period in excess of sixty days.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "-- Change of
Control."
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" means, for any
period, (i) the sum of, without duplication, the amounts for such period, taken
as a single accounting period, of (a) Consolidated Net Income, (b) to the extent
reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to the
extent reducing Consolidated Net Income, Consolidated Interest Expense, and (d)
to the extent reducing Consolidated Net Income, Consolidated Income Tax Expense
less (ii) other non-cash items increasing Consolidated Net Income for such
period.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means the ratio of the
aggregate amount of Consolidated Cash Flow Available for Fixed Charges of the
Company for the four full fiscal quarters immediately preceding the date of the
transaction (the "Transaction Date") giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio for which consolidated financial
information of the Company is available (such four full fiscal quarter period
being referred to herein as the "Four Quarter Period") to the aggregate amount
of Consolidated Fixed Charges of the Company for such Four Quarter Period. For
purposes of this definition, "Consolidated Cash Flow Available for Fixed
Charges" and "Consolidated Fixed Charges" will be calculated, without
duplication, after giving effect on a pro forma basis for the period of such
calculation to (i) the incurrence of any Indebtedness of the Company or any of
the Restricted Subsidiaries during the period commencing on the first day of the
Four Quarter Period to and including the Transaction Date (the "Reference
Period"), including, without limitation, the incurrence of the Indebtedness
giving rise to the need to make such calculation, as if such incurrence occurred
on the first day of the Reference Period, (ii) an adjustment to eliminate or
include, as applicable, the Consolidated Cash Flow Available for Fixed Charges
and Consolidated Fixed Charges of the Company directly attributable to assets
which are the subject of any Asset Sale or Asset Acquisition (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring Acquired Indebtedness) occurring during the
Reference Period, as if such Asset Sale or Asset Acquisition occurred on the
first day of the Reference Period and (iii) the retirement of Indebtedness
during the Reference Period which cannot thereafter be reborrowed occurring as
if retired on the first day of the Reference Period. For purposes of this
definition, whenever pro forma effect is to be given to an Asset Sale or Asset
Acquisition such pro forma calculations shall be determined in accordance with
Article 11 of Regulation S-X under the Securities Act. In calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on Indebtedness determined on a fluctuating basis as of the Transaction
Date and which will continue to be so determined thereafter will be deemed to
accrue at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date shall be deemed to have been in effect during the
Reference Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by Interest Rate Agreements, will be deemed to accrue at the rate per
annum resulting after giving effect to the operation of such agreements. If the
Company or any Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the above definition will give effect to the
incurrence of
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such guaranteed Indebtedness as if the Company or any Restricted Subsidiary had
directly incurred or otherwise assumed such guaranteed Indebtedness.
"CONSOLIDATED FIXED CHARGES" means, for any period, the sum of, without
duplication, the amounts for such period of (i) Consolidated Interest Expense
and (ii) the aggregate amount of cash dividends and other distributions paid or
accrued during such period in respect of Redeemable Capital Stock.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the provision
for federal, state, local and foreign income taxes payable by the Company and
the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, without
duplication, the sum of (a) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (i) any amortization of
debt discount attributable to such period (other than amortization of debt
issuance costs), (ii) the net cost under or otherwise associated with Interest
Rate Agreements and Currency Agreements (in each case, including any
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, (iv) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and (v) all
capitalized interest and all accrued interest, and (b) all but the principal
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period and as determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net
income (or loss) of the Company and its Restricted Subsidiaries for such period
on a consolidated basis as determined in accordance with GAAP, adjusted, to the
extent included in calculating such net income (or loss), by excluding, without
duplication, (i) all extraordinary gains or losses (net of all fees and expenses
relating thereto), (ii) the portion of net income (or loss) of the Company and
the Restricted Subsidiaries on a consolidated basis allocable to minority
interests of Persons in Restricted Subsidiaries or of the Company and the
Restricted Subsidiaries in unconsolidated Persons, except (in the case of
unconsolidated Persons) to the extent that cash dividends or distributions are
actually received by the Company or a Restricted Subsidiary, (iii) income of the
Company and the Restricted Subsidiaries derived from or in respect of
Investments in Unrestricted Subsidiaries, except to the extent that cash
dividends or distributions are actually received by the Company or a Restricted
Subsidiary, (iv) for purposes of "Certain Covenants -- Limitation on Restricted
Payments" above, net income (or loss) of any Person combined with the Company
or any of the Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (v) any gain or
loss realized upon the termination of any employee pension benefit plan, (vi)
gains (or losses), net of all fees and expenses relating thereto, in respect of
any Asset Sales by the Company or a Restricted Subsidiary, (vii) the net income
of any Restricted Subsidiary to the extent that the declaration of dividends or
similar distributions by that Restricted Subsidiary of that income is not at the
time permitted, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, and (viii) any gain, arising from the acquisition of any
securities, or the extinguishment, under GAAP, of any Indebtedness of the
Company or any Restricted Subsidiary.
"CONSOLIDATED NON-CASH CHARGES" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of the Company and the
Restricted Subsidiaries reducing Consolidated Net Income for such period (other
than any non-cash item requiring an accrual or reserve for cash disbursements in
any future period), determined on a consolidated basis in accordance with GAAP.
"COVENANT DEFEASANCE" has the meaning set forth under" -- Defeasance or
Covenant Defeasance of indenture."
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"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or its Restricted Subsidiaries against fluctuations in currency values.
"CREDIT FACILITY" means the Amended and Restated Credit Agreement dated
as of September 3, 1998 among the Company, the lenders named therein and
NationsBank, N.A. as administrative agent, as such agreement may be amended,
modified, supplemented, extended, restated, replaced (including replacement
after the termination of such agreement), restructured, increased, renewed or
refinanced from time to time in one or more credit agreements, loan agreements,
instruments or similar agreements, as such may be further amended, modified,
supplemented, extended, restated, replaced (including replacement after the
termination of such agreement), restricted, increased, renewed or refinanced
from time to time, in each case in accordance with and as permitted by the
indenture and whether or not with the same lenders or agents.
"DEFAULT" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"DEFEASANCE" has the meaning set forth under "-- Defeasance or Covenant
Defeasance of Indenture."
"DESIGNATED SENIOR INDEBTEDNESS" means (a) all Senior Indebtedness,
liquidated or contingent, outstanding under the Credit Facility and (b) any
other Senior Indebtedness of the Company which, at the time of determination, is
in an aggregate principal amount outstanding or committed for of at least $50.0
million and is specifically designated in the instrument governing such Senior
Indebtedness as "Designated Senior Indebtedness" by the Company.
"DESIGNATION" has the meaning set forth under "-- Certain
Covenants -- Limitations on Unrestricted Subsidiaries."
"DESIGNATION AMOUNT" has the meaning set forth under "-- Certain
Covenants -- Limitations on Unrestricted Subsidiaries."
"DISINTERESTED DIRECTOR" means, with respect to any transaction or series
of related transactions, a member of the board of directors of the Company who
does not have any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions.
"EVENT OF DEFAULT" has the meaning set forth under "-- Events of
Default."
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length transaction, for cash,
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer under no compulsion to buy. Fair Market Value shall
be determined by the Board of Directors of the Company acting in good faith
evidenced by a board resolution thereof delivered to the trustee.
"FOUR QUARTER PERIOD" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"GUARANTEE" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee
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shall include, without limitation, any agreement to maintain or preserve any
other Person's financial condition or to cause any other Person to achieve
certain levels of operating results.
"GUARANTEE" means, when used in reference to the guarantee of any
guarantor, the guarantee by any guarantor of the Company's obligations under the
indenture and the notes pursuant to a guarantee given in accordance with the
indenture.
"GUARANTOR" means the Subsidiaries listed as guarantors in the indenture
and any other Subsidiary which is a guarantor of the notes, including any Person
that executes or is required after the date of the indenture to execute a
guarantee of the notes as described in "-- Subsidiary Guarantees" and
"Certain Covenants -- Limitation on Incurrence of Senior Subordinated
Indebtedness," until a successor replaces such party pursuant to the applicable
provisions of the indenture and, thereafter, shall mean such successor;
provided, that for purposes hereof the term "guarantor" shall not include any
Unrestricted Subsidiary unless specifically provided otherwise.
"INCUR" has the meaning set forth in "-- Certain Covenants -- Limitation
on Indebtedness." "Incurrence," "incurred" and "incurring" shall have the
meanings correlative to the foregoing.
"INDEBTEDNESS" means, with respect to any Person, without duplication,
(i) all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding (a) indemnities in connection
with the disposition of assets of businesses not to exceed the purchase price
for such assets, (b) customary agreements for purchase price adjustments, hold
backs or similar obligations in connection with an Asset Acquisition and (c) any
trade payables and other accrued current liabilities incurred or arising in the
ordinary course of business, but including, without limitation, all obligations,
contingent or otherwise, of such Person in connection with any letters of
credit, bankers acceptance or other similar credit transaction and in connection
with any agreement to purchase, redeem, exchange, convert or otherwise acquire
for value any Capital Stock of such Person, or any warrants, rights or options
to acquire such Capital Stock, now or hereafter outstanding, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all Capitalized Lease Obligations of such Person, (v) all
Indebtedness referred to in clauses (i) through (iv) above of other persons and
all dividends of other Persons, the payment of which is secured by (or for which
the holder of such Indebtedness has an existing right, contingent or otherwise,
to be secured by) any Lien upon or with respect to property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness,
(vi) all guarantees of Indebtedness by such Person, (vii) except for purposes of
the covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments," all Redeemable Capital Stock issued by such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends, (viii) all obligations under Interest Rate
Agreements and Currency Agreements of such Person, and (ix) any amendment,
supplement, modification, deferral, renewal, extension, refunding or refinancing
of any liability of the types referred to in clauses (i) through (viii) above.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a nationally recognized accounting,
appraisal or investment banking firm (i) which does not, and whose directors,
officers and employees or Affiliates do not have, a direct or indirect financial
interest in the Company and (ii) which, in the judgment of
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the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST RATE AGREEMENTS" means one or more of the following agreements
which shall be entered into by one or more financial institutions: obligations
of any Person pursuant to any arrangement with any other Person whereby,
directly or indirectly, such Person is entitled to receive from time to time
periodic payments calculated by applying either a floating or a fixed rate of
interest on a stated notional amount in exchange for periodic payments made by
such Person calculated by applying a fixed or a floating rate of interest on the
same notional amount or any other arrangement involving payments by or to such
Person based upon fluctuations in interest rates (including, without limitation,
interest rate swaps, caps, floors, collars and similar agreements) and/or other
types of interest rate hedging agreements from time to time.
"INVESTMENT" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit (including by means of a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others or otherwise), or any purchase or acquisition by such Person of any
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person and all other items that would be
classified as investments on a balance sheet prepared in accordance with GAAP.
Investments shall exclude extensions of trade credit on commercially reasonable
terms in accordance with normal trade practices. In addition to the foregoing,
any Currency Agreement, Interest Rate Agreement, or similar agreement shall
constitute an Investment. Notwithstanding the foregoing, the acquisition of
assets, businesses or securities to the extent such Acquisition is for
consideration consisting of Qualified Capital Stock of the Company shall not be
an Investment.
"ISSUE DATE" means the original issue date of the notes under the
indenture.
"LIEN" means any mortgage or deed of trust, charge, pledge, lien
(statutory or other), privilege, security interest, hypothecation, cessation and
transfer, assignment for security, claim, deposit arrangement, or preference or
priority or other encumbrance upon or with respect to any property of any kind
(including any conditional sale, capital lease or other title retention
agreement, any leases in the nature thereof, and any agreement to give any
security interest), whether real, personal or mixed, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property which it has acquired or holds subject to the interest of a vendor
or lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"MATERIAL SUBSIDIARY" means each Restricted Subsidiary of the Company
that is a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X
under the Securities Act and the Exchange Act (as such regulation is in effect
on the Issue Date).
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset Sales)
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in form of, or stock or other assets
when disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of legal counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes payable as a result of
such Asset Sale, (iii) payments made to retire Indebtedness where payment of
such Indebtedness is secured by the assets or properties the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Restricted Subsidiary) owning a beneficial interest in or having
a Lien on the assets subject to the Asset Sale and (v) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale (provided that the amount of
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any such reserves shall be deemed to constitute Net Cash Proceeds at the time
such reserves shall have been released or are not otherwise required to be
retained as a reserve), all as reflected in an officers' certificate delivered
to the trustee and (b) with respect to any issuance or sale of Capital Stock
that have been converted into or exchanged for Capital Stock as referred to
under "-- Certain Covenants -- Limitation on Restricted Payments," the
proceeds of such issuance or sale in the form of cash or Cash Equivalents
including payments in respect of deferred payment obligations when received in
the form of, or stock or other assets when disposed of for, cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary), net of attorney's
fees, accountant's fees and brokerage, consultation, underwriting and other fees
and expenses actually incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
"PARI PASSU INDEBTEDNESS" means (a) any Indebtedness of the Company which
ranks pari passu in right of payment to the notes and (b) with respect to any
guarantor, Indebtedness which ranks pari passu in right of payment to the
guarantee of such guarantor.
"PERMITTED INDEBTEDNESS" has the meaning set forth under "-- Certain
Covenants -- Limitation on Indebtedness."
"PERMITTED INVESTMENTS" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans and
advances to employees made in the ordinary course of business not to exceed $1.0
million in the aggregate at any one time outstanding, (d) Interest Rate
Agreements and Currency Agreements permitted under clause (vi) or (vii) of the
second paragraph under "-- Certain Covenants -- Limitation on Indebtedness;"
(e) Investments represented by accounts receivable created or acquired in the
ordinary course of business, (f) loans or advances to vendors in the ordinary
course of business in an amount not to exceed $1.0 million at any time, (g)
Investments existing on the Issue Date and any renewal or replacement thereof on
terms and conditions no less favorable in any respect than that existing on the
Issue Date; (h) any Investment to the extent that the consideration therefor is
Qualified Capital Stock of the Company; (i) bonds, notes, debentures or other
securities received in connection with an Asset Sale permitted under
"-- Certain Covenants -- Limitation on Sale of Assets," not to exceed 25% of
the total consideration in such Asset Sale; (j) shares of Capital Stock or other
securities received in settlement of debts owed to the Company or any of the
Restricted Subsidiaries as a result of foreclosure, perfection or enforcement of
any Lien or indebtedness or in connection with any good faith settlement of a
bankruptcy proceeding; (k) the acceptance of notes payable from employees of the
Company or its Subsidiaries in payment for the purchase of Capital Stock by such
employees and (l) Investments in the Company, any Restricted Subsidiary or any
Person that as a result of such Investment becomes a Restricted Subsidiary or is
merged with or into or consolidated with the Company or a Restricted Subsidiary
(provided the Company or a Restricted Subsidiary is the survivor) as a result of
or in connection with such Investment.
"PERMITTED JUNIOR SECURITIES" means Capital Stock of the Company or debt
securities that are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to at least the same
extent as the notes are subordinated to Senior Indebtedness.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust
unincorporated organization or government or any agency or political subdivision
thereof.
"PREFERRED STOCK" means, with respect to any Person, Capital Stock of any
class or, classes (however designated) of such Person which is preferred as to
the payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over Capital Stock of any other class of such Person.
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"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien on
assets related to the business of the Company and its Restricted Subsidiaries
and any additions and accessions thereto, which are purchased by the Company or
any Restricted Subsidiary at any time after the notes are issued; provided that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively a
"Purchase Money Security Agreement") shall be entered into within 180 days
after the purchase or substantial completion of the construction of such assets
and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom, (ii)
at no time shall the aggregate principal amount of the outstanding Indebtedness
secured thereby be increased, except in connection with the purchase of
additions and accessions thereto and except in respect of fees and other
obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Purchase Money Security Agreement is entered into exceed 100% of the
purchase price to the Company and the Restricted Subsidiaries of the assets
subject thereto or (B) the Indebtedness secured thereby shall be with recourse
solely to the assets so purchased or acquired, any additions and accessions
thereto and any proceeds therefrom.
"QUALIFIED CAPITAL STOCK" of any Person means any and all Capital Stock
of such Person other than Redeemable Capital Stock.
"QUALIFIED EQUITY OFFERINGS" has the meaning set forth under
"-- Optional Redemption -- Optional Redemption upon Qualified Equity
Offering."
"REDEEMABLE CAPITAL STOCK" means any class or series of Capital Stock to
the extent that, either by its terms, by the terms of any security into which it
is convertible or exchangeable, or by contract or otherwise, is or upon the
happening of an event or passage of time would be, required to be redeemed prior
to any Stated Maturity of the principal of the notes or is redeemable at the
option of the holder thereof at any time prior to such Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
Stated Maturity.
"REFERENCE PERIOD" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
"RESTRICTED PAYMENT" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a board resolution
delivered to the trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Certain
Covenants -- Limitations on Unrestricted Subsidiaries." Any such designation
may be revoked by a board resolution of the Board of Directors of the Company
delivered to the trustee, subject to the provisions of such covenant.
"REVOCATION" has the meaning set forth under "-- Certain
Covenants -- Limitations on Unrestricted Subsidiaries."
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the Commission thereunder.
"SENIOR INDEBTEDNESS" means, with respect to the Company or any
guarantor, as applicable, the principal of, premium, if any, interest on any
Indebtedness of the Company or such guarantor, as the case may be, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to any
Indebtedness of the Company or such guarantor, as the case may be. Without
limiting the generality of the foregoing, "Senior Indebtedness" will include
the principal of, premium, if any, interest (including interest that would
accrue but for the filing of a petition initiating any proceeding under any
state or federal bankruptcy laws, whether or not such claim is allowable in such
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proceeding) on all obligations of every nature of the Company or such guarantor,
as the case may be, and all indemnity and other payment obligations from time to
time owed to the lenders under the Credit Facility, including, without
limitation, principal of and interest on, and all indemnities, fees and expenses
payable under the Credit Facility. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include, to the extent constituting Indebtedness, (i)
Indebtedness evidenced by the notes or the guarantors, (ii) Indebtedness that is
subordinate or junior in right of payment to any Indebtedness of the Company or
any guarantor, (iii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company or any guarantees, (iv) Indebtedness which is
represented by Redeemable Capital Stock, (v) Indebtedness for goods, materials
or services purchased in the ordinary course of business or Indebtedness
consisting of trade payables or other current liabilities (other than any
current liabilities owing under the Credit Facility or the current portion of
any long-term Indebtedness which would constitute Senior Indebtedness but for
the operation of this clause (v)), (vi) Indebtedness of or amounts owed by the
Company or any guarantor for compensation to employees or for services rendered
to the Company or such guarantor, (vii) any liability for federal, state, local
or other taxes owed or owing by the Company or any guarantor, (viii)
Indebtedness of the Company or any guarantor to a Subsidiary of the Company, and
(ix) that portion of any Indebtedness which at the time of issuance is issued in
violation of the indenture.
"STATED MATURITY" means, with respect to any note or any installment of
interest thereon, the dates specified in such note as the fixed date on which
the principal of such note or such installment of interest is due and payable,
and when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or any installment of interest is due and
payable.
"SUBORDINATED INDEBTEDNESS" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to the notes or, with respect to any guarantor, Indebtedness of such guarantor
which is expressly subordinated in right of payment to the guarantee of such
guarantor.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation of
which the outstanding shares of Voting Capital Stock having at least a majority
of the votes entitled to be cast in the election of directors shall at the time
be owned, directly or indirectly, by such Person, or (b) any other Person of
which at least a majority of the shares of Voting Capital Stock are at the time,
directly or indirectly, owned by such first named Person.
"SURVIVING PERSON" means, with respect to any Person involved in any
consolidation or merger, or any sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of its properties and assets as an
entirety, the Person formed by or surviving such merger or consolidation or the
Person to which such sale, assignment, conveyance, transfer or lease is made.
"TRANSACTION DATE" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
"UNRESTRICTED SUBSIDIARY" means each Subsidiary of the Company (other
than a guarantor) designated as such pursuant to and in compliance with the
covenant described under "Certain Covenants -- Limitations on Unrestricted
Subsidiaries." Any such designation may be revoked by a Board Resolution of the
Company delivered to the trustee, subject to the provisions of such covenant.
"UNUTILIZED NET CASH PROCEEDS" has the meaning set forth under
"-- Certain Covenants -- Limitation on Sale of Assets."
"VOTING STOCK" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
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"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company and/or
another Wholly-Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares shall be disregarded in determining the ownership
of a Restricted Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Notes will initially be represented by one or more permanent global notes
in definitive, fully registered book-entry form (the "Global Securities")
which will be registered in the name of a nominee of The Depositary Trust
Company ("DTC") or its nominee and deposited on behalf of purchasers of the
notes represented thereby with a custodian for DTC for credit to the respective
accounts of the purchasers (or to such other accounts as they may direct) at
DTC.
THE GLOBAL SECURITIES. The Company expects that pursuant to procedures
established by DTC (a) upon deposit of the Global Securities, DTC or its
custodian will credit on its internal system portions of the Global Securities
which shall be comprised of the corresponding respective amount of the Global
Securities to the respective accounts of persons who have accounts with such
depositary and (b) ownership of the notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC or
its nominee (with respect to interests of Participants (as defined below) and
the records of Participants (with respect to interests of persons other than
Participants). Such accounts initially will be designated by or on behalf of the
initial purchasers and ownership of beneficial interests in the Global
Securities will be limited to persons who have accounts with DTC
("Participants") or persons who hold interests through Participants.
Noteholders may hold their interests in a Global Security directly through DTC
if they are Participants in such system, or indirectly through organizations
which are Participants in such system.
So long as DTC or its nominee is the registered owner or holder of any of
the notes, DTC or such nominee will be considered the sole owner or holder of
such notes represented by such Global Securities for all purposes under the
indenture and under the notes represented thereby. No beneficial owner of an
interest in the Global Securities will be able to transfer such interest except
in accordance with the applicable procedures of DTC in addition to those
provided for under the indenture.
Payments of the principal, premium, interest and other amounts on the notes
represented by the Global Securities will be made to DTC or its nominee, as the
case may be, as the registered owner thereof. None of the Company, the trustee
or any paying agent under the indenture will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal, premium, interest or other amounts on the notes represented by
the Global Securities, will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the Global
Securities as shown on the records of DTC or its nominee. The Company also
expects that payments by Participants to owners of beneficial interests in the
Global Securities held through such Participants will be governed by standing
instructions and customary practice as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payment will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in accordance with DTC
rules and will be settled in immediately available funds.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of notes (including the presentation of notes for exchange as
described below) only at the direction of one or more Participants to whose
account the DTC interests in the Global Securities are credited and only in
respect of the aggregate principal amount of as to which such Participant or
Participants has or have given such direction.
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DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its Participants
and facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in accounts of its
Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among Participants of
DTC, DTC is under no obligation to perform such procedures, and such procedures
may be discontinued at any time. None of the Company, the trustee or the paying
agent will have any responsibility for the performance by DTC or its direct or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED SECURITIES. Interests in the Global Securities will be
exchanged for physical delivery of certificates ("Certificated Securities")
only if (i) DTC is at any time unwilling or unable to continue as depositary for
the Global Securities, or DTC ceases to be a "Clearing Agency" registered
under the Exchange Act, and a successor depositary is not appointed by the
Company within 90 days or (ii) an event of default under the indenture has
occurred and is continuing with respect to the notes. Upon the occurrence of
either of the events described in the preceding sentence, the Company will cause
the appropriate Certificated Securities to be delivered, which Certificated
Securities will bear the legends referred to under the heading "Notice to
Investors."
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with the
initial purchasers pursuant to which the Company and the guarantors have agreed,
for the benefit of the holders of the existing notes, at the Company's cost, (i)
to cause to be filed with the SEC the registration statement of which this
prospectus is a part with respect to the exchange offer of the exchange notes
within 60 days after the date of issuance of the existing notes, (ii) to use
their reasonable best efforts to have this exchange offer registration statement
declared effective under the Securities Act within 120 days after the date of
issuance of the existing notes, (iii) to use their reasonable best efforts to
have this exchange offer registration statement remain effective until the
closing of the exchange offer and (iv) to use their reasonable best efforts to
cause this exchange offer to be consummated within 150 days after the date of
issuance of the existing notes.
Under the registration rights agreement, the Company is required to allow
participating broker-dealers to use the prospectus contained in the exchange
offer registration statement (subject to certain "black out" periods)
following the exchange offer, in connection with the resale of exchange notes
received in exchange for notes acquired by such participating broker-dealers for
their own account as a result of market-making or other trading activities.
The registration rights agreement shall be governed by, and construed in
accordance with, the laws of the State of New York. The summary herein of
certain provisions of the registration rights agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the registration rights agreement, a copy of which is
available upon request to the Company. The registration rights agreement is also
attached as an exhibit to this registration statement. In addition, the
information set forth above concerning certain interpretations of and positions
taken by the staff of the SEC is not intended to constitute legal advice, and
prospective investors should consult their own advisors with respect to such
matters.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for existing notes where such existing notes were acquired as a result
of market-making activities or other trading activities. In addition, until
, 1999 all dealers effecting transactions in the exchange notes
may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of exchange notes
by broker-dealers. Exchange notes received by broker-dealers for their own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commission or concessions received by any
such person may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter," within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the notes), other than
commissions or concessions of any broker-dealers, and will indemnify the holders
of the notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This general discussion of certain United States federal income and estate
tax consequences applies to you if you acquired existing notes at original issue
for cash and you exchange those existing notes for exchange notes in the
exchange offer. This discussion only applies to you if you purchased existing
notes in the offering for an amount equal to the "issue price" of such notes
and hold the exchange notes as a "capital asset," generally, for investment,
under Section 1221 of the Code. This summary, however, does not consider state,
local or foreign tax laws. In addition, it does not include all of the rules
which may affect the United States tax treatment of your investment in the
exchange notes. For example, special rules not discussed here may apply to you
if you are, including without limitation:
o a broker-dealer, a dealer in securities or a financial
institution;
o an insurance company;
o a tax-exempt organization;
o holding the exchange notes through partnerships or other
pass-through entities;
o holding the exchange notes as part of a hedge, straddle or other
risk reduction or constructive sale transaction; or
o you have a functional currency other than the U.S. dollar.
This discussion only represents our best attempt to describe certain
federal income tax consequences that may apply to you based on current United
States federal tax law. This discussion may in the end inaccurately describe the
federal income tax consequences which are applicable to you
91
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because the law may change, possibly retroactively, and because the Internal
Revenue Service or any court may disagree with this discussion.
This summary may not cover your particular circumstances because it does
not consider foreign, state or local tax rules, disregards certain federal tax
rules, and does not describe future changes in federal tax rules. Please consult
your tax advisor concerning the application of United States federal income tax
laws, as well as the laws of any state, local or foreign taxing jurisdiction, to
your particular situation rather than relying on this general description.
UNITED STATES HOLDERS
If you are a "U.S. Holder," as defined below, this section applies to
you. You are a "U.S. Holder" if you hold notes and you are:
o a citizen or resident of the United States;
o a corporation or partnership created or organized in the United
States or under the laws of the United States or of any political
subdivision;
o an estate the income of which is subject to United States federal
income tax regardless of its source; or
o a trust, if (i) a United States court can exercise primary
supervision over the administration of the trust and one or more
United States persons can control all substantial decisions of
the trust, or (ii) the trust was in existence on August 20, 1996
and has properly elected to continue to be treated as a United
States person.
ORIGINAL ISSUE DISCOUNT
The exchange notes will be treated as our indebtedness that is issued with
original issue discount ("OID") in an amount equal to the difference between
the "stated redemption price at maturity," i.e., the face amount of the
exchange notes, and the "issue price." U.S. Holders of exchange notes,
including holders that are cash method taxpayers, will be required to report
such OID as interest income on a constant yield to maturity basis, referred to
as the "Constant Yield Method," which will result in the inclusion of OID in
income in advance of the receipt of the corresponding cash payments at maturity.
Under the Constant Yield Method, the amount of OID allocable to each
accrual period of an exchange note will equal the product of the "adjusted
issue price" of such note at the beginning of such accrual period and the
"yield to maturity" of such note, less any payments of qualified stated
interest ("QSI") allocable to such accrual period. The "adjusted issue
price" of a note at the beginning of an accrual period will equal the "issue
price" of such note, increased by all previous inclusions of OID, and decreased
by any previous cash payments other than payments of QSI. The "issue price" of
a exchange note generally will be the first price at which a substantial portion
of the notes are sold other than to underwriters or persons acting in a similar
capacity. Thus, the issue price of the exchange notes will equal the price paid
by the initial purchasers. The "yield to maturity" is the discount rate that
will cause the present value of all interest and principal payments to be made
under the note to equal the issue price of the note.
TAXATION OF STATED INTEREST
QSI is stated interest, other than any stated interest payable in kind,
that is unconditionally payable at least annually at a single fixed rate.
Subject to the discussion under "Effect of an Interest Payment Triggering
Event" below, all of the stated interest on the exchange notes should qualify
as QSI because such interest is unconditionally payable throughout the term of
the exchange notes at a single fixed rate.
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You generally must pay federal income tax on QSI on the exchange notes:
o when it accrues, if you use the accrual method of accounting for
United States federal income tax purposes; or
o when you receive it, if you use the cash method of accounting for
United States federal income tax purposes.
EFFECT OF AN INTEREST PAYMENT TRIGGERING EVENT
We believe that it is significantly more likely than not that no Interest
Payment Triggering Event will occur. Accordingly, while not entirely free from
doubt, the possibility that the stated interest on the exchange notes will
increase as the result of an Interest Payment Triggering Event should be
disregarded for purposes of determining the yield and maturity of the exchange
notes and the qualification of the stated interest as QSI. Moreover, if an
Interest Payment Triggering Event was to occur, any increased interest payments
should also be considered QSI.
EFFECT OF MANDATORY OFFER TO REPURCHASE
The exchange notes are subject to a mandatory offer to repurchase to the
extent that we sell certain assets or experiences specific kinds of changes in
control. Although not free from doubt, based on our current expectations, we
believe that the mandatory offer to repurchase should be viewed as an incidental
contingency and should not be taken into account in applying the foregoing rules
with respect to the exchange notes.
SALE OR OTHER TAXABLE DISPOSITION OF EXCHANGE NOTES
You must recognize taxable gain or loss on the sale, exchange, redemption,
retirement or other taxable disposition of an exchange note. The amount of your
gain or loss equals the difference between the amount you receive for the
exchange note in cash or other property, valued at fair market value, minus the
amount attributable to accrued QSI on the exchange note, minus your adjusted tax
basis in the exchange note. Your initial tax basis in an exchange note equals
the price you paid for the existing note which you exchanged for the exchange
note increased by amounts previously includable in income as OID and reduced by
any payments other than payments of QSI made on such notes.
Your gain or loss will generally be a long-term capital gain or loss if
your holding period in the exchange note is more than one year. Otherwise, it
will be a short-term capital gain or loss. Payments attributable to accrued QSI
which you have not yet included in income will be taxed as ordinary interest
income.
RECEIPT OF EXCHANGE NOTES
Because the economic terms of the exchange notes and the existing notes are
identical, your exchange of existing notes for exchange notes under the exchange
offer will not constitute a taxable exchange of the existing notes. As a result:
o you will not recognize taxable gain or loss when you receive
exchange notes in exchange for existing notes;
o your holding period in the exchange notes will include your
holding period in the existing notes; and
o your basis in the exchange notes will equal your basis in the
existing notes.
BACKUP WITHHOLDING
You may be subject to a 31% backup withholding tax with respect to
payments of interest (including OID), principal and premium on, and any proceeds
upon the sale or disposition of, an exchange note. Certain holders, including,
among others, corporations and certain tax-exempt organizations, are generally
not subject to backup withholding. In addition, the 31% backup
93
<PAGE>
withholding tax will not apply to you if you provide your taxpayer
identification number ("TIN") in the prescribed manner unless:
o the IRS notifies us or our agent that the TIN you provided is
incorrect;
o you fail to report interest and dividend payments that you
receive on your tax return and the IRS notifies us or our agent
that withholding is required; or
o you fail to certify under penalties of perjury that you are not
subject to backup withholding.
You should consult your tax advisor as to your qualification for exemption
from backup withholding and the procedure for obtaining such an exemption. If
the 31% backup withholding tax does apply to you, you may use the amounts
withheld as a refund or credit against your United States federal income tax
liability as long as you provide certain information to the IRS.
LEGAL MATTERS
Certain legal matters in connection with the notes being offered hereby
will be passed upon for the Company by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial
statements of Pentacon, Inc., as of September 30, 1998 and 1997 and the year
ended September 30, 1998 and the period from inception (March 20, 1997) through
September 30, 1997, the consolidated financial statements of Alatec Products,
Inc., as of September 30, 1997 and for the year ended December 31, 1995 and the
period from January 1, 1997 through September 30, 1997, the financial statements
of AXS Solutions, Inc., as of December 31, 1996 and September 30, 1997 and for
the years ended December 31, 1995 and 1996 and the period from January 1, 1997
to September 30, 1997, the financial statements of Maumee Industries, Inc., as
of December 31, 1996 and September 30, 1997 and for the years ended December 31,
1995 and 1996 and the period from January 1, 1997 to September 30, 1997, the
financial statements of Sales Systems, Limited, as of December 31, 1996 and
September 30, 1997 and for the year ended December 31, 1996 and the period from
January 1, 1997 to September 30, 1997, as set forth in their reports. The
Company has included the above described financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.
The Consolidated Financial Statements of Alatec Products, Inc. as of
December 31, 1996 and for the year then ended and of ASI Aerospace Group, Inc.
as of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996
and 1997 included in this prospectus and registration statement have been
audited by McGladrey & Pullen, LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
Grant Thornton LLP, independent certified public accountants, have audited
the consolidated financial statements of Texas International Aviation, Inc. as
of December 31, 1997 and March 31, 1997, and for the nine months ended December
31, 1997 and the year ended March 31, 1997, as set forth in their report. The
Company has included financial statements in the prospectus and elsewhere in the
registration statement in reliance on Grant Thornton LLP's report, given on
their authority as experts in accounting and auditing.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
------
PENTACON, INC. AND SUBSIDIARIES (PRO FORMA)
Unaudited Pro Forma Consolidated Statement of Operations --
Basis of Presentation ............................................ F-3
Pro Forma Consolidated Statement of Operations -- Unaudited ......... F-5
Notes to Unaudited Pro Forma Consolidated Statement of Operations ... F-6
PENTACON, INC. AND SUBSIDIARIES (UNAUDITED)
Historical Consolidated Balance Sheets .............................. F-7
Historical Consolidated Statements of Operations .................... F-8
Pro Forma Consolidated Statements of Operations ..................... F-9
Historical Consolidated Statements of Cash Flows .................... F-10
Notes to Consolidated Financial Statements .......................... F-11
PENTACON, INC. AND SUBSIDIARIES
Report of Independent Auditors ...................................... F-16
Independent Auditor's Report ........................................ F-17
Consolidated Balance Sheets ......................................... F-18
Consolidated Statements of Operations ............................... F-19
Consolidated Statements of Cash Flows ............................... F-20
Consolidated Statements of Stockholders' Equity ..................... F-21
Notes to Consolidated Financial Statements .......................... F-22
PENTACON, INC .........................................................
Report of Independent Auditors ...................................... F-35
Balance Sheets ...................................................... F-36
Statements of Operations ............................................ F-37
Statements of Stockholders' Deficit ................................. F-38
Statements of Cash Flows ............................................ F-39
Notes to Financial Statements ....................................... F-40
ALATEC PRODUCTS, INC ..................................................
Report of Independent Auditors ...................................... F-43
Independent Auditor's Report ........................................ F-44
Consolidated Balance Sheets ......................................... F-45
Consolidated Statements of Income ................................... F-46
Consolidated Statements of Stockholders' Equity ..................... F-47
Consolidated Statements of Cash Flows ............................... F-48
Notes to Consolidated Financial Statements .......................... F-49
AXS SOLUTIONS, INC ....................................................
Report of Independent Auditors ...................................... F-57
Balance Sheets ...................................................... F-58
Statements of Income ................................................ F-59
Statements of Shareholders'
Equity .............................................................. F-60
Statements of Cash Flows ............................................ F-61
Notes to Financial Statements ....................................... F-62
MAUMEE INDUSTRIES, INC ................................................
Report of Independent Auditors ...................................... F-68
Balance Sheets ...................................................... F-69
Statements of Operations ............................................ F-70
Statements of Stockholders'
Deficit ............................................................. F-71
Statements of Cash Flows ............................................ F-72
Notes to Financial Statements ....................................... F-73
F-1
<PAGE>
PAGE
------
SALES SYSTEMS, LIMITED
Report of Independent Auditors ...................................... F-78
Balance Sheets ...................................................... F-79
Statements of Income and Retained Earnings .......................... F-80
Statements of Cash Flows ............................................ F-81
Notes to Financial Statements ....................................... F-82
TEXAS INTERNATIONAL AVIATION, INC .....................................
Report of Independent Certified Public Accountants .................. F-86
Consolidated Balance Sheets ......................................... F-87
Consolidated Statements of Earnings ................................. F-88
Consolidated Statement of Stockholders' Equity ...................... F-89
Consolidated Statements of Cash Flows ............................... F-90
Notes to Consolidated Financial
Statements ....................................................... F-91
ASI AEROSPACE GROUP, INC ..............................................
Independent Auditor's Report ........................................ F-95
Consolidated Balance Sheets ......................................... F-96
Consolidated Statements of Operations ............................... F-97
Consolidated Statements of Stockholders' Equity ..................... F-98
Consolidated Statements of Cash Flows ............................... F-99
Notes to Consolidated Financial Statements .......................... F-101
F-2
<PAGE>
PENTACON, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
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 (the "Initial Acquisitions"), simultaneously
with the closing of its initial public offering of its common stock, five
businesses: 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 common stock following the initial
public offering and the Initial Acquisitions, and (ii) the stockholders of
Alatec received the greatest number of shares of common stock among the
stockholders of the Founding Companies, for financial statement presentation
purposes, Alatec has been identified as the accounting acquiror. The Initial
Acquisitions have been accounted for using the purchase method of accounting.
Therefore, Alatec's historical financial statements as of September 30, 1997 and
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 Initial
Acquisitions.
The Unaudited Pro Forma Consolidated Statement of Operations of the Company
and the related notes thereto should be read in conjunction with the Financial
Statements of Pentacon, Alatec, AXS, Maumee and SSL and related notes thereto,
and management's discussion and analysis of financial condition and results of
operations related thereto, all of which are included in this Offering
Memorandum and the Company's Registration Statements filed with the United
States Securities and Exchange Commission from time to time.
In May 1998 the Company acquired Pace Products, Inc. ("Pace"), 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. ("D-Bolt"), 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. ("TIA"), 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. ("ASI"), a distributor of fasteners and other small
parts which provides inventory procurement and management services primarily to
the aerospace industry. 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. These
acquisitions and the Initial Acquisitions are collectively referred to as the
"Acquisitions."
The following Unaudited Pro Forma Consolidated Statements of Operations of
Pentacon, Inc. and Subsidiaries gives effect to the Acquisitions for the periods
prior to the consummation of the Acquisitions.
The Unaudited Pro Forma Consolidated Statement of Operations for the twelve
months ended September 30, 1998 is based upon:
(i) the audited historical consolidated statement of operations of
Pentacon, Inc. for the twelve months ended September 30, 1998;
(ii) the unaudited historical consolidated statements of operations
of AXS, Capitol, Maumee, SSL and Pentacon for the period October
1, 1997 through March 10, 1998 (the date of the Initial
Acquisitions);
(iii) the unaudited consolidated statements of operations of TIA for
the period October 1, 1997 through July 16, 1998 (the date of
the acquisition);
F-3
<PAGE>
(iv) the unaudited consolidated statements of operations of ASI for
the period October 1, 1997 through September 4, 1998 (the date of
the acquisition); and
(v) the unaudited statements of operations of Pace and D-Bolt include
results of operations from October 1, 1997 through the respective
acquisition date.
The Unaudited Pro Forma Consolidated Statement of Operations has been
prepared based upon certain assumptions and includes all adjustments as detailed
in the Notes to Unaudited Pro Forma Consolidated Statement of Operations. The
pro forma financial data does not purport to represent what the Company's
financial position or results of operations would actually have been if the
transactions had occurred on those dates or to project the Company's financial
position or results of operations for any future period.
F-4
<PAGE>
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- UNAUDITED
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 1, 1997 TO MARCH 10, 1998
HISTORICAL -----------------------------------------------------------------
PENTACON, INC. PENTACON, INC. AXS CAPITAL MAUMEE SSL TIA
-------------- -------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 141,078 $ -- $ 13,521 $ 5,346 $ 20,061 $ 7,053 $ 23,682
Cost of Sales ................... 91,026 -- 9,002 3,652 14,316 4,625 16,955
-------------- -------------- --------- --------- --------- --------- ---------
Gross Profit ................ 50,052 -- 4,519 1,694 5,745 2,428 6,727
Operating Expenses .............. 36,524 4,900 3,149 1,636 3,868 2,204 4,046
Goodwill amortization ........... 1,111 -- 53 -- -- -- --
-------------- -------------- --------- --------- --------- --------- ---------
Operating Income ................ 12,417 (4,900) 1,317 58 1,877 224 2,681
Other (income) (expense) ........ (91) -- 33 (25) (13) -- (57)
Interest expense ................ 2,448 -- 53 13 349 46 793
-------------- -------------- --------- --------- --------- --------- ---------
Income before taxes ............. 10,060 (4,900) 1,231 70 1,541 178 1,945
Income taxes .................... 5,373 (95) 1 55 639 -- 871
-------------- -------------- --------- --------- --------- --------- ---------
Net Income ...................... $ 4,687 $ (4,805) $ 1,230 $ 15 $ 902 $ 178 $ 1,074
============== ============== ========= ========= ========= ========= =========
Diluted net income per share.......................................................................................................
Shares used in computing net income per share (Note 3(H))..........................................................................
<CAPTION>
OTHER MERGER PRO FORMA OFFERING AS
ASI ACQUISITIONS ADJUSTMENTS CONSOLIDATED ADJUSTMENTS ADJUSTED
--------- ------------ ----------- ------------ ----------- ---------
(NOTE 2) (NOTE 3)
<S> <C> <C> <C> <C> <C> <C>
Revenues .............................. $ 63,410 $ 9,643 $ -- $ 283,794 $ -- $ 283,794
Cost of Sales ......................... 43,103 6,134 -- 188,813 -- 188,813
--------- ------------ ----------- ------------ ----------- ---------
Gross Profit ...................... 20,307 3,509 -- 94,981 -- 94,981
Operating Expenses .................... 9,856 2,365 (2,322)(A) 66,226 (6,480)(E) 59,746
Goodwill amortization ................. 327 -- 1,909 (B) 3,400 -- 3,400
--------- ------------ ----------- ------------ ----------- ---------
Operating Income ...................... 10,124 1,144 413 25,355 6,480 31,835
Other (income) (expense) .............. 112 (3) -- (44) -- (44)
Interest expense ...................... 1,939 (1) 5,290 (C) 10,930 (463)(F) 10,467
--------- ------------ ----------- ------------ ----------- ---------
Income before taxes ................... 8,073 1,148 (4,877) 14,469 6,943 21,412
Income taxes .......................... 3,473 79 (413)(D) 9,983 189 (G) 10,172
--------- ------------ ----------- ------------ ----------- ---------
Net Income ............................ $ 4,600 $ 1,069 $ (4,464) $ 4,486 $ 6,754 $ 11,240
========= ============ =========== ============ =========== =========
Diluted net income per share.......................................................................................... $ 0.67
=========
Shares used in computing net income per share (Note 3(H))............................................................. 16,668
=========
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
PENTACON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
In May 1998 the Company acquired Pace, 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, a distributor of fasteners and other small parts primarily to the
fabrication, construction and mining industries. In July 1998 the Company
acquired TIA, 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, a distributor of fasteners
and other small parts which provides inventory procurement and management
services primarily to the aerospace industry. 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.
1. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements represent the results of operations of
Pentacon, the Founding Companies and acquisitions and were derived from their
respective financial statements. The Company had a fiscal year-end of September
30. Effective October 28, 1998, the Company changed its fiscal year end from
September 30 to December 31. The Founding Companies have been presented for the
period commencing with the initial public offering and ending on September 30,
1998. The historical financial statements of TIA, ASI and other acquisitions are
presented for the period commencing with their respective acquisition and ending
September 30, 1998.
2. UNAUDITED PRO FORMA CONSOLIDATED MERGER ADJUSTMENTS
(A) Adjusts salaries, bonuses, benefits, acquisition expenses and lease
expense amounts to reflect those established in contractual agreements
between the Company and certain owners and key employees of companies
acquired in the Acquisitions.
(B) Records pro forma goodwill amortization using a 40-year estimated
life.
(C) Reflects the increase in interest expense attributed to obligations
incurred to complete the acquisitions, reduced by reductions in
interest expense.
(D) Adjusts the provision for federal and state income taxes to the
effective tax rate for the Company.
3. UNAUDITED PRO FORMA CONSOLIDATED OFFERING ADJUSTMENTS
(E) Reflects the elimination of the non-recurring, non-cash compensation
charge of $4.7 million recorded by Pentacon, Inc. during the three
months ended December 31, 1997 related to common stock issued to
management of the Company. Contemporaneously with the initial public
offering, a non-cash, non-recurring charge of approximately $1.8
million was recorded to reflect compensation related to the
revaluation of 225,000 of the 450,000 shares of common stock issued to
management in November 1997.
(F) Reflects the decrease in interest expense attributed to obligations
retired with proceeds of the initial public offering.
(G) Adjusts the provision for federal and state income taxes to the
effective rate of the Company.
(H) Includes (i) 2,830,000 shares issued by Pentacon, Inc., prior to the
initial public offering (including 535,000 shares issued to management
and directors), (ii) 6,720,000 shares issued to the stockholders of
the Founding Companies in connection with the Initial Acquisitions,
(iii) 5,980,000 shares issued in connection with the initial public
offering (including the over-allotment), (iv) the effect of the 50,000
warrants outstanding with an assumed exercise price of $6.00 per share
using the treasury stock method, (v) 1,134,010 shares issued in
connection with the acquisitions of Pace, D-Bolt and TIA and (vi) the
dilutive effect of stock options in the twelve months ended September
30, 1998.
F-6
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<S> <C> <C>
Cash and cash equivalents ................................ $ 835 $ 744
Accounts receivable ...................................... 40,670 34,610
Inventories .............................................. 112,392 116,390
Deferred income taxes .................................... 4,430 4,216
Other current assets ..................................... 923 897
------------- ------------
Total current assets ................................ 159,250 156,857
Property and equipment, net of accumulated depreciation .. 7,077 7,404
Goodwill, net of accumulated amortization ................ 135,381 134,528
Deferred income taxes .................................... 670 672
Other assets ............................................. 2,013 1,892
------------- ------------
Total assets ........................................ $ 304,391 $ 301,353
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................... $ 30,314 $ 33,895
Accrued expenses ......................................... 7,281 8,875
Income taxes payable ..................................... 1,988 3,384
Current maturities of long-term debt ..................... 51,513 31,957
------------- ------------
Total current liabilities ........................... 91,096 78,111
Long-term debt, net of current maturities ................ 98,381 106,632
------------- ------------
Total liabilities ................................... 189,477 184,743
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 ............................... 100,436 100,501
Retained earnings ........................................ 14,311 15,942
------------- ------------
Total stockholders' equity .......................... 114,914 116,610
------------- ------------
Total liabilities and stockholders' equity .......... $ 304,391 $ 301,353
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
------------------------
DECEMBER 31,
------------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues ......................................... $ 14,502 $ 66,720
Cost of sales .................................... 8,555 45,021
--------- ---------
Gross profit ................................ 5,947 21,699
Operating expenses ............................... 5,397 14,575
Goodwill amortization ............................ 20 853
--------- ---------
Operating income ............................ 530 6,271
Other (income) expense, net ...................... (13) (7)
Interest expense ................................. 295 3,102
--------- ---------
Income before taxes ......................... 248 3,176
Income taxes ..................................... 103 1,545
--------- ---------
Net income .................................. $ 145 $ 1,631
========= =========
Net income per share:
Basic ....................................... $ 0.05 $ 0.10
Diluted ..................................... $ 0.05 $ 0.10
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
<PAGE>
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
-----------------------
DECEMBER 31,
-----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues .......................................... $ 39,042 $ 66,720
Cost of sales ..................................... 25,367 45,021
--------- ---------
Gross profit ................................. 13,675 21,699
Operating expenses ................................ 10,799 14,575
Goodwill amortization ............................. 374 853
--------- ---------
Operating income ............................. 2,502 6,271
Other (income) expense, net ....................... 8 (7)
Interest expense .................................. 246 3,102
--------- ---------
Income before taxes .......................... 2,248 3,176
Income taxes ...................................... 1,075 1,590
--------- ---------
Net income ................................... $ 1,173 $ 1,586
--------- ---------
Net income per share:
Basic ........................................ $ 0.08 $ 0.10
Diluted ...................................... $ 0.08 $ 0.10
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-9
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
-------------------
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income .......................................... $ 145 $ 1,631
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ....................... 45 1,487
Deferred income taxes ............................... 1 212
Loss on disposal of assets .......................... -- 5
Changes in operating assets and liabilities:
Accounts receivable ............................... (715) 6,060
Inventories ....................................... (1,852) (3,998)
Other current assets .............................. -- 26
Accounts payable and accrued expenses ............. 1,730 5,175
Income taxes payable .............................. (179) 1,396
Other assets and liabilities, net ................. -- (4)
-------- --------
Net cash provided by (used in) operating activities . (825) 11,990
Cash Flows From Investing Activities:
Capital expenditures ................................ (85) (795)
Other ............................................... (71) 1
-------- --------
Net cash used in investing activities ............. (156) (794)
Cash Flows From Financing Activities:
Principal payments on debt .......................... (52) (19,105)
Borrowings of debt .................................. 300 7,800
Debt issuance costs ................................. -- 18
-------- --------
Net cash provided by (used in) financing activities 248 (11,287)
Decrease in cash and cash equivalents .................... (733) (91)
Cash and cash equivalents, beginning of period ........... 733 835
-------- --------
Cash and cash equivalents, end of period ................. $ -- $ 744
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-10
<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,
1997 and 1998 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 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.
F-11
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Revenues ........................................... $ 65,345 $ 66,720
Gross margin ....................................... 21,501 21,699
Operating income ................................... 5,487 6,271
Net income ......................................... 1,335 1,586
Net income per share:
Basic ......................................... $ 0.08 $ 0.10
Diluted ....................................... $ 0.08 $ 0.10
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 April 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
F-12
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-13
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and diluted historical net income per share is computed based on the
following information:
THREE MONTHS ENDED
-------------------
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
BASIC:
Net income ............................................... $ 145 $ 1,631
======== ========
Average common shares .................................... 2,969 16,668
======== ========
DILUTED:
Net income ............................................... $ 145 $ 1,631
======== ========
Average common shares .................................... 2,969 16,668
Common share equivalents:
Warrants ............................................ -- --
Options ............................................. -- --
-------- --------
Total common share equivalents ................. -- --
-------- --------
Average common shares and common share equivalents ....... 2,969 16,668
======== ========
Basic and diluted pro forma net income per share is computed based on the
following information:
THREE MONTHS ENDED
-------------------
DECEMBER 31,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
BASIC:
Net income ............................................... $ 1,173 $ 1,586
======== ========
Average common shares .................................... 15,530 16,668
======== ========
DILUTED:
Net income ............................................... $ 1,173 $ 1,586
======== ========
Average common shares .................................... 15,530 16,668
Common share equivalents:
Warrants ............................................ 20 --
Options ............................................. -- --
-------- --------
Total common share equivalents ................. 20 --
-------- --------
Average common shares and common share equivalents ....... 15,550 16,668
======== ========
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, 1997 and 1998 assumes the application of
statutory federal and state income tax rates and the non-deductibility of
goodwill amortization.
F-14
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders:
We have audited the accompanying consolidated balance sheets of Pentacon,
Inc. as of September 30, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year ended September
30, 1998 and the nine months ended September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pentacon, Inc.
at September 30, 1998 and 1997, and the consolidated results of its operations
and its cash flows for the year ended September 30, 1998 and the nine months
ended September 30, 1997 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
December 24, 1998
F-16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Alatec Products, Inc.
Chatsworth, California
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Alatec Products, Inc., for the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Alatec Products, Inc., for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the Pentacon, Inc. financial statements, on March
10, 1998 Alatec Products, Inc. was acquired by Pentacon, Inc. For financial
reporting purposes, Alatec Products, Inc. has been identified as the accounting
acquiror and, therefore, the 1996 financial statements of Pentacon, Inc.
represent the historical financial statements of Alatec Products, Inc.
McGLADREY & PULLEN, LLP
Pasadena, California
November 21, 1997
F-17
<PAGE>
PENTACON, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................... $ 733 $ 835
Accounts receivable ......................................... 7,892 40,670
Inventories ................................................. 22,951 112,392
Deferred income taxes ....................................... 1,420 4,430
Other current assets ........................................ -- 923
--------- ---------
Total current assets ................................... 32,996 159,250
--------- ---------
Property and equipment, net of accumulated depreciation ..... 1,578 7,077
Goodwill, net of accumulated amortization ................... -- 135,381
Deferred income taxes ....................................... 65 670
Other assets ................................................ 272 2,013
--------- ---------
Total assets ........................................... $ 34,911 $ 304,391
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ............................................ $ 7,521 $ 30,314
Accrued expenses ............................................ 1,362 7,281
Income taxes payable ........................................ 3,594 1,988
Current maturities of long-term debt ........................ 364 51,513
--------- ---------
Total current liabilities .............................. 12,841 91,096
Long-term debt, net of current maturities ................... 13,686 98,381
--------- ---------
Total liabilities ...................................... 26,527 189,477
--------- ---------
Commitments and contingencies
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding in 1998 ...... -- --
Common stock, $.01 par value, 2,500,000 shares authorized,
145,000 shares issued and outstanding in 1997, 51,000,000
shares authorized, 16,668,129 shares issued and outstanding
in 1998 and $10 par value ................................. 1,450 167
Treasury stock .............................................. (2,690) --
Additional paid in capital .................................. -- 100,436
Retained earnings ........................................... 9,624 14,311
--------- ---------
Total stockholders' equity ............................. 8,384 114,914
--------- ---------
Total liabilities and stockholders' equity ............. $ 34,911 $ 304,391
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-18
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ----------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Revenues .......................... $ 44,726 $ 42,296 $ 141,078
Cost of sales ..................... 26,707 25,114 91,026
------------ ----------------- --------------
Gross profit ................. 18,019 17,182 50,052
Operating expenses ................ 12,818 11,664 36,524
Goodwill amortization ............. -- -- 1,111
------------ ----------------- --------------
Operating income ............. 5,201 5,518 12,417
Other (income) expense, net ....... (56) (26) (91)
Interest expense .................. 1,118 1,015 2,448
------------ ----------------- --------------
Income before taxes .......... 4,139 4,529 10,060
Income taxes ...................... 1,628 1,860 5,373
------------ ----------------- --------------
Net income ................... $ 2,511 $ 2,669 $ 4,687
============ ================= ==============
Net income per share:
Basic ........................ $ 0.85 $ 0.90 $ 0.45
Diluted ...................... $ 0.85 $ 0.90 $ 0.45
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-19
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income ..................................... $ 2,511 $ 2,669 $ 4,687
Adjustments to reconcile net income to net cash
used in operating activities:(1)
Depreciation and amortization .................. 180 129 1,798
Deferred income taxes .......................... (372) 4 (107)
Compensation expense related to issuance of
management shares ............................ -- -- 1,800
Changes in operating assets and liabilities:
Accounts receivable .......................... 847 (2,588) (1,826)
Inventories .................................. (5,567) (3,336) (16,015)
Other current assets ......................... -- -- (265)
Accounts payable and accrued expenses ........ 2,023 3,176 (8,046)
Income taxes payable ......................... -- -- (3,420)
Other assets and liabilities, net ............ (31) -- 2,661
------------ ------------- -------------
Net cash used in operating activities .......... (409) 54 (18,733)
Cash Flows From Investing Activities:
Capital expenditures ........................... (114) (138) (3,097)
Cash paid for acquisitions, net of cash acquired -- -- (77,031)
Cash paid for Founding Companies, net of cash
acquired ..................................... -- -- (21,948)
Other .......................................... (209) 14 (52)
------------ ------------- -------------
Net cash used in investing activities ........ (323) (124) (102,128)
Cash Flows From Financing Activities:
Repayments of debt ............................. (192) (150) (99,928)
Proceeds from issuance of debt ................. 1,063 700 171,600
Proceeds from issuance of Common Stock, net
of offering costs ............................ -- -- 50,815
Debt issuance costs ............................ -- -- (1,524)
Other .......................................... -- (3) --
------------ ------------- -------------
Net cash provided by financing activities .... 871 547 120,963
Increase in cash and cash equivalents ............... 139 477 102
Cash and cash equivalents, beginning of period ...... 117 256 733
------------ ------------- -------------
Cash and cash equivalents, end of period ............ $ 256 $ 733 $ 835
============ ============= =============
</TABLE>
- ------------
(1) Net of the effects of acquisitions.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-20
<PAGE>
PENTACON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
----------------------- ------------------ PAID IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ------- ------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ................ 100 $ 1 -- $ -- $ 24 $ 5,094 $ 5,119
Net income .............................. -- -- -- -- -- 2,511 2,511
----------- ------- ------- ------- ---------- -------- -------------
Balance, December, 31, 1996 ............... 100 1 -- -- 24 7,605 7,630
Shares issued and shares repurchased .... 45 -- (51) (2,690) 776 -- (1,914)
Stock-split (1,000 to 1) ................ 144,855 1,449 (51,239) -- (800) (650) (1)
Net income .............................. -- -- -- -- -- 2,669 2,669
----------- ------- ------- ------- ---------- -------- -------------
Balance, September 30, 1997 ............... 145,000 1,450 (51,290) (2,690) -- 9,624 8,384
Elimination of Alatec shares ............ (145,000) (1,450) 51,290 2,690 -- -- 1,240
Issuance of common stock for Alatec
common stock .......................... 2,969,493 30 -- -- 23,726 -- 23,756
Initial public offering ................. 5,980,000 60 -- -- 50,755 -- 50,815
Issuance of common stock for acquisitions
of Founding Companies ................. 6,580,507 66 -- -- 14,293 -- 14,359
Issuance of common stock for acquisitions 1,134,010 11 -- -- 11,485 -- 11,496
Issuance of restricted stock grants ..... 4,119 -- -- -- -- -- --
Amortization of deferred compensation ... -- -- -- -- 177 -- 177
Net income .............................. -- -- -- -- -- 4,687 4,687
----------- ------- ------- ------- ---------- -------- -------------
Balance, September 30, 1998 ............... 16,668,129 $ 167 -- $ -- $ 100,436 $ 14,311 $ 114,914
=========== ======= ======= ======= ========== ======== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-21
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: Pentacon, Inc. ("Pentacon" or the "Company")
was incorporated in March 1997. On March 10, 1998, Pentacon and separate
wholly-owned subsidiaries acquired in separate transactions (the
"Acquisitions"), simultaneously with the closing of its initial public
offering (the "Offering") of its common stock (the "Common Stock"), five
businesses: 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 Acquisitions of the Founding Companies consisted of a
combination of cash and Common Stock. Because (i) the stockholders of the
Founding Companies owned a majority of the outstanding shares of Common Stock
following the Offering and the Acquisitions, and (ii) the stockholders of Alatec
received the greatest number of shares of 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. Alatec's historical financial statements for all periods prior to
March 10, 1998 are presented as the historical financial statements of the
Company. Unless the context otherwise requires, all references herein to the
Company include Pentacon 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.
Pentacon distributes fasteners and other small parts and provides related
inventory management services primarily to customers in the United States.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Pentacon, Inc. and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION: Revenues are recognized upon shipment of products.
CASH EQUIVALENTS: Short-term investments purchased with original
maturities of three months or less are considered cash equivalents.
INVENTORIES: Inventories consist of products held for resale and are
stated at the lower of cost, determined using the first-in, first-out method, or
market.
INCOME TAXES: The Company recognizes deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Deferred tax assets and liabilities are
determined based on the differences between the financial statements carrying
amounts and the tax basis of assets and liabilities using enacted tax rates and
laws in effect in the years in which the differences are expected to reverse.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.
Depreciation is provided over the estimated useful lives of the related assets
using primarily the straight-line method. The amortization expense on assets
acquired under capital leases is included with depreciation expense on owned
assets.
GOODWILL: Goodwill is amortized over a period of 40 years. The carrying
value of goodwill is reviewed if there are indications that the goodwill may be
impaired. If this review indicates that the goodwill will not be recoverable, as
determined based on undiscounted cash flows over the remaining amortization
periods, the carrying value of the goodwill will be reduced by the estimated
shortfall in discounted cash flow.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
F-22
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK: The Company performs credit evaluations of
its customers and generally does not require collateral. The Company maintains
an allowance for doubtful accounts based upon the expected collectibility of all
accounts receivable. The allowance for doubtful accounts and related activity
were not material at and for the periods ended September 30, 1998 and 1997 and
December 31, 1996. One customer accounted for approximately 12% of revenues for
the year ended September 30, 1998. Accounts receivable balances related to this
customer represented approximately 9% of total accounts receivable at September
30, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of accounts
receivable, prepaid expenses and accounts payable approximate fair values due to
the short-term maturities of these instruments. The carrying value of the
Company's debt facilities and capital lease obligations approximate fair value
since the rates on such facilities are variable, based on current market or are
at fixed rates currently available to the Company.
EXPORT SALES: The Company recorded export sales of $8,875,000, $9,434,000,
and $18,584,000 in the year ended December 31, 1996, the nine months ended
September 30, 1997 and the year ended September 30, 1998, respectively. The
Company has export sales through its foreign sales corporation to Europe, the
Far East, Canada, South America, Australia and Mexico, of which no country or
region is individually significant.
COMMON STOCK BASED COMPENSATION: The Company follows the intrinsic value
method of accounting for stock options and performance-based stock awards as
prescribed by Accounting Principles Board Opinion No. 25 (APB 25), ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 130, REPORTING COMPREHENSIVE INCOME and Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. These statements, which are
effective for fiscal years beginning after December 15, 1997, expand and modify
disclosures and, accordingly, will have no impact on the Company's net income or
financial position.
In March 1998, the AICPA issued SOP 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE OBTAINED FOR INTERNAL USE. The SOP requires companies to
capitalize qualifying computer software costs incurred during the application
development stage. The SOP is effective for fiscal years beginning after
December 15, 1998 and permits early adoption. The Company adopted the SOP in the
quarter ended March 31, 1998. The adoption had no impact on net income as the
Company's policy was materially consistent with the requirements of the SOP.
In April 1998, the AICPA issued SOP 98-5, ACCOUNTING FOR THE COSTS OF
START-UP ACTIVITIES. The SOP requires that all costs of start-up activities be
expensed as incurred. The SOP is effective for fiscal years beginning after
December 15, 1998 and permits early adoption. The Company adopted this standard
in the quarter ended September 30, 1998. The adoption had no impact on net
income as the Company's policies were consistent with this standard.
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE FINANCIAL
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). SFAS No. 133 requires
that all derivatives be recognized as assets and liabilities and measured at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999 and early
adoption is permitted. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on net income or the financial position of the Company.
F-23
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
During the year ended September 30, 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 September 30, 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:
YEAR ENDED
SEPTEMBER 30,
-----------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Revenues ........................................... $ 223,673 $ 283,794
Gross margin ....................................... 73,021 94,981
Operating income ................................... 20,129 31,835
Net income ......................................... 4,450 11,240
Net income per share:
Basic ......................................... $ 0.27 $ 0.67
Diluted ....................................... $ 0.27 $ 0.67
F-24
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT AND GOODWILL
USEFUL SEPTEMBER 30,
LIVES IN --------------------
YEARS 1997 1998
--------- --------- ---------
(DOLLAR AMOUNTS
IN THOUSANDS)
Buildings............................ 10-40 $ 1,637 $ 2,476
Leasehold improvements............... 6-39 208 1,078
Equipment............................ 3-8 1,234 4,299
Furniture and fixtures............... 5-7 327 1,198
Construction in progress............. -- -- 402
--------- ---------
3,406 9,453
Less accumulated depreciation and
Amortization....................... (1,828) (2,376)
--------- ---------
$ 1,578 $ 7,077
========= =========
SEPTEMBER 30,
---------------------
1997 1998
--------- ----------
(DOLLAR AMOUNTS
IN THOUSANDS)
Goodwill............................. $ -- $ 136,492
Less accumulated amortization........ -- (1,111)
--------- ----------
$ -- $ 135,381
========= ==========
4. CREDIT FACILITY, LONG-TERM DEBT AND LEASES
SEPTEMBER 30,
---------------------
1997 1998
--------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Borrowings under Credit Facility:
Revolving credit loan with
interest payable quarterly at
LIBOR + 2 1/8% (7.8% at
September 30, 1998), maturing
September 2003................ $ -- $ 103,000
Revolver term loan with interest
payable quarterly at
LIBOR + 2 1/8% (7.8% at
September 30, 1998) and
principal and interest payable
quarterly commencing September
30, 1999, maturing September
2003.......................... -- 40,000
Line of credit borrowing with
interest payable monthly at a
variable rate (8.25% at
September 30, 1998) maturing
September 2003................ -- 3,300
Notes payable to a bank with interest
payable at 8.5%.................... 9,500 --
Capital leases....................... 1,526 2,792
Other notes payable (See Note 13).... 3,024 802
--------- ----------
14,050 149,894
Less current maturities.............. 364 51,513
--------- ----------
Long-term debt, net of current
maturities......................... $ 13,686 $ 98,381
========= ==========
F-25
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective September 3, 1998, the Company amended its credit agreement with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility
provides the Company with a revolving line of credit of up to $175 million,
which may be used for general corporate purposes, future acquisitions, capital
expenditures and working capital. The Credit Facility is secured by Company
stock and assets. Advances under the Credit Facility bear interest at the bank's
designated variable rate plus margins ranging from 0 to 50 basis points,
depending on 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. At the Company's option, the loans
may bear interest based on a designated London interbank offering rate plus a
margin ranging from 75 to 212.5 basis points, depending on the same ratios.
Commitment fees of 20 to 37.5 basis points per annum are payable on the unused
portion of the line of credit, based on the same ratio. 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 September 3, 2003. At
September 30, 1998, the Company has approximately $5.8 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
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.
In December 1998, the Company reached agreement in substance, subject to
execution of appropriate documentation, with the lenders under the Credit
Facility to amend certain provisions of the Credit Facility. The amendment
would, among other things, adjust the step down reductions in the ratio of the
Company's interest-bearing debt to pro forma EBITDA, reduce the line of credit
to $150 million and to $130 million on March 1, 1999, increase the amount of
subordinated debt permitted under the Credit Facility, shorten the term of the
facility to three years, and increase the interest rate on the Company's
LIBOR-based borrowings under the Credit Facility from LIBOR plus 212.5 basis
points to LIBOR plus 300 basis points.
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 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.
Maturities of long-term debt (excluding capital leases) for the five years
subsequent to September 30, 1998 are $51,326,000, $10,171,000, $10,171,000,
$10,122,000, and $65,222,000.
F-26
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases a portion of its buildings and equipment under
noncancelable capital and operating leases. Future minimum lease payments under
the capital and operating leases, together with the present value of the net
minimum lease payments, as of September 30, 1998 are as follows:
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDING:
1999................................. $ 510 $ 2,985 $ 3,495
2000................................. 494 2,652 3,146
2001................................. 490 2,353 2,843
2002................................. 421 1,997 2,418
2003................................. 378 1,582 1,960
Thereafter........................... 2,375 6,365 8,740
------- --------- -------
Total minimum lease payments......... 4,668 17,934 22,602
Less amount representing Interest.... 1,876
-------
Present value of net minimum Lease
payments........................... 2,792
Current maturities................... 187
-------
Long-term portion.................... $ 2,605
=======
Total rental and interest expense under operating and capital leases for
the year ended December 31, 1996, the nine months ended September 30, 1997, and
the year ended September 30, 1998, was approximately $778,000, $640,000, and
$1,775,000, respectively, including amounts to related parties of $359,000,
$451,000, and $807,000, respectively. Total minimum lease payments include
payments due to stockholders of $2,401,000 for capital leases and $7,082,000 for
operating leases.
5. INCOME TAXES
The Company will file a consolidated federal income tax return which
includes the operations of the Founding Companies for periods subsequent to the
Acquisitions. The Founding Companies will file "short period" federal and
state income tax returns through the date of the Acquisitions.
Deferred income taxes as reflected on the historical financial statements
as of September 30, 1997 include the activity of the accounting acquiror only.
Although deferred income taxes on the September 30, 1998 historical financial
statements reflect the activity of the accounting acquiror for the entire year,
the remaining Founding Companies are included for all periods subsequent to
March 10, 1998, the date of the Acquisitions. Also reflected in deferred income
taxes on the September 30, 1998 historical financial statements are the deferred
income taxes acquired through various acquisitions during the year ended
September 30, 1998 which were unrelated to the original Acquisitions.
If it is more likely than not that some portion or all of the deferred tax
assets will not be realized, a valuation allowance to reduce the deferred tax
assets reported is required based on the weight of evidence. After consideration
of all the evidence, both positive and negative, no valuation allowance is
necessary to reduce the deferred tax assets at September 30, 1998 as the Company
believes it will realize the deferred tax assets principally through future
earnings.
F-27
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Currently paid or payable:
Federal......................... $1,611 $ 1,496 $ 3,949
State........................... 389 360 1,531
------------ ------------- -------------
2,000 1,856 5,480
Deferred:
Federal......................... (357) 3 (77)
State........................... (15) 1 (30)
------------ ------------- -------------
(372) 4 (107)
------------ ------------- -------------
$1,628 $ 1,860 $ 5,373
============ ============= =============
</TABLE>
The net deferred tax assets (liabilities) consist of the following:
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
(DOLLAR AMOUNTS
IN THOUSANDS)
Deferred tax assets:
Receivables allowance........... $ 75 $ 276
Inventory allowance............. 632 2,002
Accrued expenses................ 243 1,011
Uniform cost capitalization..... 583 854
Property and equipment.......... 198 670
Other........................... -- 608
--------- ---------
1,731 5,421
--------- ---------
Deferred tax liabilities, other...... (246) (321)
--------- ---------
$ 1,485 $ 5,100
========= =========
Net deferred taxes consist of the
following:
Current assets.................. $ 1,420 $ 4,430
Noncurrent assets............... 65 670
--------- ---------
$ 1,485 $ 5,100
========= =========
F-28
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate varied from the federal statutory tax rate
during the year ended December 31, 1996, the nine months ended September 30,
1997 and the year ended September 30, 1998, as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Expected income tax rate............. 34.0% 34.0% 34.0%
International export sales partially
Exempt from federal income taxes
(FSC benefit)...................... (4.4) (2.6) (1.4)
State taxes, net of federal
benefit............................ 7.7 7.2 9.8
Nondeductible compensation........... -- -- 6.1
Adjustment to reflect IRS Audit
settlement......................... 6.0 0.2 --
Nondeductible goodwill............... -- -- 3.8
Other nondeductible expenses......... 2.1 1.0 1.1
Other................................ (6.1) 1.3 --
------------ ------------- -------------
Effective tax rate................... 39.3% 41.1% 53.4%
============ ============= =============
</TABLE>
6. COMMON STOCK
In March 1997, the Company granted stock purchase warrants that entitled
certain venture capital investors to purchase 50,000 shares of the Company's
common stock at a price of $6.00 per share through March 13, 2002. All of the
warrant shares were vested at issuance.
In May 1997, Alatec's Board of Directors (the "Board") authorized an
increase in the authorized shares of common stock from 2,500 shares to 2,500,000
shares. Concurrently, the Board approved a 1,000 for 1 stock-split.
On March 10, 1998, the Company completed the Offering, which involved the
sale by the Company of 5,980,000 shares of Common Stock at a price to the public
of $10.00 per share, including 780,000 shares pursuant to an over-allotment
option granted by the Company to the underwriters in connection with the
Offering. The net proceeds to the Company from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$50.8 million. Of this amount, $23.3 million was used to pay the cash portion of
the purchase price relating to the Acquisitions of the Founding Companies with
the remainder being used to pay certain indebtedness of the Founding Companies,
make capital expenditures and fund working capital requirements.
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 September 30, 1998, 1,134,010
shares of Common Stock were issued in connection with acquisitions (See Note 2).
F-29
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The periods ended prior to October 1, 1997 represent 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 these periods. The computation of net income
per share for the year ended September 30, 1998 is based on the weighted average
shares of Common Stock outstanding as of September 30, 1998, which includes
shares:
Issued in consideration for
acquisition of Founding
Companies.......................... 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
acquisitions....................... 1,134,010
------------
16,668,129
============
Basic and diluted net income per share is computed based on the following
information:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
BASIC:
Net income........................... $2,511 $ 2,669 $ 4,687
============ ============= =============
Average Common shares................ 2,969 2,969 10,335
============ ============= =============
DILUTED:
Net income........................... $2,511 $ 2,669 $ 4,687
============ ============= =============
Average Common shares................ 2,969 2,969 10,335
Common share equivalents:
Warrants........................ -- -- 12
Options......................... -- -- 27
------------ ------------- -------------
Total Common share
equivalents............. -- -- 39
------------ ------------- -------------
Average Common shares and Common
share equivalents.................. 2,969 2,969 10,374
============ ============= =============
</TABLE>
8. STOCK OPTION PLAN
The Board of Directors has adopted, and the stockholders of the Company
have approved, the Pentacon, Inc. 1998 Stock Plan (the "1998 Stock Plan"). The
aggregate amount of Common Stock with respect to which options or other awards
may be granted may not exceed 1,700,000 shares. As of September 30, 1998, the
Company had granted options and other awards for a total of 1,109,105 shares
under the 1998 Stock Plan.
The 1998 Stock Plan is administered by the Compensation Committee, which is
composed of non-employee directors (the "Committee"). Subject to the terms of
the 1998 Stock Plan, the Committee generally determines to whom options will be
granted and the terms and conditions of option grants. Options granted under the
1998 Stock Plan may be either non-qualified stock options, or may qualify as
incentive stock options ("ISOs"), provided that the aggregate fair market
value (determined at the time the
F-30
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ISO is granted) of the Common Stock with respect to which ISOs are exercisable
for the first time by any employee during any calendar year under all plans of
the company and any parent or subsidiary corporation shall not exceed $100,000.
No employee or consultant may receive an option in any year to purchase more
than 250,000 shares of Common Stock. The Committee determines the period over
which options become exercisable, provided that all options become immediately
exercisable upon death of the grantee or upon a change-in-control of the
Company.
The 1998 Stock Plan also provides for automatic option grants to directors
who are not otherwise employed by the Company or its subsidiaries. Upon
commencement of service, a non-employee director will receive a non-qualified
option to purchase 15,000 shares of Common Stock, and continuing non-employee
directors annually will receive options to purchase 5,000 shares of Common
Stock. Options granted to non-employee directors are immediately exercisable in
full and have a term of ten years.
Upon exercise of a non-qualified option, the optionee generally will
recognize ordinary income in the amount of the "option spread"(the difference
between the market value of the option shares at the time of exercise and the
exercise price), and the Company is generally entitled to a corresponding tax
deduction (subject to certain withholding requirements). When an optionee sells
shares issued upon the exercise of a non-qualified stock option, the optionee
realizes a short-term or long-term gain or loss, depending on the length of the
holding period, but the Company is not entitled to any tax deduction in
connection with such sale.
The Company applies APB 25 in accounting for the Plan. Accordingly, no
compensation cost has been recognized for its fixed stock option plan. Pro forma
information regarding net income and earnings per common share is required by
FAS 123 as if the Company had accounted for its employee stock options under the
fair value method of that statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
("Black-Scholes") model with the following weighted average assumptions for
1998: (i) risk-free interest rate of 6.5%, (ii) a dividend yield of 0.0%, (iii)
volatility factors of the historical market price of the Company's Common Stock
of 49.8% and (iv) a weighted average expected life of 10 years.
The Black-Scholes model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions, including the expected volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
F-31
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the vesting period of the stock options.
Had compensation for the Company's stock-based compensation plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the method of FAS 123, the Company's net income and earnings per common
share would have been adjusted to the pro forma amounts indicated below:
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
Net income
As reported..................... $ 2,669 $ 4,687
============= =============
Pro forma....................... $ 2,669 $ 3,101
============= =============
Income per share
As reported..................... $ 0.90 $ 0.45
============= =============
Pro forma....................... $ 0.90 $ 0.30
============= =============
A summary of the status of the Company's fixed stock option plans for
officers and employees as of September 30, 1998 and activity during the year is
presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------------ ---------
Outstanding at beginning of year..... -- $ --
Granted.............................. 1,117,180 10.24
Canceled............................. (8,075) 10.00
------------
1,109,105 $ 10.24
============
Common shares authorized............. 1,700,000
Outstanding options.................. (1,109,105)
Outstanding stock grants............. (4,119)
------------
Options available for grant at end of
year............................... 586,776
============
Weighted average fair value of
options granted during the year.... $ 7.15
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED --------------------------
SHARES AVERAGE WEIGHTED SHARES WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICES 9/30/98 LIFE PRICE 9/30/98 PRICE
- ------------- ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$9.00-$12.44 1,109,105 9.5 $ 10.24 30,000 $ 10.00
</TABLE>
F-32
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Interest paid during the period...... $1,029 $ 829 $ 1,612
Income taxes paid during the
period............................. $ 404 $ 930 $ 10,817
Details of Founding Companies'
acquisition:
Fair value of assets............ $ -- -- $ 139,392
Liabilities..................... -- -- 62,354
------------ ------------- -------------
Total consideration............. -- -- 77,038
Less stock consideration........ -- -- 53,760
Less cash acquired.............. -- -- 1,330
------------ ------------- -------------
Net cash paid for Founding
Companies..................... $ -- -- $ 21,948
============ ============= =============
Details of acquisitions:
Fair value of assets............ $ -- $ -- $ 152,708
Liabilities..................... -- -- 63,692
------------ ------------- -------------
Total consideration............. -- -- 89,016
Less stock consideration........ -- -- 11,496
Less cash acquired.............. -- -- 489
------------ ------------- -------------
Net cash paid for
acquisitions.................. $ -- $ -- $ 77,031
============ ============= =============
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has a number of defined contribution plans which cover
substantially all of the Company's full-time employees. Under certain plans, the
Company may make discretionary contributions, match various percentages of
participants' contributions or both. The Company contributed $99,000, $80,000
and $411,000 in matching contributions to the plans for the year ended December
31, 1996, the nine months ended September 30, 1997 and the year ended September
30, 1998, respectively. Additionally, the Company made discretionary
contributions to certain plans of $300,000 and $10,000 for the nine months that
ended September 30, 1997 and the year ended September 30, 1998, respectively.
F-33
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. UNAUDITED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED SEPTEMBER 30, 1997
Revenue......................... $11,458 $12,776 $14,334 $15,186
Gross profit.................... 4,488 5,004 5,536 6,642
Operating income................ 1,007 1,563 1,887 2,068
Net income...................... 476 726 917 1,026
Basic earnings per share........ 0.16 0.24 0.31 0.35
Diluted earnings per share...... 0.16 0.24 0.31 0.35
YEAR ENDED SEPTEMBER 30, 1998
Revenue......................... $14,502 $19,856 $46,428 $60,292
Gross profit.................... 5,947 7,469 16,048 20,588
Operating income................ 530 171 4,727 6,989
Net income (loss)............... 145 (91) 2,121 2,512
Basic earnings (loss) per
share......................... 0.05 (0.02) 0.13 0.15
Diluted earnings (loss) per
share......................... 0.05 (0.02) 0.13 0.15
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
13. RELATED PARTY TRANSACTIONS
NOTES PAYABLE: The Company had notes payable to stockholders of $2,687,000
at September 30, 1997. During the year ended December 31, 1996, the nine months
ended September 30, 1997, and the year ended September 30, 1998, interest
expense of $69,000, $50,000 and $19,000, respectively, was incurred on these
notes (See Note 4).
RELATED PARTY PURCHASES: The Company purchased approximately $1,386,000,
$1,100,000 and $1,756,000, in the year ended December 31, 1996, the nine months
ended September 30, 1997 and the year ended September 30, 1998, respectively,
from a supplier which is 50% owned by a shareholder.
14. SUBSEQUENT EVENT (UNAUDITED)
On March 25, 1999, the Company completed a $100 million 12.25% ten year
senior subordinated notes offering. The notes are guaranteed by all of the
subsidiaries of the Company. Each of the subsidiaries are wholly-owned by the
Company, and the guarantees are full, unconditional, and joint and several.
Separate financial statements of the guarantors are not presented because
management has determined that they would not be material to investors.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pentacon, Inc.
We have audited the accompanying balance sheet of Pentacon, Inc. (the
"Company"), as of September 30, 1997 and the related statement of operations,
stockholders' deficit, and cash flows for the period from inception (March 20,
1997) through September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pentacon, Inc., as of
September 30, 1997, and the results of its operations and cash flows for the
period from inception (March 20, 1997) through September 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 16, 1997
F-35
<PAGE>
PENTACON, INC.
BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,050 $ 5,550
Prepaid expenses and other current
assets............................ -- 2,243
------------- -----------
Total current assets.................... 1,050 7,793
Deferred offering costs................. 268,138 939,870
Property and equipment.................. 7,210 7,510
------------- -----------
Total assets............................ $ 276,398 $ 955,173
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued expenses................... $ -- $ 180,200
Amounts due to stockholder......... 292,945 892,690
------------- -----------
Total current liabilities..... 292,945 1,072,890
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value,
10,000,000 shares authorized, -0-
outstanding....................... -- --
Common stock, $0.01 par value,
51,000,000 shares authorized,
2,380,000 and 2,830,000
outstanding at September 30, 1997,
and December 31, 1997,
respectively...................... 23,800 28,300
Paid-in capital.................... 50 4,680,050
Accumulated deficit, net of
subscriptions receivable.......... (40,397) (4,826,067)
------------- -----------
Total stockholders' deficit............. (16,547) (117,717)
------------- -----------
Total liabilities and stockholders'
deficit............................... $ 276,398 $ 955,173
============= ===========
SEE ACCOMPANYING NOTES.
F-36
<PAGE>
PENTACON, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM
INCEPTION
(MARCH 20, 1997) THREE MONTHS
THROUGH ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
---------------- --------------
(UNAUDITED)
Net sales............................ $ -- $ --
Selling, general, and administrative
expenses........................... (17,597) (4,785,670)
---------------- --------------
Loss before income taxes............. (17,597) (4,785,670)
Income tax expense................... -- --
---------------- --------------
Net loss...................... $(17,597) $ (4,785,670)
================ ==============
SEE ACCOMPANYING NOTES.
F-37
<PAGE>
PENTACON, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- SUBSCRIPTIONS PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT DEFICIT
----------- --------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization............... 2,380,000 $ 23,800 $ (22,800) $ -- $ -- $ 1,000
Issuance of warrants................. -- -- -- 50 -- 50
Net loss............................. -- -- -- -- (17,597) (17,597)
----------- --------- ------------- ------------ ----------- -------------
Balance at September 30, 1997........ 2,380,000 23,800 (22,800) 50 (17,597) (16,547)
Sale of common stock to officers
(unaudited)........................ 450,000 4,500 -- 4,680,000 -- 4,684,500
Net loss (unaudited)................. -- -- -- -- (4,785,670) (4,785,670)
----------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1997
(unaudited)........................ 2,830,000 $ 28,300 $ (22,800) $ 4,680,050 $(4,803,267) $ 117,717
=========== ========= ============= ============ =========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-38
<PAGE>
PENTACON, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
(MARCH 20, 1997) THREE MONTHS
THROUGH ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
---------------- --------------
(UNAUDITED)
OPERATING ACTIVITIES
Net loss........................... $ (17,597) $ (4,785,670)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and
amortization............... -- 395
Deferred offering costs....... (268,138) (671,732)
Stock compensation............ -- 4,680,000
Prepaid expenses and other
current assets............. -- (2,243)
Amounts due to stockholder.... 292,945 599,745
Accrued expenses.............. -- 180,200
---------------- --------------
Net cash provided by operating
activities....................... 7,210 695
INVESTING ACTIVITIES
Capital expenditures............... (7,210) (695)
---------------- --------------
Net cash used in investing
activities....................... (7,210) (695)
FINANCING ACTIVITIES
Proceeds from sale of common stock
and warrants..................... 1,050 4,500
---------------- --------------
Net cash provided by financing
activities....................... 1,050 4,500
---------------- --------------
Net increase in cash............... 1,050 4,500
Cash and cash equivalents at
beginning of period.............. -- 1,050
---------------- --------------
Cash and cash equivalents at end of
period........................... $ 1,050 $ 5,550
================ ==============
SEE ACCOMPANYING NOTES.
F-39
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BUSINESS AND ORGANIZATION
Pentacon, Inc., a Delaware corporation ("Pentacon" or the "Company"),
was organized on March 20, 1997 to (i) become a leading domestic and
international value-added distributor of fasteners and other small parts to
original equipment manufacturers ("OEMs"), (ii) provide related inventory
management services to OEMs and others, and (iii) pursue the consolidation of
the highly-fragmented fastener distribution industry. Pentacon intends to
acquire five businesses (the "Acquisitions") and contemporaneously complete an
initial public offering (the "Offering") of its common stock.
Pentacon has not conducted any operations, and all activities to date have
related to the Offering and the Acquisitions. Initial capitalization of the
Company by McFarland, Grossman Capital Ventures II, L.C. ("MGCV"), was $1,000.
All expenditures to date have been funded by MGCV, on behalf of the Company. As
of September 30, 1997, costs of approximately $268,138 have been paid by MGCV on
behalf of the Company in connection with the Offering. Pentacon has treated
these costs as deferred offering costs. Pentacon is dependent upon the Offering
to execute the pending Acquisitions and to repay MGCV. The Company has agreed to
pay Donald Luke, a manager of MGCV, a success fee of $100,000 upon consummation
of the Offering. There is no assurance that the pending Acquisitions discussed
below will be completed or that Pentacon will be able to generate future
operating revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results could differ from those estimates.
INCOME TAXES
The Company has incurred a net operating loss since inception of which a
100% valuation allowance has been established for financial reporting purposes.
Accordingly no deferred tax asset has been recorded.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1997 has
not been audited by independent accountants. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from the unaudited interim financial information. In the opinion of management
of the Company, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjusments, necessary for a
fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
2. STOCKHOLDERS' EQUITY
COMMON STOCK
Pentacon has entered into agreements whereby the total shares and warrants
to purchase shares of common stock of Pentacon held by MGCV, certain consultants
to MGCV, and management of the Company, will represent approximately 30% of the
total shares outstanding immediately before completion of the Offering. Of these
shares, certain members of management will hold 4.7% of the total shares
outstanding immediately before completion of the Offering and MGCV will hold the
remaining shares. Based on these agreements and the estimated total shares to be
outstanding upon completion of the Offering, the shares presented herein have
been restated to effect a 2,380-for-one stock split and an increase in
authorized shares of common stock to 50,000,000 voting shares and 1,000,000
non-voting shares.
In connection with the organization and initial capitalization of Pentacon,
the Company issued 2,380,000 shares of common stock to MGCV. In November 1997,
management of the Company acquired
F-40
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
450,000 shares of common stock for $0.01 per share. As a result of the issuance
of the 450,000 shares, the Company will record a nonrecurring, non-cash
compensation charge in November 1997 of approximately $4.7 million, based on an
estimated Offering price to the public net of a 20% marketability discount.
RESTRICTED COMMON STOCK
In December 1997, MGCV exchanged 667,000 shares of Common Stock for an
equal number of shares of restricted voting common stock ("Restricted Common
Stock"). The holder of Restricted Common Stock is entitled to elect one member
of the Company's Board of Directors and to 0.25 of one vote for each share held
on all other matters on which such holder is entitled to vote.
Each share of Restricted Common Stock will automatically convert into
Common Stock on a share-for-share basis (a) in the event of a disposition of
such share of Restricted Common Stock by the holder thereof (other than a
disposition which is a distribution by a holder to its partners or beneficial
owners or a transfer to a related party of such holder (as defined)), (b) in the
event any person acquires beneficial ownership of 30% or more of the outstanding
shares of Common Stock of the Company, or (c) in the event any person acquires
30% or more of the total number of outstanding shares of Common Stock.
After January 1, 2003, the Corporation may elect to convert any outstanding
shares of Restricted Common Stock into shares of Common Stock.
WARRANTS
At the date of the Company's organization, warrants were issued for 50,000
shares of common stock with an exercise price equal to the lesser of $8 per
share or 60% of the initial public offering price. These warrants were issued to
legal and investment advisors for a total of $50. As the Company was subject to
significant uncertainties, the value of the warrants and their underlying shares
was de minimus at that date and no value beyond the consideration received has
been assigned to them. The warrants may be exercised up to four years after the
consummation of the Offering.
STOCK PLAN
The board of directors of the Company has adopted the Pentacon, Inc. 1998
Stock Plan (the "Plan"). The Company anticipates that upon or shortly after
the consummation of its Offering, it will have granted options to purchase up to
approximately 1.0 million shares of common stock. Subsequent to September 30,
1997, the Company has granted certain members of management options for 420,000
shares of common stock and intends to grant additional options for 600,000
shares of common stock with the exercise prices to be equal to the Offering
price. It is not expected that existing management team will be granted
additional options under the 1998 Stock Option Plan and, in any event, such
persons should not be issued additional options under the 1998 Stock Option Plan
for several years following the Offering. It is expected that substantially all
of the additional options available to be granted during this time period will
be awarded to various employees of the Founding Companies. The Company will
account for options issued to employees and nonemployee directors under the Plan
in accordance with APB Opinion No. 25 and, accordingly, no compensation cost
will be recognized to the extent that shares are issued at the fair market value
as of the date of grant. The Company will provide the pro forma disclosure of
net earnings per share in the notes to the financial statements as if the fair
value-based method of accounting has been applied to awards as required by
Statement of Financial Standard No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.
3. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE. For the Company, SFAS No. 128 will be effective for the
first quarter ended December 31, 1997. SFAS No. 128 simplifies the standards
required under current accounting rules for computing earnings per share and
replaces the presentation of primary earnings per share and fully diluted
earnings per share with a
F-41
<PAGE>
PENTACON, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
presentation of basic earnings per share ("basic EPS") and diluted earnings
per share ("diluted EPS"). Basic EPS excludes dilution and is determined by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities and other contracts to issue
common stock were exercised or converted into common stock. Diluted EPS is
computed similarly to fully diluted earnings per share under current accounting
rules. The implementation of SFAS No. 128 is not expected to have a material
effect on the Company's earnings per share as determined under current
accounting rules.
4. EVENT SUBSEQUENT TO THE DATE OF AUDITOR'S REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
Wholly-owned subsidiaries of Pentacon, Inc. have signed definitive
agreements to acquire by merger or share exchange five companies ("Founding
Companies") to be effective contemporaneously with the Offering. The companies
to be acquired are Alatec Products, Inc., AXS Solutions, Inc., Capitol Bolt &
Supply, Inc., Maumee Industries, Inc., and Sales Systems, Limited. The aggregate
consideration that will be paid by Pentacon to acquire the Founding Companies is
approximately $28.7 million in cash and 6,720,000 shares of Common Stock.
In December 1997, the Company filed a registration statement on Form S-1
for the sale of its common stock.
The Company has received a commitment from a bank for a credit facility of
$50 million. The bank has also committed to use its best efforts to form a
syndicate for an additional $25 million credit facility. The Company intends to
use such facilities for working capital, payoff of indebtedness of the Founding
Companies, and acquisitions. The credit facilities will be subject to customary
drawing conditions and the completion of negotiations with the lender and the
execution of appropriate loan documentation.
In January 1998, the Company has agreed to grant options for 80,000 shares
of Common Stock at the initial public offering price.
In January 1998, MGCV made a restricted stock grant of 65,000 shares to an
employee of the Company and agreed to make restricted stock grants of 20,000
shares in the aggregate to two non-employee directors. The total of 85,000
shares will vest ratably over three years. The Company will recognize
approximately $680,000 of compensation expense ratably over three years, based
on an estimated initial public offering price net of a twenty percent
marketability discount.
F-42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc.
and
Board of Directors
Alatec Products, Inc.
We have audited the accompanying consolidated balance sheet of Alatec
Products, Inc., as of September 30, 1997, and the related statements of income,
stockholders' equity, and cash flows for the year ended December 31, 1995 and
the period from January 1, 1997 through September 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alatec
Products, Inc., as of September 30, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1995 and the period from January
1, 1997 through September 30, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
November 21, 1997, except for Note 3,
as to which the date is November 26, 1997
F-43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Alatec Products, Inc.
Chatsworth, California
We have audited the accompanying consolidated balance sheet of Alatec
Products, Inc., as of December 31, 1996, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alatec
Products, Inc., as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Pasadena, California
November 21, 1997, except for Note 3,
as to which the date is November 26, 1997
F-44
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash............................... $ 256,000 $ 733,000 $ --
Receivables, less allowance for
doubtful accounts of $118,000,
$173,000, and $290,536........... 5,304,000 7,892,000 8,607,000
Inventory.......................... 19,615,000 22,951,000 24,803,000
Deferred taxes..................... 1,457,000 1,420,000 1,419,000
------------ ------------- ------------
Total current assets.......... 26,632,000 32,996,000 34,829,000
Property under capital lease, leasehold
improvements and equipment, net....... 1,583,000 1,578,000 1,618,000
Other assets:
Deferred taxes..................... 32,000 65,000 65,000
Security deposits and other........ 272,000 272,000 343,000
------------ ------------- ------------
Total other assets............ 304,000 337,000 408,000
------------ ------------- ------------
Total assets.................. $ 28,519,000 $ 34,911,000 $ 36,855,000
============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable
to related party................. $ -- $ 158,000 $ 158,000
Current maturities of long-term
debt............................. 169,000 169,000 127,000
Current maturities of obligation
under capital lease.............. 32,000 37,000 37,000
Accounts payable................... 5,771,000 7,521,000 9,219,000
Income taxes payable............... 2,668,000 3,594,000 3,647,000
Accrued compensation and
commissions...................... 556,000 866,000 687,000
Other accrued expenses............. 306,000 496,000 475,000
------------ ------------- ------------
Total current liabilities..... 9,502,000 12,841,000 14,350,000
Subordinated note payable to related
party, less current maturities........ 776,000 2,529,000 2,528,000
Revolving line of credit................ 8,800,000 9,500,000 9,800,000
Long-term debt, less current
maturities............................ 294,000 168,000 168,000
Obligation under capital lease, less
current maturities.................... 1,517,000 1,489,000 1,480,000
------------ ------------- ------------
Total liabilities............. 20,889,000 26,527,000 28,326,000
Commitments and contingencies
Stockholders' equity:
Common stock, $10 par value;
authorized 2,500,000 shares;
issued 100 shares (pre
stock-split) in 1996 and 145,000
shares in 1997................... 1,000 1,450,000 1,450,000
Treasury stock, 51,290 shares at
cost............................. -- (2,690,000) (2,690,000)
Additional paid-in capital......... 24,000 -- --
Retained earnings.................. 7,605,000 9,624,000 9,769,000
------------ ------------- ------------
Total stockholders' equity.... 7,630,000 8,384,000 8,529,000
------------ ------------- ------------
Total liabilities and
stockholders' equity....... $ 28,519,000 $ 34,911,000 $ 36,855,000
============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-45
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 1, THREE MONTHS ENDED DECEMBER
YEAR ENDED DECEMBER 31, 1997 THROUGH 31,
------------------------------ SEPTEMBER 30, ------------------------------
1995 1996 1997 1996 1997
-------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................... $ 41,204,000 $ 44,726,000 $ 42,296,000 $ 11,458,000 $ 14,502,000
Cost of goods sold...................... 26,196,000 26,707,000 25,114,000 6,970,000 8,554,000
-------------- -------------- ------------- -------------- --------------
Gross profit............................ 15,008,000 18,019,000 17,182,000 4,488,000 5,948,000
Selling, general and administrative
expenses.............................. 11,285,000 12,818,000 11,664,000 3,481,000 5,417,000
-------------- -------------- ------------- -------------- --------------
Operating income........................ 3,723,000 5,201,000 5,518,000 1,007,000 531,000
Interest expense........................ (1,235,000) (1,118,000) (1,015,000) (230,000) (295,000)
Interest income......................... 22,000 56,000 26,000 15,000 12,000
Other expense........................... (91,000) -- -- -- --
-------------- -------------- ------------- -------------- --------------
Income before income taxes.............. 2,419,000 4,139,000 4,529,000 792,000 248,000
Provision for income taxes.............. 995,000 1,628,000 1,860,000 317,000 103,000
-------------- -------------- ------------- -------------- --------------
Net income.............................. $ 1,424,000 $ 2,511,000 $ 2,669,000 $ 475,000 $ 145,000
============== ============== ============= ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-46
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK AT COST
----------------------- PAID-IN ------------------------- RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS
--------- ------------ ---------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 100 $ 1,000 $ 24,000 -- $ -- $ 3,670,000
Net income...................... -- -- -- -- -- 1,424,000
--------- ------------ ---------- --------- -------------- ------------
Balance, December 31, 1995........... 100 1,000 24,000 -- -- 5,094,000
Net income...................... -- -- -- -- -- 2,511,000
--------- ------------ ---------- --------- -------------- ------------
Balance, December 31, 1996........... 100 1,000 24,000 -- -- 7,605,000
Shares issued and shares
repurchased................... 45 -- 776,000 (51) (2,690,000) --
Stock-split (1,000 to 1)........ 144,855 1,449,000 (800,000) (51,239) -- (650,000)
Net income...................... -- -- -- -- -- 2,669,000
--------- ------------ ---------- --------- -------------- ------------
Balance, September 30, 1997.......... 145,000 1,450,000 -- (51,290) (2,690,000) 9,624,000
Net income (unaudited).......... -- -- -- -- -- 145,000
--------- ------------ ---------- --------- -------------- ------------
Balance, December 31, 1997
(unaudited)........................ 145,000 $ 1,450,000 $ -- (51,290) $ (2,690,000) $ 9,769,000
========= ============ ========== ========= ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-47
<PAGE>
ALATEC PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1,
1997 THROUGH THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER DECEMBER 31,
-------------------------- 30, --------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income.......................... $ 1,424,000 $ 2,511,000 $2,669,000 $ 475,000 $ 145,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and
amortization................. 271,000 180,000 129,000 45,000 45,000
Deferred taxes................. (173,000) (372,000) 4,000 (378,000) 1,000
Loss on disposal of asset...... 14,000 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable........ (612,000) 847,000 (2,588,000) 1,879,000 (715,000)
Inventory.................. (2,502,000) (5,567,000) (3,336,000) (1,671,000) (1,852,000)
Other receivables.......... -- (31,000) -- -- --
Accounts payable and
accrued expenses......... 501,000 2,023,000 3,176,000 (390,000) 1,551,000
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities.............. (1,077,000) (409,000) 54,000 (40,000) (825,000)
INVESTING ACTIVITIES
Collections of note receivable...... -- 42,000 -- -- --
(Investment in) return of security
deposits and other assets......... 6,000 (251,000) -- (239,000) (71,000)
Purchase of leasehold improvements
and equipment..................... (89,000) (114,000) (138,000) (48,000) (85,000)
Proceeds from sale of assets........ 13,000 -- 14,000 -- --
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities........................ (70,000) (323,000) (124,000) (287,000) (156,000)
FINANCING ACTIVITIES
Principal payments on long-term
debt.............................. (128,000) (169,000) (127,000) (42,000) (42,000)
Net advances on revolving line of
credit............................ 1,175,000 1,063,000 700,000 225,000 300,000
Principal payments on obligation
under capital lease............... (20,000) (23,000) (23,000) (8,000) (9,000)
Repayment on stockholder note....... -- -- (3,000) 1,000 (1,000)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities........................ 1,027,000 871,000 547,000 176,000 248,000
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash..... (120,000) 139,000 477,000 (151,000) (733,000)
Cash at beginning of period......... 237,000 117,000 256,000 407,000 733,000
------------ ------------ ------------ ------------ ------------
Cash at end of period............... $ 117,000 $ 256,000 $ 733,000 $ 256,000 $ --
============ ============ ============ ============ ============
Cash paid during the period for:
Interest....................... $ 899,000 $ 1,029,000 $ 829,000
============ ============ ============
Income taxes................... $ 715,000 $ 404,000 $ 930,000
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-48
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Alatec Products, Inc. (the "Company") is a wholesale distributor of
industrial and aerospace fasteners throughout the United States, Canada, Europe,
South America, and the Far East. Sales to the aerospace and defense industries
represent a significant portion of the Company's total annual sales. The
Company's corporate headquarters are based in Chatsworth, California, and it has
regional sales offices in six states.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company's wholly owned
subsidiaries, Trace Alatec Supply Company, Inc.; Alatec Race, Inc.; Alatec
Fastener and Component Group, Inc.; Alatec Cable Harness and Assembly Division,
Inc.; and Alatec International Sales, Inc., a foreign international sales
corporation. All significant intercompany accounts and transactions have been
eliminated.
CONCENTRATIONS OF CREDIT RISK
The Company distributes industrial and aerospace fasteners to manufacturers
in a wide variety of industries including the aerospace and defense industries.
Credit is extended based on an evaluation of the customer's financial condition
and collateral is typically not required. Credit losses are provided for in the
financial statements through a charge to operations. Credit losses have been
consistently within management's expectations. Provisions for bad debts and
accounts receivable write-offs have not been significant.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash maintained in bank deposit accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories consist primarily of industrial and aerospace fasteners and
related hardware held for sale and are valued at the lower of cost (first-in,
first-out method) or market.
PROPERTY UNDER CAPITAL LEASES, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
Leasehold improvements, buildings acquired under capital leases, and
equipment are recorded at cost. Depreciation is computed using straight-line and
primarily accelerated methods over useful lives ranging from 5 to 20 years.
Leasehold improvements and buildings acquired under capital leases are amortized
over the lesser of the life of the lease or the life of the improvements.
The amortization expense on assets acquired under capital leases is
included with depreciation expense on owned assets.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, prepaid expenses, and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying value of the Company's debt facilities and capital
lease agreements approximates fair value because the rates on such facilities
are
F-49
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
variable, based on current market, or are at fixed rates currently available to
the Company. The rate of the subordinated note payable to stockholder (discussed
in Note 4 and Note 7) is less than the market rate currently available to the
Company; however, the difference between the carrying value of this note and the
fair value is not significant.
NET SALES RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily allowances for discounts and
returns.
EXPORT SALES
The Company recorded export sales of $8,847,000, $8,875,000, and $9,434,000
in the years ended December 31, 1995 and 1996 and the period from January 1,
1997 through September 30, 1997, respectively. The Company has export sales
through its foreign sales corporation to Canada, Europe, South America, and the
Far East of which no country or region is individually significant.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
FISCAL YEAR
In 1997, the Company changed its fiscal year-end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
In January 1998, the Company came to a final settlement agreement with the
Internal Revenue Service with regards to all outstanding items under audit
including the issues related to the inventory issues. The amount of the
settlement, which did not include any penalties, was within amounts accrued in
the financial statements at September 30, 1997. (See Note 8)
F-50
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property under capital leases, leasehold improvements, and equipment
consist of:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
Automobile equipment................. $ 181,000 $ 181,000
Leasehold improvements............... 201,000 208,000
Office equipment..................... 299,000 327,000
Warehouse equipment.................. 290,000 312,000
Computer equipment................... 674,000 741,000
Buildings acquired under capital
leases............................... 1,637,000 1,637,000
------------- --------------
3,282,000 3,406,000
Less accumulated depreciation,
including amortization of assets
acquired under capital leases...... 1,699,000 1,828,000
------------- --------------
$ 1,583,000 $1,578,000
============= ==============
3. REVOLVING LINE OF CREDIT
The revolving line of credit represents borrowings under a $13.3 million
line of credit with a bank. This facility expires in June 1999. At September 30,
1997, unused credit available under this facility was $3,000,000. The Company
has classified all borrowings outstanding under its line of credit as a
long-term liability as it intends to maintain borrowings of at least $9.5
million during 1998. The Company may borrow amounts against 80% of eligible
trade receivables and 50% of eligible inventory, up to $7,000,000. The note
provides for interest at the prime rate (8.5% at September 30, 1997) and is
collateralized by inventory, accounts receivable, equipment and the personal
guarantee of a stockholder. The credit agreement also provides for standby
letters of credit of up to $100,000. At September 30, 1997, there were no
amounts outstanding on the letters of credit. The credit agreement contains
certain restrictive financial covenants including, but not limited to, minimum
working capital requirements and dividend restrictions. As of September 30,
1997, the Company was in compliance with the financial covenants. However, at
September 30, 1997, the Company was not in compliance with certain nonfinancial
covenants relating to providing information and notice of defined transactions
and events to the bank. The bank has provided a written waiver for these
covenant violations and management believes that the Company will be in
compliance with these covenants in future periods.
F-51
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Note payable to a bank, secured by a
vehicle costing $32,850, with monthly
payments of $507, including interest
at 9.99%, maturing June 1999.......... $ 13,000 $ 9,000
Note payable to a bank, secured by
accounts receivable, inventory and
equipment, with monthly payments of
$13,646 plus interest at .75% over the
bank's prime rate (8.5% at September
30, 1997), maturing September 1999.... 450,000 328,000
Note payable to a stockholder,
unsecured, due February 1998, with
interest payable monthly at 9%,
subordinated to all senior bank
debt.................................. 776,000 --
Note payable to a former stockholder,
secured by assets of the corporation,
due November 2024, with interest
payable monthly at 5.64%, subordinated
to all senior bank debt............... -- 2,687,000
------------ -------------
1,239,000 3,024,000
Less current maturities................. 169,000 327,000
------------ -------------
$1,070,000 $ 2,697,000
============ =============
As discussed in Note 7, the $776,000 note payable to a stockholder was
cancelled in exchange for 45 shares (pre stock-split) of common stock.
The aggregate maturities required on long-term debt at September 30, 1997
(not including the revolving line of credit) are due in future years as follows:
Fiscal year ending:
1998............................... $ 327,000
1999............................... 334,000
2000............................... 174,000
2001............................... 182,000
2002............................... 191,000
Thereafter......................... 1,816,000
------------
$ 3,024,000
============
F-52
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASE COMMITMENTS
The Company leases a portion of its facilities, equipment, and vehicles
under noncancelable capital and operating lease agreements. In April 1992, the
Company entered into a capital lease with a stockholder for its Chatsworth
facilities with an original cost of $1,637,000. Monthly installments, subject to
Consumer Price Index adjustments and including interest at 11.6%, are required
through March 2012. Additionally, the Company leases a smaller facility from the
stockholder under an operating lease.
Future minimum lease payments under the capital and operating leases,
together with the present value of the net minimum lease payments, as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
RELATED-PARTY
------------------------
CAPITAL OPERATING
LEASE LEASES OTHER TOTAL
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Fiscal year ending:
1998............................ $ 212,000 $ 457,000 $ 268,000 $ 937,000
1999............................ 212,000 352,000 246,000 810,000
2000............................ 212,000 352,000 220,000 784,000
2001............................ 212,000 352,000 173,000 737,000
2002............................ 215,000 349,000 43,000 607,000
Thereafter...................... 2,135,000 3,082,000 -- 5,217,000
---------- ---------- ---------- ------------
Total minimum lease payments.... 3,198,000 $4,944,000 $ 950,000 $ 9,092,000
========== ========== ============
Less amount representing interest.... 1,672,000
----------
Present value of net minimum lease
payments........................... 1,526,000
Current maturities................... 37,000
----------
Long-term portion.................... $1,489,000
==========
</TABLE>
Total rental and interest expense charged to operations for the nine months
ended September 30, 1997 and the years ended December 31, 1996 and 1995 was
approximately $640,000, $778,000, and $697,000, respectively, including amounts
to related parties of $451,000, $359,000, and $322,000, respectively.
6. 401(K) PLAN
The Company has a defined contribution 401(k) plan (the "Plan") for
substantially all of the Company's full-time employees. The Company may make
discretionary contributions and, in addition, may match participants'
contributions. The Company contributed $80,000, $99,000, and $80,000 in matching
contributions to the plan for the nine months ended September 30, 1997 and the
years ended December 31, 1996 and 1995, respectively. Additionally, in 1997, the
Board of Directors approved a $300,000 discretionary contribution to the Plan.
Accordingly, the contribution was accrued and expensed as of September 30, 1997.
7. RELATED-PARTY TRANSACTIONS
EQUITY TRANSACTIONS
At December 31, 1996, the Company was a closely held corporation and all of
the outstanding common stock was owned by immediate family members. During May
1997, certain equity transactions occurred simultaneously. The Company issued 45
shares (pre stock-split) of common stock in exchange for the cancellation of a
stockholder note payable of $776,000. Simultaneously, the Company purchased as
treasury stock 51.29 shares (pre stock split) of common stock representing all
of the shares of common
F-53
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock held by one of the family members in exchange for a note payable in the
original amount of $2,690,000. The terms of these notes payable are described
below.
NOTES PAYABLE AND RECEIVABLE
As discussed above, the Company had a 9%, $776,000 note payable to a
stockholder at December 31, 1996. At September 30, 1997, the Company had a
5.64%, $2,687,000 note payable to a former stockholder and current Director, due
November 2024. The note is subordinated to all senior bank debt and is
guaranteed by the President and sole remaining stockholder of the Company. The
note contains provisions that upon the death of the former stockholder, the note
will be terminated and the related debt will be cancelled. During the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
interest expense of $70,000, $69,000, and $50,000, respectively, was incurred on
these notes.
In addition, the Company has a non-interest-bearing receivable from a
stockholder of $9,000 as of December 31, 1996 and accrued rents and interest due
to a stockholder of $88,000 as of December 31, 1996. These balances are included
in receivables and other accrued expenses, respectively.
DEBT GUARANTEE
The U.S. Small Business Administration ("SBA") has issued a Secured
Business Disaster Loan to a related party for earthquake repairs and
improvements to the Chatsworth facility, which is owned by a stockholder and
leased to the Company. The Company is identified as a co-borrower; however, the
Company has reflected this as a contingent liability similar to a debt
guarantee. The remaining balance on the SBA loan was $1,255,231 and $1,217,000
at December 31, 1996 and at September 30, 1997, respectively. The debt matures
in August 2024. No amount of this debt is recorded in the accompanying financial
statements.
RELATED PARTY PURCHASES
The Company purchased approximately $1,100,000, $1,386,000, and $1,100,000
in 1995, 1996, and during the period from January 1, 1997 through September 30,
1997, respectively, from a supplier which is 50% owned by the principal
stockholder. Additionally, the Company owed $136,000, $209,000, and $154,000 for
the respective periods related to goods purchased for resale classified as
accounts payable in the balance sheet.
8. CONTINGENCIES
INCOME TAX EXAMINATION
The Company's federal income tax returns for the year ended January 31,
1995 are currently being examined by the Internal Revenue Service (the "IRS").
No notices of deficiency have been issued. The Internal Revenue Service has
proposed the capitalization of certain repairs to the Company's Chatsworth
facilities, which sustained earthquake damage, rather than to treat them as
deductible expenses in the year incurred, capitalization of freight costs and
adjustments for certain other nondeductible accrued expenses. The Company has
recorded an adjustment of approximately $120,000 for these known deficiencies as
a result of the examination. $116,000 of this adjustment is reflected in the
1996 tax provision and approximately $4,000 in the 1997 tax provision. The
Company has reached an understanding that resolves all open issues on the audit;
however, this understanding is subject to final IRS approval. There can be no
assurance that there will be no additional assessments; however, management
believes that any additional assessment would not be material.
During 1997, the Company detected that it had erroneously omitted certain
amounts of inventory from its financial statements for federal and state income
tax purposes for tax years ending December 31, 1995 and 1996. The Company
anticipates filing amended returns for 1996 and certain prior periods and has
accrued the tax liability and related interest totaling approximately $2,568,000
and $2,225,000 in 1997 and
F-54
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, respectively. No underpayment or late payment penalties have been accrued
in the financial statements based on preliminary discussions with the IRS
indicating that no penalties would be assessed. If assessed, these penalties
could be as much as $850,000. Based on management's discussion with the IRS, it
is their opinion that no significant penalties will be assessed, and management
believes it will be successful in settling this issue with the Internal Revenue
Service and state taxing authorities within the amounts accrued in the financial
statements.
9. INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
JANUARY 1,
1997
YEAR ENDED DECEMBER 31, THROUGH
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ --------------
Currently paid or payable:
<S> <C> <C> <C>
Federal............................ $ 1,049,000 $ 1,611,000 $1,496,000
State.............................. 119,000 389,000 360,000
------------ ------------ --------------
1,168,000 2,000,000 1,856,000
Deferred:
Federal............................ (157,000) (357,000) 3,000
State.............................. (16,000) (15,000) 1,000
------------ ------------ --------------
(173,000) (372,000) 4,000
------------ ------------ --------------
$ 995,000 $ 1,628,000 $1,860,000
============ ============ ==============
</TABLE>
The net deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
Deferred tax assets:
<S> <C> <C>
Receivables allowance.............. $ 47,000 $ 75,000
Inventory allowance................ 562,000 632,000
Accrued expenses................... 239,000 243,000
Equipment.......................... 32,000 198,000
Uniform cost capitalization........ 618,000 583,000
------------- --------------
1,498,000 1,731,000
------------- --------------
Deferred tax liabilities, other...... (9,000) (246,000)
------------- --------------
$ 1,489,000 $1,485,000
============= ==============
Net deferred taxes consist of the
following:
Current assets....................... $ 1,457,000 $1,420,000
Noncurrent assets.................... 32,000 65,000
------------- --------------
$ 1,489,000 $1,485,000
============= ==============
</TABLE>
F-55
<PAGE>
ALATEC PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective tax rate varied from the federal statutory tax rate
during the nine months ended September 30, 1997 and the years ended December 31,
1996 and 1995 for the following reasons:
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 THROUGH
---------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
Expected income tax rate................ 34.0% 34.0% 34.0%
International export sales partially
exempt from federal income taxes (FSC
benefit).............................. (9.2) (4.4) (2.6)
State taxes, net of federal benefit..... 7.3 7.7 7.2
Adjustment to reflect proposed IRS audit
settlement............................ -- 6.0 0.2
Nondeductible expenses.................. 4.3 2.1 1.0
Other................................... 4.7 (6.1) 1.3
---------- ---------- -------------
Effective tax rate...................... 41.1% 39.3% 41.1%
========== ========== =============
10. STOCKHOLDERS' EQUITY
In May 1997, the Company's Board of Directors (the "Board") authorized an
increase in the authorized shares of common stock from 2,500 shares to 2,500,000
shares. Concurrently, the Board approved a 1,000 for 1 stock-split.
11. SUBSEQUENT EVENT (UNAUDITED)
In December 1997, the Company and its stockholder entered into a definitive
agreement with a wholly owned subsidiary of Pentacon, Inc., which among other
things calls for the merger of the Company with the Pentacon, Inc. subsidiary.
F-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc. and
The Board of Directors
AXS Solutions, Inc.
We have audited the accompanying balance sheets of AXS Solutions, Inc. as
of December 31, 1996 and September 30, 1997, and the related statements of
income, shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996 and the period from January 1, 1997 through
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AXS Solutions, Inc. at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996
and the period from January 1, 1997 through September 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
November 7, 1997
F-57
<PAGE>
AXS SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......... $ 3,487,371 $ 2,777,160 $ 1,748,814
Accounts receivable -- net of
allowance for doubtful accounts
of $91,500, $105,000, and
$90,000.......................... 3,710,420 3,160,537 2,822,241
Inventory.......................... 4,952,648 5,323,516 5,448,850
Prepaid expenses and other current
assets........................... 66,839 27,737 18,644
Receivable from shareholder........ 169,476 169,476 --
------------ ------------- ------------
Total current assets.................... 12,386,754 11,458,426 10,038,549
Property and equipment:
Building and improvements.......... 192,763 212,437 195,997
Machinery and equipment............ 2,162,291 2,220,002 2,241,162
Assets under capital lease......... 1,058,589 1,058,589 1,058,589
------------ ------------- ------------
Total cost.............................. 3,413,643 3,491,028 3,495,748
Less: accumulated depreciation and
amortization..................... (1,719,540) (1,890,382) (1,964,839)
------------ ------------- ------------
1,694,103 1,600,646 1,530,909
Goodwill................................ 3,118,414 3,058,310 3,038,275
Non-compete agreement................... 537,050 457,805 431,390
Cash surrender value of life
insurance............................. 617,196 654,198 660,802
Other................................... 336,832 454,867 450,295
------------ ------------- ------------
Total assets............................ $ 18,690,349 $ 17,684,252 $ 16,150,220
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Demand note payable................ $ 3,300,000 $ 1,939,000 $ 300,000
Accounts payable................... 1,878,235 1,919,913 1,790,449
Accrued expenses and other current
liabilities...................... 713,010 467,432 368,307
Shareholder distribution payable... -- 2,713,162 3,076,152
Current portion of long-term debt
to former shareholder............ 70,199 76,451 88,301
Current portion of capital lease
obligation....................... 53,215 76,420 78,055
------------ ------------- ------------
Total current liabilities............... 6,014,659 7,192,378 5,701,264
Long-term debt to former shareholder,
less current portion.................. 423,715 347,264 324,483
Capital lease obligation, less current
portion............................... 988,375 911,955 891,818
Commitments and contingencies
Shareholders' equity:
Common stock:
AXS Solutions, Inc. class A
voting common stock, no par
value, authorized 1,000
shares, issued and
outstanding, 100 shares.... 55,785 55,785 55,785
AXS Solutions, Inc. class B
nonvoting common stock, no
par value, authorized
99,000 shares, issued and
outstanding, 9,900
shares..................... 5,522,687 5,650,187 5,650,187
Retained earnings.................. 5,685,128 3,526,683 3,526,683
------------ ------------- ------------
Total shareholders' equity.............. 11,263,600 9,232,655 9,232,655
------------ ------------- ------------
Total liabilities and shareholders'
equity................................ $ 18,690,349 $ 17,684,252 $ 16,150,220
============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-58
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE-MONTHS THREE MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, --------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................... $ 20,227,664 $ 23,176,615 $ 22,002,438 $ 8,566,214 $ 7,412,348
Cost of goods sold...................... 12,993,622 15,052,732 15,275,990 5,606,715 4,986,304
------------ ------------ ------------- ------------ ------------
Gross profit............................ 7,234,042 8,123,883 6,726,448 2,959,499 2,426,044
Selling, general and administrative
expenses.............................. 4,709,974 5,647,019 4,979,848 1,896,068 1,797,575
------------ ------------ ------------- ------------ ------------
Operating income........................ 2,524,068 2,476,864 1,746,600 1,063,431 628,469
Interest expense........................ (289,310) (326,785) (207,766) (70,482) (35,873)
Other income (expense).................. 232,747 19,619 7,513 (109,897) (38,007)
------------ ------------ ------------- ------------ ------------
Net income.............................. $ 2,467,505 $ 2,169,698 $ 1,546,347 $ 883,052 $ 554,589
============ ============ ============= ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-59
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
AXS SOLUTIONS, INC.
---------------------- CHAMPION RETAINED
CLASS A CLASS B BOLT CORP. EARNINGS TOTAL
------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.............. $ -- $ -- $ 378,472 $ 5,350,075 $ 5,728,547
Net income.............................. -- -- -- 2,467,505 2,467,505
Shareholder distributions............... -- -- -- (3,294,756) (3,294,756)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1995............ -- -- 378,472 4,522,824 4,901,296
Net income.............................. -- -- -- 2,169,698 2,169,698
Issuance of AXS Solutions, Inc. Common
Stock (80 Shares Voting Common and
7,920 Nonvoting Common) in exchange
for all of Champion Bolt Corp. Common
Stock................................. 3,785 374,687 (378,472) -- --
Purchase of Hoyt Fastener Corp. in
exchange for AXS Solutions, Inc.
Common Stock (20 Shares Voting Common
and 1,980 Shares Nonvoting Common).... 52,000 5,148,000 -- -- 5,200,000
Shareholder distributions............... -- -- -- (1,007,394) (1,007,394)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1996............ 55,785 5,522,687 -- 5,685,128 11,263,600
Net income.............................. -- -- -- 1,546,347 1,546,347
Transfer of 75 Nonvoting Common Shares
from existing shareholders in exchange
for acquired customers................ -- 127,500 -- -- 127,500
Shareholder distributions............... -- -- -- (991,630) (991,630)
Distribution of cumulative S-Corporation
earnings.............................. -- -- -- (2,713,162) (2,713,162)
------- ------------ ----------- -------------- --------------
Balance at September 30, 1997........... 55,785 5,650,187 -- 3,526,683 9,232,655
Net income (unaudited).................. -- -- -- 554,589 554,589
Distributions of cumulative
S-Corporation earnings (unaudited).... -- -- -- (554,589) (554,589)
------- ------------ ----------- -------------- --------------
Balance at December 31, 1997
(unaudited)........................... $55,785 $ 5,650,187 $ -- $ 3,526,683 $ 9,232,655
======= ============ =========== ============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-60
<PAGE>
AXS SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTHS THREE MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, -------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income........................... $ 2,467,505 $ 2,169,698 $ 1,546,347 $ 883,052 $ 554,589
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 250,887 326,550 373,095 124,539 120,907
Loss on disposal of fixed
assets......................... 50,371 6,299 -- -- --
Gain on sale of fixed assets..... (232,747) -- -- -- --
Increase in cash surrender value
of officers' life insurance.... (59,529) (58,393) (37,002) (14,599) (6,604)
Changes in operating assets and
liabilities:
Accounts receivable......... 284,696 (712,179) 549,883 46,347 338,296
Inventory................... 1,237,850 759,041 (370,868) (193,660) (125,334)
Prepaid expenses and other
current assets............ (38,803) (16,531) 39,102 (70,717) 9,093
Receivable from
shareholder............... -- (169,476) -- 78,127 169,476
Other....................... (82,856) 611 6,714 -- 4,572
Accounts payable............ (450,351) 150,587 41,678 45,908 (129,464)
Accrued expenses and other
current liabilities....... (50,335) 1,511 (245,578) (296,930) (99,125)
------------ ------------ ------------- ----------- ------------
Net cash provided by operating
activities......................... 3,376,688 2,457,718 1,903,371 602,067 836,406
INVESTING ACTIVITIES
Purchases of property and
equipment............................ (210,567) (152,223) (137,538) (10,381) (4,720)
Proceeds from sale of fixed assets... -- 25,300 -- -- --
Cash acquired during acquisition of
Hoyt Fastener Corp. ............... -- 416,743 -- -- --
------------ ------------ ------------- ----------- ------------
Net cash (used in) provided by
investing activities............... (210,567) 289,820 (137,538) (10,381) (4,720)
FINANCING ACTIVITIES
Proceeds from demand note payable.... 19,850,000 23,500,000 12,589,000 -- 1,044,000
Payments on demand note payable...... (18,950,000) (23,300,000) (13,950,000) (200,000) (2,683,000)
Payments on long-term debt to former
shareholder........................ (58,487) (84,541) (70,199) (19,231) (10,931)
Payments on capital lease
obligation......................... -- (16,999) (53,215) (11,373) (18,502)
Shareholder distributions............ (3,294,756) (1,007,394) (991,630) -- (191,599)
------------ ------------ ------------- ----------- ------------
Net cash used in financing
activities......................... (2,453,243) (908,934) (2,476,044) (230,604) (1,860,032)
------------ ------------ ------------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents................... 712,878 1,838,604 (710,211) 361,082 (1,028,346)
Cash and cash equivalents at
beginning of period................ 935,889 1,648,767 3,487,371 3,126,289 2,777,160
------------ ------------ ------------- ----------- ------------
Cash and cash equivalents at end of
period............................. $ 1,648,767 $ 3,487,371 $ 2,777,160 $ 3,487,371 $ 1,748,814
============ ============ ============= =========== ============
SUPPLEMENTARY CASH FLOW DATA:
- -------------------------------------
Interest paid........................ $ 284,796 $ 323,753 $ 217,305
============ ============ =============
</TABLE>
SIGNIFICANT NON-CASH TRANSACTIONS
- -------------------------------------
1995: Sale of fixed assets in
exchange for note
receivable of $250,000
1996: Incurred capital lease
obligation for $1,058,589
Acquisition of Hoyt
Fastener Corp. in exchange
for $5,200,000 of AXS
Solutions, Inc. common
stock (net assets of
$1,638,130, net of cash
acquired of $416,743)
1997: Transferred 75 nonvoting
common shares ($127,500)
from existing shareholder
in exchange for acquired
customers
Accrual of S-Corporation
distribution of $2,713,162
Three Months Ended December 31, 1997
(unaudited):
Accrual of S-Corporation
distribution of $362,990
SEE ACCOMPANYING NOTES.
F-61
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BUSINESS AND BASIS OF PRESENTATION
AXS Solutions, Inc. ("AXS Solutions") is a wholesaler and distributor of
threaded fastener products, including nuts, bolts, washers and screws, to
customers located predominantly in the Northeastern and Midwestern United
States. AXS Solutions was incorporated on August 19, 1996. On August 31, 1996,
the shareholders of Champion Bolt Corp. ("Champion Bolt") surrendered all of
their shares of common stock of Champion Bolt in exchange for shares of both
voting and non-voting common stock of AXS Solutions. There was deemed to be no
change of control as a result of this transaction. Subsequently, the Champion
Bolt shares were cancelled for no consideration.
AXS Solutions then acquired all of the common stock of Hoyt Fastener Corp.
("Hoyt Fastener") in exchange for shares of both voting and non-voting common
stock of AXS Solutions. This acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price (approximately $5.2
million based on an independent valuation) has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. Goodwill of approximately $3,145,000 was recorded as a result of
this acquisition. The Hoyt Fastener shares were also subsequently cancelled. The
operating results of the acquired business, Hoyt Fastener, have been included in
the income statement from the date of the acquisition.
The financial statements presented herein represent the operating results
of Champion Bolt for the period from January 1, 1995 through August 31, 1996 and
the operating results of AXS Solutions for the period from September 1, 1996
through September 30, 1997. The reference to "Company" in these financial
statements includes such presentation.
The following unaudited results of operations have been prepared assuming
the acquisition had occurred on January 1, 1995. These results are not
necessarily indicative of results of future operations nor of results that would
have occurred had the acquisitions been consummated as of January 1, 1995:
1995 1996
-------------- --------------
Net sales............................... $ 27,332,285 $ 28,044,941
Net income.............................. $ 2,803,676 $ 2,428,068
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORY
Inventory consists of product held for resale and is stated at the lower of
cost or market, with cost determined using the first-in, first-out (FIFO) method
of inventory valuation.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the respective estimated useful lives of the assets
ranging from 5 to 40 years. The capital lease is amortized over the estimated
useful life of the asset or lease term, as appropriate, using the straight-line
method. Depreciation expense includes amortization of assets recorded under the
capital lease. Accumulated amortization for the capital lease was $35,288 and
$114,686 at December 31, 1996 and September 30, 1997, respectively.
NON-COMPETE AGREEMENT
The cost of the non-compete agreement is being amortized over 10 years, the
term of the covenant. Accumulated amortization amounted to $519,495 and $598,740
at December 31, 1996 and September 30, 1997, respectively.
F-62
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill is being amortized over a period of 40 years. Accumulated
amortization amounted to $26,713 and $86,817 at December 31, 1996 and September
30, 1997, respectively.
CASH EQUIVALENTS
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents.
INCOME TAXES
The Company is a Subchapter S Corporation and as such, its stockholders are
taxed directly on all income.
NET SALES RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily related to discounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company performs credit evaluations of its customers and generally does
not require collateral. The Company maintains an allowance for doubtful accounts
based upon the expected collectibility of all accounts receivable. One customer
accounted for approximately 55%, 50% and 45% of revenues for 1995, 1996 and the
period from January 1, 1997 through September 30, 1997, respectively. At
December 31, 1996 and September 30, 1997, accounts receivable balances related
to this customer represented approximately 34% and 28% of total accounts
receivable, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, prepaid expenses, and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying value of the Company's debt facilities and capital
lease agreements approximate fair value because the rates on such facilities are
variable, based on current market or are at fixed rates currently available to
the Company.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the
F-63
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited interim
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of operations
for the interim periods are not necessarily indicative of the results of
operations for the respective full years.
3. DEBT
Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Non-interest bearing obligation payable
to a former shareholder for
non-compete agreement, payable in
monthly payments of $10,000 through
January 15, 2002. Implicit interest of
8.5%.................................. $493,914 $ 423,715
Less current portion.................... 70,199 76,451
------------ -------------
$423,715 $ 347,264
============ =============
Scheduled maturities on long-term debt for each of the next five years as
of September 30, 1997 are as follows:
Year ending September 30, 1998.......... $ 76,451
1999....... 94,092
2000....... 102,409
2001....... 111,461
2002....... 39,302
----------
$ 423,715
==========
The Company has a demand note payable with a bank up to a maximum of
$3,000,000, with interest payable at the prime rate. The demand note payable is
guaranteed by separate balances with this bank of two of the four voting
shareholders of the Company. At December 31, 1996, the Company had exceeded its
borrowing limit by $300,000 as a result of making a year end tax payment. The
excess borrowings were repaid in early January 1997.
In addition, at September 30, 1997 the Company has an available letter of
credit of approximately $50,000 for inventory purchases.
4. LEASES
The Company is obligated under a noncancelable lease with a related party
which expires August 31, 2006. Under this lease, the lessor of warehouse and
office space in Erie, Pennsylvania is a partnership composed of two of the four
voting shareholders of the Company. The Company is also obligated under
noncancelable operating leases for certain automobiles and warehouse equipment.
Future minimum annual operating lease payments under all noncancelable leases as
of September 30, 1997 are as follows:
Year ending September 30, 1998....... $ 264,177
1999.... 253,180
2000.... 241,818
2001.... 240,285
2002.... 240,000
Thereafter........................... 940,000
F-64
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense was approximately $288,000, $258,000 and $188,000 for 1995,
1996 and the period from January 1, 1997 through September 30, 1997,
respectively.
The Company is also obligated under a capital lease with a related party
which expires August 31, 2006. Under this lease, the lessor of warehouse and
office space in Niles, Illinois includes family residual trusts which represent
two of the four voting shareholders of the Company.
Future minimum annual capital lease payments as of September 30, 1997 are
as follows:
TOTAL
------------
Year ending September 30, 1998....... $ 157,500
1999.... 157,500
2000.... 157,500
2001.... 157,500
2002.... 157,500
Thereafter......................... 630,000
------------
Total minimum lease payments......... 1,417,500
Amount representing interest......... 429,125
------------
Present value of minimum lease
payments............................. 988,375
Current maturities................... 76,420
------------
Long-term portion.................... $ 911,955
============
5. EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory defined-benefit pension plan
covering all of its employees. The benefits are based on years of service and
the employee's compensation during the entire period of employment. The
Company's funding policy is to contribute annually the amount necessary to meet
minimum funding standards of ERISA. Plan assets are invested primarily in
corporate stocks and government securities.
The following table sets forth the plan's funded status and amounts
recognized in the Company's respective balance sheets:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Actuarial present value of benefit
obligations:
Vested............................. $ (352,039) $(406,538)
Non-vested......................... (37,690) (34,920)
------------ -------------
Accumulated benefit obligations......... $ (389,729) $(441,458)
============ =============
Projected benefit obligation............ $ (503,184) $(559,125)
Plan assets at fair value............... 714,701 806,946
------------ -------------
Plan assets in excess of projected
benefit obligation.................... 211,517 247,821
Unrecognized net transition
obligation............................ 2,005 1,671
Unrecognized net gain from past
experience different from that assumed
and effects of changes in
assumptions........................... (108,110) (156,660)
------------ -------------
Prepaid pension cost.................... $ 105,412 $ 92,832
============ =============
F-65
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The prepaid pension costs are recorded in other noncurrent assets on each
of the respective balance sheets.
Net pension expense was comprised of the following:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1, 1997
DECEMBER 31, TO SEPTEMBER 30,
---------------------- ----------------
1995 1996 1997
---------- ---------- ----------------
<S> <C> <C> <C>
Service cost............................ $ 43,376 $ 43,219 $ 39,305
Interest cost on projected benefit
obligation............................ 31,594 34,419 37,739
Actual return on plan assets............ (86,202) (46,590) (114,545)
Net amortization and deferral........... 52,751 (2,978) 18,921
---------- ---------- ----------------
$ 41,519 $ 28,070 $ (18,580)
========== ========== ================
</TABLE>
The assumptions used in these calculations were as follows for each of the
periods presented:
Weighted average discount rate.......... 7.5%
Rate of increase in compensation
levels................................ 3%
Expected long-term rate of return on
assets................................ 8%
Employee turnover....................... None
Mortality Table......................... 1983 GAM
The Company also sponsors two defined contribution plans under Section
401(k) of the Code. The first plan covers all eligible Pennsylvania employees of
the Company, and participants are permitted to make elective pretax deferrals up
to 20% of their compensation. Under this plan, the Company has the ability to
make additional discretionary contributions allocated to the participants as a
flat dollar amount or in proportion to their compensation. The second plan
covers all eligible Illinois employees of the Company, and participants are
permitted to make elective pretax deferrals up to a set percentage of their
compensation (to be determined by the Company) as well as post-tax contributions
subject to IRS limitations. Under this plan, the Company has the ability to make
additional discretionary contributions allocated to the participants in
proportion to their compensation. The Company contributed approximately $0,
$19,200, and $9,600 to these plans for 1995, 1996, and the period January 1,
1997 through September 30, 1997, respectively.
6. RELATED PARTIES
The Company has a receivable from a shareholder which represents an excess
S Corporation distribution which is expected to be paid back to the Company by
December 31, 1997.
The shareholder distribution payable is a result of the Company declaring a
dividend in 1997 in the amount equal to the total undistributed S Corporation
accumulated earnings of the Company as of September 30, 1997.
7. COMMITMENTS AND CONTINGENCIES
Under terms of the Shareholders Agreement, upon the death or withdrawal of
a shareholder, the Company has the option to purchase that shareholder's
non-voting shares at the purchase price as defined in the Shareholders
Agreement. The remaining shareholders then have the option to purchase the
remaining decedent/withdrawn shareholder's non-voting shares at the purchase
price as defined in the Shareholders Agreement. If any of the decedent/withdrawn
shareholder's non-voting shares remain, the decedent/withdrawn shareholder's
estate has the option to require the Company to redeem such non-voting shares at
the purchase price as defined in the Shareholders Agreement.
F-66
<PAGE>
AXS SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon the death or withdrawal of a shareholder, the Company is required to
redeem the voting shares of the decedent/withdrawn shareholder at the purchase
price as defined in the Shareholders Agreement.
8. SUBSEQUENT EVENT (UNAUDITED)
In December 1997, the Company and its shareholders entered into a
definitive agreement with a wholly-owned subsidiary of Pentacon, Inc. which
among other things calls for the merger of the Company with the Pentacon, Inc.
subsidiary.
F-67
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc.
and
Board of Directors
Maumee Industries, Inc.
We have audited the accompanying balance sheets of Maumee Industries, Inc.
(the "Company"), as of December 31, 1996 and September 30, 1997, and the
related statements of operations, stockholders' deficit, and cash flows for each
of the two years in the period ended December 31, 1996 and the period from
January 1, 1997 through September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Maumee Industries, Inc., at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996
and the period from January 1, 1997 through September 30, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 15, 1997
F-68
<PAGE>
MAUMEE INDUSTRIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
DECEMBER 31, SEPTEMBER 30, 31,
1996 1997 1997
------------ ------------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Accounts receivable, less allowance
of $45,000, $70,000, and
$70,000.......................... $ 3,421,509 $ 5,200,253 $ 4,927,013
Inventories........................ 4,265,628 6,524,717 6,555,095
Prepaid expenses and other
assets........................... 26,562 24,362 42,083
Deferred income taxes.............. 165,000 139,000 137,680
------------ ------------- -----------
Total current assets.................... 7,878,699 11,888,332 11,661,871
Deferred income taxes................... 329,000 284,000 284,000
Property and equipment, at cost:
Machinery and equipment............ 2,367,139 2,781,709 2,888,083
Leasehold improvements............. 399,301 440,516 477,991
------------ ------------- -----------
2,766,440 3,222,225 3,366,074
Less accumulated depreciation and
amortization.......................... 1,994,219 2,247,242 (2,336,394)
------------ ------------- -----------
772,221 974,983 1,029,680
------------ ------------- -----------
Total assets............................ $ 8,979,920 $ 13,147,315 $12,975,551
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft..................... $ 403,811 $ 1,001,999 $ 1,187,087
Accounts payable................... 2,800,950 3,965,264 3,356,178
Income taxes payable............... 513,744 708,744 1,086,768
Accrued expenses................... 505,634 1,141,654 1,064,320
Notes payable...................... 5,605,357 5,855,550 5,419,595
Notes payable to principal
stockholder...................... 997,181 997,181 997,181
Current portion of capital lease
obligations...................... 39,412 154,291 107,765
------------ ------------- -----------
Total current liabilities............... 10,866,089 13,824,683 13,218,894
Long-term portion of capital lease
obligations........................... 146,496 270,984 255,708
------------ ------------- -----------
Total liabilities....................... 11,012,585 14,095,667 13,474,602
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value:
Authorized shares -- 2,830
Issued shares -- 318
Outstanding shares -- 103.5 in
1996 and 318 in 1997....... 41,000 691,000 691,000
Accumulated deficit..................... (1,503,115) (1,068,802) (619,501)
------------ ------------- -----------
(1,462,115) (377,802) 71,499
Less treasury stock -- 77 shares in 1996
and 218 shares in 1997, at cost....... 570,550 570,550 570,550
------------ ------------- -----------
Total stockholders' deficit............. (2,032,665) (948,352) (499,051)
------------ ------------- -----------
Total liabilities and stockholders'
deficit............................... $ 8,979,920 $ 13,147,315 $12,975,551
============ ============= ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-69
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEARS ENDED 1997 THREE MONTHS ENDED
DECEMBER 31, THROUGH DECEMBER 31,
-------------------------- SEPTEMBER 30, -------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................... $ 20,582,200 $ 26,234,653 $27,472,902 $ 7,071,763 $ 10,541,994
Cost of sales........................... 16,099,808 19,712,909 19,557,148 5,522,964 7,432,716
------------ ------------ ------------- ----------- ------------
Gross profit............................ 4,482,392 6,521,744 7,915,754 1,548,799 3,109,278
Selling and administrative expenses..... 4,626,153 5,277,107 6,628,643 1,510,586 2,145,830
------------ ------------ ------------- ----------- ------------
Operating income (loss)................. (143,761) 1,244,637 1,287,111 38,213 963,448
Interest expense........................ (572,387) (585,090) (547,274) (201,277) (200,071)
Other income (expense).................. 2,578 (23,680) 10,476 (28,748) 10,814
------------ ------------ ------------- ----------- ------------
Income (loss) before taxes.............. (713,570) 635,867 750,313 (191,812) 774,191
Income tax expense (benefit)............ (250,000) 304,000 316,000 (84,397) 324,890
------------ ------------ ------------- ----------- ------------
Net income (loss)....................... $ (463,570) $ 331,867 $ 434,313 $ (107,415) $ 449,301
============ ============ ============= =========== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-70
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------------- --------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIT
------ ---------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... 103.5 $ 41,000 (77) $ (570,550) $(1,371,412) $ (1,900,962)
Net loss............................. -- -- -- -- (463,570) (463,570)
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1995......... 103.5 41,000 (77) (570,550) (1,834,982) (2,364,532)
Net income........................... -- -- -- -- 331,867 331,867
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1996......... 103.5 41,000 (77) (570,550) (1,503,115) (2,032,665)
Stock split (2.83 for 1)............. 189.5 -- (141) -- -- --
Net income........................... -- -- -- -- 434,313 434,313
Issuance of common stock............. 25 650,000 -- -- -- 650,000
------ ---------- ------ ------------ ----------- -------------
Balance at September 30, 1997........ 318 691,000 (218) (570,550) (1,068,802) (948,352)
Net income (unaudited)............... -- -- -- -- 449,301 449,301
------ ---------- ------ ------------ ----------- -------------
Balance at December 31, 1997
(unaudited)........................ 318 $ 691,000 (218) $ (570,550) $ (619,501) $ (499,051)
====== ========== ====== ============ =========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-71
<PAGE>
MAUMEE INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997 THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, THROUGH DECEMBER 31,
------------------------------- SEPTEMBER 30, ----------------------------
1995 1996 1997 1996 1997
-------------- --------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss).................. $ (463,570) $ 331,867 $ 434,313 $ (107,415) $ 449,301
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and
amortization............... 358,681 327,945 316,823 20,060 89,152
Issuance of common stock for
compensation............... -- -- 650,000 -- --
(Gain) or loss on disposal of
equipment.................. (1,283) 28,290 (8,980) -- --
Deferred income taxes......... (22,000) (448,000) 71,000 (491,132) 1,320
Changes in operating assets
and liabilities:
Accounts receivable...... (453,257) (725,349) (1,778,744) (159,116) 273,240
Inventories.............. (480,392) (1,328,228) (2,259,089) (1,040,258) (30,378)
Prepaid expenses and
other assets.......... (23,164) 12,912 2,200 41,496 (17,721)
Income tax receivable.... (239,150) 239,150 -- -- --
Accounts payable......... 762,714 866,783 1,164,314 1,436,806 (609,086)
Income taxes payable..... (36,653) 501,700 195,000 367,616 378,024
Accrued expenses......... (27,593) 160,410 636,020 279,845 (77,334)
-------------- --------------- -------------- -------------- ------------
Net cash (used in) provided by
operating activities............. (625,667) (32,520) (577,143) 347,902 456,518
INVESTING ACTIVITIES
Capital expenditures............... (204,581) (133,704) (210,968) (2,327) (143,849)
Proceeds from sale of equipment.... 2,367 1,342 59,200 -- --
-------------- --------------- -------------- -------------- ------------
Net cash used in investing
activities....................... (202,214) (132,362) (151,768) (2,327) (143,849)
FINANCING ACTIVITIES
Bank overdraft..................... (548,755) (100,295) 598,188 (232,696) 185,088
Payments on capital leases......... (26,475) (48,764) (119,472) (12,000) (61,802)
Proceeds from revolving line of
credit........................... 6,000,200 10,042,100 20,464,195 2,510,879 6,821,955
Payments on revolving line of
credit........................... (4,396,709) (10,003,263) (20,504,163) (2,554,008) (7,200,160)
Proceeds from notes payable........ 50,000 467,796 424,000 -- --
Payments on notes payable.......... (250,380) (192,692) (133,837) (57,750) (57,750)
-------------- --------------- -------------- -------------- ------------
Net cash provided by (used in)
financing activities............. 827,881 164,882 728,911 (345,575) (312,669)
Net increase (decrease) in cash.... -- -- -- -- --
Cash at beginning of period........ -- -- -- -- --
-------------- --------------- -------------- -------------- ------------
Cash at end of period.............. $ -- $ -- $ -- $ -- $ --
============== =============== ============== ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-72
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Maumee Industries, Inc. (the "Company") is engaged in the wholesale
distribution of fasteners and nonfastener small parts primarily to
Midwestern-based manufacturers in the automotive industry. For the years ended
December 31, 1995, 1996, and the period from January 1, 1997 through September
30, 1997, net sales to two customers approximated $18,000,000, $23,100,000, and
$21,800,000, respectively. In relation to these customers, approximately
$4,300,000 was included in accounts receivable at September 30, 1997.
NET SALE RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily related to discounts.
INVENTORIES
Inventories consist of goods held for resale and are valued at the lower of
cost (first-in, first-out method) or market.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated on the cost basis.
Equipment is depreciated using accelerated depreciation methods based on
estimated useful lives ranging from three to ten years. Leasehold improvements
are amortized using the straight-line method over the lesser of the estimated
useful lives of the assets or the term of the related lease.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, prepaid expenses, and accounts
payable approximate fair value due to the short-term maturities of these
instruments. The carrying value of the Company's debt facilities and capital
lease agreements approximates fair value because the rates on such facilities
are variable, based on current market, or are at fixed rates currently available
to the Company.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES.
F-73
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
2. NOTES PAYABLE
At September 30, 1997, the Company has a bank line of credit under which
the Company may borrow up to $7,700,000. At September 30, 1997, the unused
portion of the line of credit was $2,194,032. Borrowings under this line of
credit bear interest at 1.5% over the bank's base rate (10% at September 30,
1997) and expire on May 31, 2000. The line of credit is collateralized by
substantially all of the Company's assets, including equipment, general
intangibles, inventory, receivables, and any balance in the collateral account.
The Company's principal stockholder has guaranteed the line of credit. The line
of credit agreement includes provisions for maintenance of minimum net worth and
restrictions on capital expenditures. The Company was in compliance with these
financial covenants at September 30, 1997.
At September 30, 1997, the Company has a special accommodation/over advance
note payable to a bank. The note is payable on demand and accrues interest at
the bank's base rate plus 2.5% (11% at September 30, 1997). If no demand is
made, the note is payable in 18 monthly installments of $16,667 plus interest,
beginning June 1, 1997. There was $233,332 outstanding on this note at September
30, 1997.
At September 30, 1997, the Company has an equipment loan payable to a bank.
The loan is payable on demand and accrues interest at the bank's base rate plus
1.5% (10% at September 30, 1997). If demand is not made, the note is payable in
48 monthly installments of $2,583, plus interest. There was $116,250 outstanding
on this note at September 30, 1997.
Equipment purchased from the proceeds of the installment notes is pledged
as collateral on the respective loans.
The Company made interest payments of approximately $453,000, $531,000 and
$529,000 for the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 through September 30, 1997, respectively.
3. NOTE PAYABLE TO STOCKHOLDER
At September 30, 1997, the Company has notes payable to the principal
stockholder. The notes payable represent amounts advanced to the Company by the
principal stockholder. The notes require monthly interest payments at rates
ranging from 6.5% to 13.8% with principal payable upon demand. Interest payments
for the years ended December 31, 1995 and 1996 and for the period from January
1, 1997 through September 30, 1997 was approximately $45,377, $0, and $56,000,
respectively.
F-74
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CAPITAL LEASE OBLIGATIONS
The Company has entered into capital lease arrangements to finance the
purchase of machinery and equipment. Future minimum payments under these
agreements as of September 30, 1997 are as follows:
1998................................. $ 189,251
1999................................. 134,959
2000................................. 91,196
2001................................. 53,532
2002................................. 39,237
----------
Total minimum lease payments......... 508,175
Amount representing interest......... 82,900
----------
Present value of minimum lease
payments............................. 425,275
Current maturities................... 154,291
----------
Long-term portion.................... $ 270,984
==========
The cost of assets held under capital leases as of September 30, 1997 and
December 31, 1996 was $619,987 and $261,149, respectively. Amortization of
equipment acquired under capital lease arrangements is included in depreciation
and amortization expense.
5. COMMITMENTS
The Company leases certain of its facilities and equipment under
noncancelable operating leases. Rent expense for the years ended December 31,
1995 and 1996 and the period from January 1, 1997 through September 30, 1997 was
$138,000, $174,000, and $120,000, respectively. Lease commitments at September
30, 1997 for long-term noncancelable operating leases are as follows:
1998................................. $ 278,299
1999................................. 82,486
2000................................. 43,040
----------
$ 403,825
==========
6. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997
YEARS ENDED DECEMBER 31, THROUGH
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal......................... $ (183,000) $ 591,000 $ 192,000
State........................... (45,000) 161,000 53,000
------------ ------------ -------------
(228,000) 752,000 245,000
Deferred:
Federal......................... (22,000) (448,000) 71,000
------------ ------------ -------------
$ (250,000) $ 304,000 $ 316,000
============ ============ =============
</TABLE>
F-75
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the income tax expense computed at U.S. federal
statutory tax rates to the reported tax expense is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997
YEARS ENDED DECEMBER 31, THROUGH
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Expected income tax expense (benefit)
at 34%............................. $ (242,615) $ 216,194 $ 255,106
State income taxes, net of federal
benefit............................ (36,099) 36,444 43,428
Non-deductible expenses.............. 2,662 26,050 17,466
Other................................ 26,052 25,312 --
------------ ------------ -------------
Reported total income tax expense
(benefit).......................... $ (250,000) $ 304,000 $ 316,000
============ ============ =============
</TABLE>
The Company paid $59,076, $-0- and $50,000 of income taxes for the years
ended December 31, 1995 and 1996 and the period from January 1, 1997 through
September 30, 1997, respectively.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. The components of the
deferred tax assets are as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Deferred tax assets:
Change in inventory estimate....... $378,834 $ 284,125
Nondeductible accruals:
Accrued interest.............. 21,496 21,496
Pension....................... 53,986 53,558
Other.............................. 39,684 63,821
------------ -------------
Total deferred tax assets............... $494,000 $ 423,000
============ =============
7. EMPLOYEE RETIREMENT PLANS
The Company maintains a defined contribution pension plan for all eligible
full-time employees. All contributions to the plan are made by the Company at an
amount equal to 7% of each participant's annual salary. The plan provides for
100% vesting of values accumulated for the employee after six years of service.
The Company also sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code which covers substantially all full-time employees.
The plan allows for both employee and Company contributions. The Company
contribution consists of a matching contribution of 50% of employee
contributions, up to 6% of eligible employee compensation.
Employees vest immediately in their contribution and vest in the Company
contribution over a six-year period of service.
F-76
<PAGE>
MAUMEE INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of employee retirement plan expense for the
years ended December 31, 1995 and 1996 and the period from January 1, 1997
through September 30, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Defined contribution pension plan....... $106,917 $104,819 $ 103,520
401(k) matching contribution............ 26,694 33,183 32,690
------------ ------------ -------------
Total................................... $133,611 $138,002 $ 136,210
============ ============ =============
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company leases its main building facility from Maumee Properties, which
is owned by the primary shareholder and president. Annual rental expense under
the lease amounted to $312,000 for the years ended December 31, 1995 and 1996,
respectively, and $234,000 for the period from January 1, 1997 through September
30, 1997.
The Company rents an airplane from Summit Transportation, which is owned by
the primary shareholder and president. The related expense for use of the
airplane amounted to $-0- and $46,028 for the years ended December 31, 1995 and
1996, respectively, and $4,171 for the nine months ended September 30, 1997.
9. COMMON STOCK
On September 30, 1997, the Company executed a share split of 2.83 ordinary
shares for each authorized ordinary share.
On September 30, 1997, pursuant to an agreement in July 1997 and subsequent
to the aforementioned share split, 25 shares of common stock were issued to the
chief executive officer. The issuance of the common stock resulted in a
compensation charge to the Company of $650,000 based on an independent valuation
of the Company.
10. SUBSEQUENT EVENTS (UNAUDITED)
In December 1997, Maumee Industries, Inc., and its shareholders entered
into a definitive agreement with a wholly owned subsidiary of Pentacon, Inc.,
which among other things calls for the merger of Maumee Industries, Inc., with
the Pentacon, Inc., subsidiary.
F-77
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Pentacon, Inc.
and
Board of Directors
Sales Systems, Limited
We have audited the balance sheets of Sales Systems, Limited (the
"Company"), as of December 31, 1996 and September 30, 1997, and the related
statements of income and retained earnings and cash flows for the year ended
December 31, 1996 and the period from January 1, 1997 through September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sales Systems, Limited, at
December 31, 1996 and September 30, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1996 and the period from January
1, 1997 through September 30, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 20, 1997
F-78
<PAGE>
SALES SYSTEMS, LIMITED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash............................... $ 63,755 $ -- $ 101,749
Trade accounts receivable, less
allowance for doubtful accounts
of $38,000 at December 31, 1996,
September 30, 1997, and December
31, 1997......................... 1,129,433 1,090,628 1,148,344
Inventories........................ 2,723,660 2,255,465 2,346,057
Prepaid expenses and other current
assets........................... -- 6,589 18,632
------------ ------------- ------------
Total current assets.................... 3,916,848 3,352,682 3,614,782
Property, plant, and equipment:
Fixtures and equipment............. 1,030,403 1,123,795 1,151,546
Automotive equipment............... 82,151 82,151 82,151
------------ ------------- ------------
1,112,554 1,205,946 1,233,697
Less accumulated depreciation........... (778,625) (859,976) (901,574)
------------ ------------- ------------
333,929 345,970 332,123
Other assets............................ 8,477 27,109 8,478
------------ ------------- ------------
Total assets............................ $4,259,254 $ 3,725,761 $ 3,955,383
============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable....................... $1,250,000 $ 342,347 $ 645,592
Note payable to former
shareholders..................... -- -- 5,000,000
Trade accounts payable and accrued
expenses......................... 943,109 980,922 1,048,561
Accrued salaries, wages, payroll
expenses, and commissions........ 138,804 60,484 39,819
Advances payable................... 40,000 -- --
Current maturities of unsecured
notes to officers................ 22,670 23,890 20,139
Current maturities of long-term
debt............................. 78,823 77,850 75,336
------------ ------------- ------------
Total current liabilities............... 2,473,406 1,485,493 6,829,447
Long-term debt, less current
maturities............................ 257,176 199,967 182,567
Unsecured notes to officers, less
current maturities.................... 194,228 176,154 174,088
------------ ------------- ------------
Total liabilities....................... 2,924,810 1,861,614 7,186,102
Shareholders' equity:
Common stock, $100 par value:
Authorized shares -- 100
Issued and outstanding
shares -- 64............... 6,400 6,400 6,400
Retained earnings.................. 1,375,242 1,904,945 1,810,079
------------ ------------- ------------
1,381,642 1,911,345 1,816,479
Less 14 shares at September 30, 1997 and
47 shares at
December 31, 1997 shares of treasury
stock at cost......................... (47,198) (47,198) (5,047,198)
------------ ------------- ------------
Total shareholders' equity (deficit).... 1,334,444 1,864,147 (3,230,719)
------------ ------------- ------------
Total liabilities and shareholders'
equity................................ $4,259,254 $ 3,725,761 $ 3,955,383
============ ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-79
<PAGE>
SALES SYSTEMS, LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 THREE MONTHS ENDED
YEAR ENDED THROUGH DECEMBER 31
DECEMBER 31, SEPTEMBER 30, --------------------------
1996 1997 1996 1997
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................... $ 15,663,326 $11,987,479 $ 3,724,591 $ 3,746,387
Cost of goods sold...................... 10,495,123 8,056,780 2,532,158 2,452,853
------------ --------------- ------------ ------------
Gross profit............................ 5,168,203 3,930,699 1,192,433 1,293,534
Selling, general, and administrative
expenses.............................. 4,598,895 3,096,934 1,561,310 1,367,336
------------ --------------- ------------ ------------
Operating income (loss)................. 569,308 833,765 (368,877) (73,802)
Interest expense........................ (106,799) (95,162) (28,167) (21,064)
Other income............................ 17,912 -- 17,912 --
------------ --------------- ------------ ------------
Net income (loss)....................... 480,421 738,603 (379,132) (94,866)
Retained earnings at beginning of
period................................ 1,114,575 1,375,242 1,790,848 1,904,945
Distributions to shareholders........... (219,754) (208,900) (36,474) --
------------ --------------- ------------ ------------
Retained earnings at end of period...... $ 1,375,242 $ 1,904,945 $ 1,375,242 $ 1,810,079
============ =============== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-80
<PAGE>
SALES SYSTEMS, LIMITED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 THREE MONTHS ENDED
YEAR ENDED THROUGH DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, --------------------------
1996 1997 1996 1997
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)....................... $ 480,421 $ 738,603 $ (379,132) $ (94,866)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation....................... 94,668 81,351 48,137 41,598
Loss on sale of equipment.......... 1,052 -- -- --
Change in operating assets and
liabilities:
Trade accounts receivable..... (343,571) 38,805 372,465 (57,716)
Inventories................... (518,271) 468,195 (201,941) (90,592)
Prepaid expenses and other
current assets............. -- (6,589) -- (12,043)
Other assets.................. -- (18,632) (891) 18,631
Trade accounts payable and
accrued expenses........... 28,375 37,813 (456,914) 67,639
Accrued salaries, wages, and
payroll withholdings....... 102,289 (78,320) 105,216 (20,665)
Advances payable.............. 40,000 (40,000) 40,000 --
------------ --------------- ------------ ------------
Net cash provided by (used in) operating
activities............................ (115,037) 1,221,226 (473,060) (148,014)
INVESTING ACTIVITIES
Capital expenditures.................... (216,869) (93,392) (146,502) (27,751)
------------ --------------- ------------ ------------
Net cash used in investing activities... (216,869) (93,392) (146,502) (27,751)
FINANCING ACTIVITIES
Distributions paid to shareholders...... (219,754) (208,900) (36,474) --
Borrowings on term loans................ 61,582 -- 40,328 --
Payments on term loans.................. (91,523) (75,036) (10,537) (25,731)
Net borrowings (repayments) on line of
credit................................ 525,555 (907,653) 690,000 303,245
Other................................... (992) -- -- --
------------ --------------- ------------ ------------
Net cash provided by (used in) financing
activities............................ 274,868 (1,191,589) 683,317 277,514
------------ --------------- ------------ ------------
Increase (decrease) in cash............. (57,038) (63,755) 63,755 101,749
Cash at beginning of period............. 120,793 63,755 -- --
------------ --------------- ------------ ------------
Cash at end of period................... $ 63,755 $ -- $ 63,755 $ 101,749
============ =============== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-81
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY DESCRIPTION
Sales Systems, Limited (the "Company") is a wholesaler and distributor of
industrial fasteners, primarily to manufacturers in the eastern United States.
INVENTORIES
Inventories consist of goods held for resale and are stated at the lower of
cost or market using the first-in, first-out method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation and
amortization expense, including amounts related to capital leases, is calculated
by accelerated methods over the estimated useful lives of the assets, which vary
from three to eight years.
NET SALES RECOGNITION
Net sales are recognized upon shipment of the product to the customer.
Adjustments to arrive at net sales are primarily for discounts.
INCOME TAXES
Effective January 1, 1995, the Company made an election to be taxed as an S
corporation for federal purposes and for the majority of states in which the
Company operates. Accordingly, tax liabilities subsequent to this date related
to the Company's ongoing operations will generally be the responsibility of the
individual shareholders.
STATEMENT OF CASH FLOWS
Cash paid for interest during the year ended December 31, 1996 and the
period from January 1, 1997 through September 30, 1997 was $106,799 and $95,167,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, prepaid expenses, and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying value of the Company's debt facilities approximates
fair value because the rates on such facilities are variable, based on current
market, or are at fixed rates currently available to the Company.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 in the first quarter of 1996 and the effect of adoption had no impact on the
financial statements.
F-82
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FISCAL YEAR
In 1997, the Company changed its fiscal year end from December 31 to
September 30.
UNAUDITED INTERIM INFORMATION
The financial information for the three months ended December 31, 1996 and
1997 has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
years.
2. CONCENTRATION OF CREDIT RISK AND SALES TO LARGEST CUSTOMERS
Sales to the Company's two largest customers were approximately $9,500,000,
or 60.6% of net sales, for the year ended December 31, 1996. Sales to the
Company's four largest customers were approximately $9,400,000, or 78.7% of net
sales, for the period January 1, 1997 through September 30, 1997.
The related accounts receivable balances were $442,545 and $538,940 as of
December 31, 1996 and September 30, 1997, respectively.
3. FINANCING ARRANGEMENTS
NOTE PAYABLE
The Company has a $1,250,000 line of credit agreement with a bank. The line
of credit matures on June 1, 1998, subject to automatic renewals thereof on an
annual basis unless a contrary notice is delivered by either party within a
prescribed period. The line of credit is secured by accounts receivable and
inventory, and is guaranteed by the Company's shareholders. The line of credit
bears interest at the New York prime rate (8.5% at September 30, 1997). At
September 30, 1997, there were available amounts of $907,626 to be borrowed
under the line of credit.
The agreement includes certain restrictive covenants with respect to, among
other matters, distributions paid to shareholders, purchase or redemption of the
Company's stock, mergers or consolidated transactions, asset dispositions, and
the incurrence of additional debt. It also includes additional financial
covenants related to the maintenance of net worth, working capital, and net
income levels along with a limitation on annual capital expenditures. At
September 30, 1997 the Company was in compliance with these covenants.
F-83
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- --------------
Note payable to bank requiring
monthly principal payments of
$4,167 plus interest at a variable
rate (9.25% at September 30, 1997);
due January 2003, secured by
equipment, furniture and fixtures,
accounts receivable, and
inventory.......................... $ 254,167 $ 216,667
Notes payable to bank requiring
monthly payments totaling $2,462
including interest at 8.2% -- 8.5%;
maturing January 2002, secured by
equipment.......................... 71,176 53,715
Notes payable to bank requiring
monthly payments totaling $418
including interest at 7.75%;
maturing March 1999; secured by a
vehicle............................ 10,656 7,435
------------- --------------
335,999 277,817
Less current portion................. 78,823 77,850
------------- --------------
Long-term debt, net of current
portion............................ $ 257,176 $ 199,967
============= ==============
The aggregate annual principal maturities of long-term debt for each of the
next five years are as follows:
1998................................. $ 77,850
1999................................. 60,782
2000................................. 59,313
2001................................. 58,616
2002................................. 21,256
----------
$ 277,817
==========
4. LEASES AND TRANSACTIONS WITH RELATED PARTIES
The Company leases an Allentown warehouse and office facility under an
informal lease arrangement, presently requiring monthly payments of $6,631.
The Company leases a South Carolina warehouse and office facility under an
informal lease arrangement with a partnership whose partners are the
shareholders of the Company. This partnership advanced $40,000 to the Company
during 1996, which was repaid during 1997.
Rent expense for these facilities for the year ended December 31, 1996 and
the period from January 1, 1997 through September 30, 1997 was $165,500 and
$144,000, respectively.
5. PENSION PLAN
The Company has a qualified profit sharing plan covering substantially all
employees with at least one year of service. Employee 401(k) contributions are
permitted and the Company is committed to contribute $1 for each $1 of employee
contributions, up to 6% of the employee's salary. The matching contributions
were $134,772 and $95,971 for the year ended December 31, 1996 and the period
from January 1, 1997 through September 30, 1997, respectively.
There were no discretionary contributions made by the Company for the year
ended December 31, 1996 and the period from January 1, 1997 through September
30, 1997.
F-84
<PAGE>
SALES SYSTEMS, LIMITED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS
The Company has 10% unsecured subordinated notes to certain officers
totaling $174,087 as of September 30, 1997. The Company also has an unsecured
note payable to an officer requiring monthly payments of $2,079, including
interest at 7% through October 1998, totaling $25,957 as of September 30, 1997.
7. SUBSEQUENT EVENT (UNAUDITED)
In December 1997, Sales Systems, Limited, and its shareholders entered into
a definitive agreement with a wholly owned subsidiary of Pentacon, Inc., which
among other things calls for the merger of the Company with the Pentacon, Inc.,
subsidiary.
In October 1997, the Company entered into an agreement whereby the Company
purchased 30 shares of common stock from two shareholders for two promissory
notes totaling $5.0 million. The purchase price was based on an offer received
by the Company to purchase all of the common stock of the Company for cash.
Payment of the promissory notes are conditioned upon the occurrence of the
above-named acquisition and resulting initial public offering and if not
completed by March 15, 1998 the notes will be void and the shares will revert
back to the original owners.
F-85
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Texas International Aviation, Inc.
We have audited the accompanying consolidated balance sheet of Texas
International Aviation, Inc. and Subsidiary (a Texas corporation) as of December
31, 1997 and March 31, 1997, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the nine months ended December
31, 1997 and the year ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Texas
International Aviation, Inc. and Subsidiary as of December 31, 1997 and March
31, 1997, and the consolidated results of their operations and their
consolidated cash flows for the nine months ended December 31, 1997 and the year
ended March 31, 1997, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Dallas Texas
April 3, 1998
F-86
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1998
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 8,593 $ 20,093 $ 20,467
Trade accounts receivable, net
of allowance for doubtful
accounts of $15,259 at March
31, 1997 and December 31, 1997
and $946 at June 30, 1998..... 2,716,444 4,533,895 4,626,526
Inventories..................... 9,393,408 15,885,605 20,861,277
Prepaid expenses................ 43,254 43,014 25,443
Deferred income taxes........... -- 15,358 15,358
----------- ------------ -----------
Total current assets.. 12,161,699 20,497,965 25,549,071
Property, plant and equipment - at cost
Property, plant and equipment... 635,723 883,561 930,605
Less accumulated
depreciation............ 434,542 565,018 660,571
----------- ------------ -----------
201,181 318,543 270,034
Other Assets
Receivables from stockholders... 362,334 486,599 565,852
Other........................... 9,500 9,500 9,500
----------- ------------ -----------
$12,734,714 $ 21,312,607 $26,394,457
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdrafts................. $ -- $ -- $ 1,088,561
Current maturities of long-term
debt.......................... 153,992 141,235 146,743
Accounts payable -- trade....... 2,512,800 4,763,771 4,126,764
Accrued liabilities............. 207,208 352,467 325,209
Line of credit.................. 4,755,505 10,035,345 13,729,698
Income taxes payable............ 18,977 323,019 93,164
----------- ------------ -----------
Total current
liabilities........ 7,648,482 15,615,837 19,510,139
Long-term debt, less current
maturities......................... 347,137 241,680 172,620
Stockholders' Equity
Common stock $.10 par value;
authorized 1,000,000 shares;
issued and outstanding 65,763
shares........................ 6,576 6,576 6,576
Additional paid-in capital...... 2,515,908 2,515,908 2,515,908
Retained earnings............... 2,216,611 2,932,606 4,189,214
----------- ------------ -----------
Total stockholders'
equity............. 4,739,095 5,455,090 6,711,698
----------- ------------ -----------
$12,734,714 $ 21,312,607 $26,394,457
=========== ============ ===========
</TABLE>
F-87
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SIX MONTHS ENDED JUNE 30,
MARCH 31, DECEMBER 31, ----------------------------
1997 1997 1997 1998
----------- ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................ $11,823,132 $ 17,721,766 $ 9,070,866 $ 14,945,051
Cost of sales........................ 8,091,140 12,894,231 6,805,210 10,271,146
----------- ------------ ------------ --------------
3,731,992 4,827,535 2,265,656 4,673,905
Operating costs and expenses
Selling expenses................ 409,481 353,469 250,551 447,579
General and administrative
expenses...................... 2,465,861 2,929,298 1,741,692 1,799,306
----------- ------------ ------------ --------------
2,875,342 3,282,767 1,992,243 2,246,885
----------- ------------ ------------ --------------
Operating profit........... 856,650 1,544,768 273,413 2,427,020
Other income (expenses)
Interest expense................ (325,318) (530,882) (271,173) (534,774)
Other income.................... 1,674 70,202 9,632 11,705
----------- ------------ ------------ --------------
Earnings before income
taxes................... 533,006 1,084,088 11,872 1,903,951
Income tax expense................... 135,655 368,093 4,031 647,343
----------- ------------ ------------ --------------
Net earnings............... $ 397,351 $ 715,995 $ 7,841 $ 1,256,608
=========== ============ ============ ==============
</TABLE>
F-88
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWO FISCAL YEARS IN THE PERIOD ENDED DECEMBER 31,
1997 AND THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996............. 65,763 $6,576 $2,515,908 $ 1,819,260 $ 4,341,744
Net earnings......................... -- -- -- 397,351 397,351
------ ------ ---------- ------------ ------------
Balance at March 31, 1997............ 65,763 6,576 2,515,908 2,216,611 4,739,095
Net earnings......................... -- -- -- 715,995 715,995
------ ------ ---------- ------------ ------------
Balance at December 31, 1997......... 65,763 6,576 2,515,908 2,932,606 5,455,090
Net earnings (unaudited)............. -- -- -- 1,256,608 1,256,608
------ ------ ---------- ------------ ------------
Balance at June 30, 1998
(unaudited)........................ 65,763 $6,576 $2,515,908 $ 4,189,214 $ 6,711,698
====== ====== ========== ============ ============
</TABLE>
F-89
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR NINE MONTHS SIX MONTHS
ENDED ENDED ENDED
MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1998
----------- ------------- -----------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.................... $ 397,351 $ 715,995 $ 1,256,608
Adjustments to reconcile net
earnings to net cash used in
operating activities
Depreciation............... 112,421 130,476 95,553
Deferred income taxes...... -- (15,358) --
Inventory obsolescence..... 400,000 431,206 307,536
Changes in operating assets
and liabilities Accounts
receivable -- trade..... (1,159,669) (1,817,451) (92,631)
Inventories........... (4,021,498) (6,923,403) (5,283,208)
Income taxes
payable............ -- 304,042 (229,855)
Prepaid expenses...... (16,417) 240 17,571
Other assets.......... (1,000) -- --
Liability for bank
overdraft.......... -- -- 1,088,561
Accounts
payable -- trade... 1,052,036 2,250,971 (637,007)
Accrued liabilities... 125,261 145,259 (27,258)
----------- ------------- -----------
Net cash used in
operating
activities.... (3,111,515) (4,778,023) (3,504,130)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment..................... (197,518) (247,838) (47,044)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and
line of credit................ 5,011,172 5,280,149 3,694,353
Repayments of notes payable and
line of credit................ (1,573,323) (118,523) (63,552)
Change in receivables from
stockholders.................. (132,690) (124,265) (79,253)
----------- ------------- -----------
Net cash
provided by
financing
activities.... 3,305,159 5,037,361 3,551,548
----------- ------------- -----------
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS... (3,874) 11,500 374
Cash and cash equivalents at
beginning of period................ 12,467 8,593 20,093
----------- ------------- -----------
Cash and cash equivalents at end of
period............................. $ 8,593 $ 20,093 $ 20,467
=========== ============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during period for
Interest................... $ 325,318 $ 458,660 $ 502,116
Income taxes............... 80,000 $ 65,000 $ 892,555
</TABLE>
F-90
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1997
NOTE A -- NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
NATURE OF OPERATIONS
Texas International Aviation, Inc. and its wholly-owned subsidiary TIA
International (collectively, the Company) are engaged in wholesale distribution
of aircraft hardware products. Sales of the Company's products are worldwide.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment.
CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
INVENTORIES
Inventories are comprised of goods held for resale, which are valued at the
lower of cost (specific identification) or market.
DEPRECIATION
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives ranging from
5 to 7 years on an accelerated method. Computer software is depreciated using
the straight-line method over three years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
INCOME TAXES
Deferred income taxes are determined using the liability method, under
which deferred tax assets and liabilities are determined based on differences
between financial and tax bases of assets and liabilities at the rate expected
to be in effect when taxes become payable.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements as
of June 30, 1998 and for the six months ended June 30, 1997 and 1998 include all
adjustments, consisting only of those of a normal recurring nature, necessary to
present fairly the Company's financial position as of June 30, 1998 and the
results of its operations and cash flows for the six months ended June 30, 1997
and 1998. The results of operations for the six months ended June 30, 1997 and
1998 are not necessarily indicative of the results to be expected for the full
year.
F-91
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- LINE OF CREDIT
The Company has a $12.5 million line of credit with a bank expiring on July
1, 1998. The Company may borrow up to $10 million for operations and up to $5
million on eligible inventory buyback contracts, with total borrowings not to
exceed $12.5 million. Borrowings under the line of credit bear interest at the
lesser of prime or a maximum rate, as defined, (8.5% at December 31, 1997).
Borrowings are collateralized by substantially all assets of the Company. The
Company had $2,464,655 and $7,744,495 available for borrowings under the line of
credit at December 31, 1997 and March 31, 1997, respectively. The line of credit
includes certain restrictive covenants which include, among others, working
capital requirements, interest coverage, and tangible net worth.
NOTE C -- LONG-TERM DEBT
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
Notes payable to stockholders, in 60
monthly installments, of principal
of $5,705 through January 2001,
plus interest at 7%................ $187,263 $ 237,945
Note payable to a bank bearing
interest at a rate equal to the
lesser of prime or a maximum rate,
as defined, (8.5% at December 31,
1997) due in 36 monthly
installments of principal ($6,945)
plus interest through May 1,
2000............................... 194,440 250,000
Other................................ 1,212 13,184
------------ ---------
382,915 501,129
Less current maturities......... 141,235 153,992
------------ ---------
$241,680 $ 347,137
============ =========
The following are scheduled future maturities of long-term debt at December
31, 1997:
YEAR ENDING
DECEMBER 31,
- -------------------------------------
1998............................... $ 141,235
1999............................... 144,120
2000............................... 91,049
2001............................... 6,511
----------
$ 382,915
==========
F-92
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- INCOME TAXES
The income tax provision is comprised of the following components:
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------- ----------
Current
Federal......................... $ 347,855 $131,155
State........................... 35,596 4,500
------------- ----------
383,451 135,655
Deferred
Federal......................... (14,113) --
State........................... (1,245) --
------------- ----------
(15,358) --
------------- ----------
Total...................... $ 368,093 $135,655
============= ==========
The income tax provision reconciled to the tax computed at the statutory
Federal rate is as follows:
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------- ----------
Tax at statutory rate................ $ 368,590 $181,222
State income taxes, net of Federal
benefit............................ 23,493 2,970
Impact of foreign sales
corporation........................ (27,517) (43,822)
Other................................ 3,527 (4,715)
------------- ----------
$ 368,093 $135,655
============= ==========
Deferred tax assets consist of the following at December 31, 1997:
Allowance for doubtful accounts...... $ 5,645
Accrued vacation..................... 9,713
---------
$ 15,358
=========
NOTE E -- BENEFIT PLAN
The Company sponsors the Texas International Aviation, Inc. 401(k) Plan
(the Plan). Under the Plan, eligible employees are permitted to contribute to
the Plan up to 20% of gross compensation and the Company matches 50% of the
employees' contributions up to 3% of the employees' gross compensation. Matching
contributions begin vesting after three years of employment at a rate of 20% per
year and fully vest after seven years. The Company made approximately $14,300
and $14,000 of matching contributions during the nine months and year ended
December 31, 1997 and March 31, 1997, respectively.
NOTE F -- CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A significant portion of the Company's sales are to customers whose
activities are related to the aviation industry, including some who are located
in foreign countries. The Company generally extends credit to these customers
and, therefore, collection of receivables is affected by the economy of the
aviation industry. Also, with respect to foreign sales, collection may be more
difficult in the event of a default.
F-93
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
However, the Company closely monitors extensions of credit and has not
experienced significant credit losses. Most foreign sales are made to large,
well-established companies.
During the nine months ended December 31, 1997, sales to three customers
were approximately 12% each (total 36%) of the Company's total sales. The loss
of any one of these customers could have a severe impact on the operations of
the Company.
Some product purchases are denominated in foreign currencies. The Company
had foreign currency transaction gains of approximately $65,000 and $1,000 for
the nine months and year ended December 31, 1997 and March 31, 1997,
respectively.
NOTE G -- COMMITMENTS
The Company leases office and warehouse facilities in Grand Prairie, Texas
from a partnership owned by the stockholders. The lease expires December 31,
1997 and rental payments of $7,500 are due monthly. Rent expense for these
facilities was $82,065 and $82,500 for the period ended December 31, 1997 and
March 31, 1997, respectively.
The Company leases office facilities in California, under a lease agreement
classified as an operating lease. Total rent expense for this facility during
1997 was approximately $10,700 and $3,000 for the periods ended December 31,
1997 and March 31, 1997, respectively. The lease expires August 31, 1999 and
rental payments of $1,425 are due monthly.
The Company leases office facilities in Washington under a lease agreement
classified as an operating lease. Total rent expense for this facility for the
period ended December 31, 1997 was approximately $1,900. The lease expires July
16, 1998, and rental payments of $345 are due monthly.
Future minimum rentals on these leases at December 31, 1997 are as follows:
YEAR ENDING
DECEMBER 31,
- -------------------------------------
1998............................... $ 21,341
1999............................... 13,399
---------
$ 34,740
=========
F-94
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
ASI Aerospace Group, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of ASI
Aerospace Group, Inc. and subsidiary as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ASI
Aerospace Group, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
McGladrey & Pullen, LLP
San Diego, California
February 20, 1998, except for
Note 13 as to which the date is
August 14, 1998
F-95
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30,
1996 1997 1998
-------------- -------------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS (NOTES 6 AND 7)
Current Assets
Cash............................ $ 13,418 $ 12,882 $ 176,249
Trade receivables, net of
allowance for doubtful
accounts of 1996, $78,000;
1997 $54,000;
1998 $59,000 (Note 2)......... 3,443,912 7,644,842 10,210,006
Inventory....................... 11,570,026 25,649,166 29,969,641
Prepaid expenses and other...... 45,905 233,009 344,132
Deferred tax assets (Note 12)... 349,300 1,256,000 1,256,000
-------------- -------------- -----------
TOTAL CURRENT ASSETS....... 15,422,561 34,795,899 41,956,028
-------------- -------------- -----------
Property, Equipment and Leasehold
Improvements, net (Note 4)......... 572,048 1,087,752 1,151,600
-------------- -------------- -----------
Intangibles and Other Assets (Note
5)................................. 1,764,287 4,899,430 4,637,356
-------------- -------------- -----------
$ 17,758,896 $ 40,783,081 $47,744,984
============== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks outstanding in excess of
bank balances................. $ 159,222 $ 580,982 $ --
Note payable, bank (Note 6)..... -- 13,312,073 17,592,302
Current maturities of long-term
debt (Note 7):
Related parties............ 2,286,697 2,286,697 2,286,697
Other...................... 835,044 1,084,812 1,259,738
Accounts payable, trade......... 4,473,462 7,331,940 8,499,131
Accrued expenses and other (Note
7)............................ 561,910 1,035,726 1,272,583
Income taxes payable............ 11,500 683,000 78,768
-------------- -------------- -----------
Total current
liabilities............. 8,327,835 26,315,230 30,989,219
-------------- -------------- -----------
Long-Term Debt
Note payable, bank (Note 6)..... 3,725,000 -- --
Long-term debt, less current
maturities (Note 7)........... 1,984,415 4,800,233 4,269,151
-------------- -------------- -----------
5,709,415 4,800,233 4,269,151
-------------- -------------- -----------
Commitments (Notes 3, 8, 10 and 11)
Redeemable Preferred Stock,
redemption value $1,000
per share (Note 10)................ 1,800,000 1,800,000 1,800,000
-------------- -------------- -----------
Stockholders' Equity (Note 6)
Common stock, $.01 par value;
authorized 1,000 shares;
issued and outstanding 113
shares........................ 1 1 1
Additional paid-in capital...... 833,975 2,886,975 2,886,975
Retained earnings............... 1,087,670 4,980,642 7,799,638
-------------- -------------- -----------
1,921,646 7,867,618 10,686,614
-------------- -------------- -----------
$ 17,758,896 $ 40,783,081 $47,744,984
============== ============== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-96
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ -------------- --------------
Net sales (Note 2)................... $ 8,525,062 $ 24,587,196 $ 53,551,932
<S> <C> <C> <C>
Cost of goods sold................... 7,167,319 17,663,851 37,479,851
------------ -------------- --------------
Gross profit............... 1,357,743 6,923,345 16,072,081
General and administrative
expenses........................... 1,646,829 4,483,990 8,294,754
------------ -------------- --------------
Operating income (loss).... (289,086) 2,439,355 7,777,327
------------ -------------- --------------
Nonoperating (income) expense:
Interest expense (Note 7)....... 189,231 700,223 1,388,836
Other (income) expense (Note
3)............................ (30,135) 82,998 98,519
------------ -------------- --------------
159,096 783,221 1,487,355
------------ -------------- --------------
Income (loss) before
taxes................... (448,182) 1,656,134 6,289,972
Provision for income taxes (Note
12)................................ 1,600 49,700 2,181,000
------------ -------------- --------------
Net income (loss).......... $ (449,782) $ 1,606,434 $ 4,108,972
============ ============== ==============
Basic and diluted income (loss) per
share.............................. $ (4,223) $ 14,216 $ 34,451
============ ============== ==============
Weighted average common shares
outstanding........................ 106.5 113 113
============ ============== ==============
</TABLE>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1998
-------------- --------------
(UNAUDITED)
Net sales (Note 2)................... $ 21,935,091 $ 36,458,662
Cost of goods sold................... 15,567,862 24,969,097
-------------- --------------
Gross profit............... 6,367,229 11,489,565
General and administrative
expenses........................... 3,277,871 5,316,138
-------------- --------------
Operating income........... 3,089,358 6,173,427
-------------- --------------
Nonoperating expense:
Interest expense (Note 7)....... 492,448 1,041,431
Other expense................... 3,768 --
-------------- --------------
496,216 1,041,431
-------------- --------------
Income before income
taxes................... 2,593,142 5,131,996
Provision for income taxes (Note
12)................................ 964,000 2,097,000
-------------- --------------
Net income................. $ 1,629,142 $ 3,034,996
============== ==============
Basic and diluted income per share... $ 13,461 $ 25,903
============== ==============
Weighted average common shares
outstanding........................ 113 113
============== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-97
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE, 1,000
SHARES AUTHORIZED
--------------------- RETAINED
ISSUED AND ADDITIONAL EARNINGS/
OUTSTANDING PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
----------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994........... 100 $ 1 $ 446,684 $ (68,982) $ 377,703
Issuance of 13 shares of common
stock......................... 13 -- 591 -- 591
Net (loss)...................... -- -- -- (449,782) (449,782)
--- ------ ---------- ------------ -----------
Balance, December 31, 1995........... 113 1 447,275 (518,764) (71,488)
Effects of intercorporate tax
allocations (Note 12)......... -- -- 386,700 -- 386,700
Net income...................... -- -- -- 1,606,434 1,606,434
--- ------ ---------- ------------ -----------
Balance, December 31, 1996........... 113 1 833,975 1,087,670 1,921,646
Effects of intercorporate tax
allocations (Note 12)......... -- -- 2,053,000 -- 2,053,000
Dividends (Note 10)............. -- -- -- (216,000) (216,000)
Net income...................... -- -- -- 4,108,972 4,108,972
--- ------ ---------- ------------ -----------
Balance, December 31, 1997........... 113 1 2,886,975 4,980,642 7,867,618
UNAUDITED INFORMATION:
Dividends (Note 10)............. -- -- -- (216,000) (216,000)
Net income for the six months
ended June 30, 1998........... -- -- -- 3,034,996 3,034,996
--- ------ ---------- ------------ -----------
Balance, June 30, 1998 (Unaudited)... 113 $ 1 $2,886,975 $7,799,638 $10,686,614
=== ====== ========== ============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-98
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................. $ (449,782) $ 1,606,434 $ 4,108,972 $ 1,629,142 $ 3,034,996
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and
amortization................ 64,027 202,084 410,769 158,718 328,667
Inventory reserve.............. 646,939 -- -- -- 270,000
Loss on disposal of
equipment................... -- 3,521 -- -- 6,716
Deferred income taxes.......... -- 37,400 1,146,000 514,765 --
Change in working capital components,
net of effects of business
combinations:
(Increase) decrease in:
Trade receivables.............. (153,288) (1,116,618) (2,045,504) (3,118,037) (2,565,164)
Inventory...................... 197,003 (4,294,249) (10,470,184) (4,158,416) (4,590,475)
Prepaid expenses and other..... (32,886) 3,827 (163,739) (23,281) (111,123)
Increase (decrease) in:
Accounts payable, trade........ 212,043 2,984,852 827,981 1,757,278 1,167,191
Accrued expenses and other..... (19,921) 379,686 473,816 100,266 236,857
Income taxes payable........... -- 11,500 671,500 449,440 (604,232)
---------- ------------ ------------ ----------- -----------
Net cash provided by (used
in) operating activities.. 464,135 (181,563) (5,040,389) (2,690,125) (2,826,567)
---------- ------------ ------------ ----------- -----------
Cash Flows from Investing Activities
Payments for purchase of
businesses..................... (236,029) (6,434,840) (5,017,475) -- --
Purchase of equipment............ (24,269) (59,081) (472,660) (282,559) (392,360)
Increase in deposits and other
assets, net.................... (17,794) (32,290) (209,357) (679,257) 83,268
Proceeds from sales of property
and equipment.................. -- 45,000 -- -- 171,935
Proceeds from stockholder
receivable..................... -- 10,500 -- -- --
---------- ------------ ------------ ----------- -----------
Net cash (used in) investing
activities................ (278,092) (6,470,711) (5,699,492) (961,816) (137,157)
---------- ------------ ------------ ----------- -----------
Cash Flows from Financing Activities
Checks outstanding in excess of
bank balances.................. -- 159,222 421,760 822,113 (580,982)
Net borrowings on note payable,
bank........................... -- 3,725,000 9,587,073 3,332,146 4,280,229
Principal payments on long-term
debt........................... (25,680) (571,273) (990,984) (424,097) (556,156)
Borrowings on long-term debt..... (5,892) 3,004,870 1,937,496 152,329 200,000
Cash dividends paid.............. -- -- (216,000) (216,000) (216,000)
Proceeds from issuance of common
stock.......................... 591 -- -- -- --
---------- ------------ ------------ ----------- -----------
Net cash provided by (used
in) financing activities.. (30,981) 6,317,819 10,739,345 3,666,491 3,127,091
---------- ------------ ------------ ----------- -----------
Net increase (decrease) in
cash...................... 155,062 (334,455) (536) 14,550 163,367
Cash, beginning...................... 192,811 347,873 13,418 13,418 12,882
---------- ------------ ------------ ----------- -----------
Cash, ending......................... $ 347,873 $ 13,418 $ 12,882 $ 27,968 $ 176,249
========== ============ ============ =========== ===========
</TABLE>
F-99
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest...................... $ 173,736 $ 584,425 $ 1,303,577 $ 426,128 $ 974,114
========== ============ ============ =========== ===========
Income taxes.................. $ 3,200 $ 800 $ 433,706 $ 14,600 $ 2,652,000
========== ============ ============ =========== ===========
Supplemental Schedule of Noncash
Financing Activities:
Capital lease obligations
incurred for use of
equipment..................... $ 28,211 $ 135,692 $ 152,329
========== ============ ============
Effects of intercorporate tax
allocation.................... $ -- $ 386,700 $ 2,053,000
========== ============ ============
Acquisition of Businesses (Note 9):
Purchase Price:
Cash paid..................... $ 236,029 $ 6,434,840 $ 5,017,475
Debt to sellers............... 253,044 -- 1,876,678
---------- ------------ ------------
$ 489,073 $ 6,434,840 $ 6,894,153
========== ============ ============
Assets Acquired:
Working capital acquired........ $ 469,073 $ 4,585,391 $ 3,757,249
Fair value of other assets
acquired, principally
equipment..................... 20,000 424,594 128,835
Costs in excess of net assets of
businesses acquired........... -- 1,424,855 3,098,133
Long-term liabilities assumed... -- -- (90,064)
---------- ------------ ------------
$ 489,073 $ 6,434,840 $ 6,894,153
========== ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-100
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ASI Aerospace Group, Inc. (an eighty-eight percent owned subsidiary of West
Coast Aero Products Holding Company (WCAPHC)) and subsidiary (individually or
collectively, the "Company") is a distributor of specialty fasteners,
primarily for the aircraft and aerospace industry. The Company grants credit in
the form of accounts receivable to its customers which are located primarily
throughout the United States and internationally. Sales to international
customers during the year ended December 31, 1997 were approximately 5%. All
sales are transacted in U.S. dollars.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Pollard Aviation, Inc. All material
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and short-term debt approximate fair value
due to the immediate short-term maturity of these financial instruments.
Based on the borrowing rates currently available to the Company for bank
loans with similar maturities and similar collateral requirements, the fair
value of notes payable and long-term debt approximates the carrying amount.
CASH
The Company maintains its cash accounts primarily in one commercial bank
located in California. Accounts at this bank are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. The Company's accounts at this
institution, at times, may exceed the federally insured limit. The Company has
not experienced any losses in such accounts.
INVENTORY
Inventory is stated at lower of cost (weighted average method) or market
and consists entirely of products for resale. The Company periodically reviews
the age and turnover of its inventory to determine whether any inventory has
become obsolete or has declined in value and incurs a charge to operations for
known and estimated inventory obsolescence. Inventory quantities in excess of a
four-year supply based on projected and historical sales levels have been
reduced to their net realizable value. It is reasonably possible that additional
adjustments to reduce inventory to market value will be required in the future.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost.
Depreciation on property and equipment is computed utilizing the straight-line
method over the estimated useful lives ranging from 5 to 7 years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the term of the leases or the estimated useful lives of the improvements.
Amortization of equipment acquired under capital leases is included with
depreciation expense on owned assets.
F-101
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
The Company's intangible asset "costs in excess of net assets of
businesses acquired" is amortized utilizing the straight-line method over 15
years.
Non-competition agreements with former owners of businesses acquired are
expensed on a straight-line basis over the lives of the respective agreements.
Organization costs are being amortized over 3 years.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
In accordance with FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. The Company continually evaluates the
recovery of its intangible assets by assessing whether the amortization of the
balance over its estimated remaining life can be recovered based upon operating
income, cash flows and business prospects.
The Company does not believe an impairment of its long-lived assets used in
operations or its intangible assets has occurred.
INCOME TAXES
The Company recognizes deferred tax assets for deductible temporary
differences and deferred tax liabilities for taxable temporary differences.
Temporary differences are the differences between the reported amount of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
ADVERTISING AND PROMOTION
Costs associated with advertising and promotion are expensed in the year
incurred.
EARNINGS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128), Earnings per Share. In computing earnings per
share for the year ended December 31, 1997 and unaudited earnings per share for
the six month periods ended June 30, 1997 and 1998, dividends on preferred stock
were deducted from net income in calculating basic earnings per share. The
Company has no dilutive potential common shares. Accordingly, the Company's
presentation of diluted earnings (loss) per share is the same as that of basic
earnings (loss) per share for the years ended December 31, 1995, 1996 and 1997.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying balance sheet as of June 30, 1998 and the statements of
operations and cash flows for the six month periods ended June 30, 1997 and
1998, respectively, have not been audited. However, these financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In management's opinion, the accompanying
interim financial statements reflect all material adjustments (consisting only
of normal recurring accruals) necessary for a fair statement of the results for
the interim periods presented. The results for the interim periods are not
necessarily indicative of the results which will be reported for the entire
year.
F-102
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. CONCENTRATIONS
The Company performs ongoing credit evaluation of its customers and
generally does not require collateral. Provisions are made for estimated
uncollectible trade receivables as considered necessary. To date, losses on
trade receivables have been minimal in relation to the volume of sales and have
been within management's expectations.
Net sales and accounts receivable include sales to and accounts receivable
from the following major customers.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1995 1996 1997
-------------------------- -------------------------- ---------------------------
NET NET NET NET NET NET
SALES RECEIVABLES SALES RECEIVABLES SALES RECEIVABLES
---------- ------------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer A........................... $1,156,297 $ 55,593 $5,799,826 $636,404 $16,260,993 $ 1,996,032
Customer B........................... -- -- 2,638,029 168,307 -- --
---------- ------------ ---------- ------------ ----------- ------------
$1,156,297 $ 55,593 $8,437,855 $804,711 $16,260,993 $ 1,996,032
========== ============ ========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, (UNAUDITED)
---------------------------------------------------------
1997 1998
-------------------------- ---------------------------
NET NET NET NET
SALES RECEIVABLES SALES RECEIVABLES
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Customer A........................... $6,636,950 $ 1,408,298 $11,083,781 $ 2,721,049
========== ============ =========== ============
</TABLE>
The net sales to Customer B did not exceed 10% of net sales for the years
ended December 31, 1995 and 1997.
NOTE 3. INVESTMENT IN JITCO, LLC
The Company is a 50% member in JITCO, LLC (JITCO) at December 31, 1997. The
Company may be required to make additional capital contributions to JITCO at
such time as additional working capital is needed for the operation of the
business. Members' contributions are pro rata based on their respective
ownership percentages. The Company is accounting for its investment in JITCO by
the equity method of accounting and the net investment of approximately $11,500
and $20,000 is included in deposits and other assets as of December 31, 1996 and
1997, respectively.
The following are the approximate reported assets, liabilities, revenues,
and expenses of JITCO as of and for the years ended December 31:
1996 1997
---------- ------------
Assets............................... $ 334,100 $ 1,924,000
Liabilities.......................... $ 216,400 $ 1,876,000
Revenues............................. $ 22,200 $ 2,045,000
Expenses............................. $ 114,500 $ 2,258,000
The Company's share in the net loss of JITCO was approximately $18,500 and
$106,000 for the years ended December 31, 1996 and 1997, respectively, and is
included in other expense in the Company's consolidated statements of
operations.
At December 31, 1997, the Company has guaranteed the payment of up to
$120,000 of certain notes payable to a bank by JITCO.
F-103
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
DECEMBER 31, JUNE 30,
------------------------ 1998
1996 1997 (UNAUDITED)
---------- ------------ -----------
Office furniture and equipment....... $ 500,786 $ 939,456 $ 1,153,990
Leasehold improvements............... 81,875 121,800 242,468
Building............................. 93,000 93,000 --
---------- ------------ -----------
675,661 1,154,256 1,396,458
Less accumulated depreciation and
amortization....................... 160,613 343,806 369,855
---------- ------------ -----------
515,048 810,450 1,026,603
Construction in progress............. -- 220,302 124,997
Land................................. 57,000 57,000 --
---------- ------------ -----------
$ 572,048 $ 1,087,752 $ 1,151,600
========== ============ ===========
NOTE 5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
DECEMBER 31,
-------------------------- 1998
1996 1997 (UNAUDITED)
------------ ------------ -----------
Costs in excess of net assets of
businesses acquired, less
accumulated amortization of 1996
$137,426; 1997 $336,325; 1998
$483,493........................... $ 1,663,081 $ 4,579,745 $ 4,420,087
Organization costs, net of
accumulated amortization of 1996
$20,926; 1997 $34,882; 1998
$41,860............................ 48,532 34,576 27,598
Covenant not to compete, less
accumulated amortization of 1997
$13,333; 1998 $25,833.............. -- 111,667 99,167
Deposits and other assets (Note 3)... 52,674 173,442 90,504
------------ ------------ -----------
$ 1,764,287 $ 4,899,430 $ 4,637,356
============ ============ ===========
NOTE 6. NOTE PAYABLE, BANK
The Company has a revolving line of credit agreement with a commercial
bank. The agreement allows for advances up to a maximum of $19,000,000, of which
approximately $13,300,000 was outstanding and approximately $1,500,000 was
available for borrowing at December 31, 1997. Borrowings are limited to 80% of
the Company's eligible domestic trade receivables plus 70% of eligible foreign
accounts and 50% of eligible inventory up to $9,000,000, as defined by the
agreement. The line of credit bears interest at LIBOR (5.69% at December 31,
1997) plus 3%. The Company may elect to fix the rate under this line of credit
at the bank's prime rate (8.5% at December 31, 1997) plus an applicable margin
ranging from 2.25% to 3% based on the Company's total liabilities to tangible
net worth at the time, as defined by the agreement. Advances are collateralized
by substantially all of the Company's assets and the line of credit agreement
expires in August 1998. As of December 31, 1996, the balance outstanding on this
agreement of $3,725,000 was classified as long-term based on an expiration date
greater than one year in the future. The Company had an adequate borrowing base
to support this balance and did not intend to pay down the balance within a
twelve-month period.
F-104
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this credit agreement as well as other obligations (Note
7), the Company has agreed, among other things, to maintain certain consolidated
financial ratios and consolidated amounts, including:
o a current ratio of not less than 1.20 to 1.0
o a minimum tangible net worth, as defined, of $6,500,000 at December 31,
1997
o a total debt to tangible net worth ratio not to exceed 4.25 to 1.0
o minimum profitability of $1,000,000
o a minimum debt service ratio of 1.35 to 1.0
o annual limit on capital expenditures of $700,000
The agreement also provides for certain covenants including restrictions on
new indebtedness or loans other than trade debt or loans incurred in the normal
course of business, paying dividends on Company stock other than the 12%
cumulative preferred stock dividends, purchasing or retiring any Company stock,
or amending or altering the Company's capital structure. The agreement requires
the bank's preapproval for any and all business acquisitions.
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Note payable to a bank, due in
monthly installments of $62,500,
plus interest at 1.5% above the
bank's prime rate through November
2002 (a) (c)....................... $ 2,500,000 $ 3,687,500
Unsecured subordinated note payable
to a related party, due on demand,
monthly interest only payments at
11.2%.............................. 1,600,000 1,600,000
Unsecured subordinated notes payable
to various related parties, due on
demand, monthly interest only
payments at 12.0%.................. 686,697 686,697
Unsecured subordinated note payable
to former owner of acquired
business, due July 2002, annual
interest only payments at 10%...... -- 500,000
Unsecured notes payable to former
owners of acquired businesses, due
in aggregate monthly installments
of $24,371 including interest at
10% through August 2007............ -- 1,298,924
Note payable to former owner of
acquired business, due in monthly
payments of $5,027 including
interest at 7.0% through May 2000
(b)................................ 185,507 136,451
Other................................ 133,952 262,170
------------ ------------
5,106,156 8,171,742
Less current maturities.............. 3,121,741 3,371,509
------------ ------------
$ 1,984,415 $ 4,800,233
============ ============
- ------------
(a) Subject to the loan agreement covenants on the revolving line of credit
(Note 6) and collateralized by substantially all assets of the Company.
(b) These amounts are collateralized by certain inventory and trade receivables.
(c) Interest under this note may be fixed by the Company for terms of not less
than 30 days at the then current LIBOR rate plus 3.5%. At December 31, 1997
the Company had elected to fix the rate on the entire outstanding balance at
the LIBOR rate option.
F-105
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate aggregate annual maturities on long-term debt at December 31,
1997 are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------------------
1998............................ $ 3,372,000
1999............................ 1,068,000
2000............................ 1,042,000
2001............................ 996,000
2002............................ 1,366,000
Thereafter...................... 328,000
------------
$ 8,172,000
============
During the years ended December 31, 1995, 1996 and 1997, the Company
incurred approximately $188,000, $263,000 and $310,000, respectively, in
interest expense to related parties of which approximately $83,000 and $187,000
are included in accrued expenses and other at December 31, 1996 and 1997,
respectively.
During the six-month periods ended June 30, 1997 and 1998, the Company
incurred approximately $137,000 and $145,000 in interest expense, respectively,
to related parties, of which approximately $42,000 and $73,000 are included in
accrued expenses and other at June 30, 1997 and 1998, respectively.
NOTE 8. LEASE COMMITMENTS
OPERATING LEASES
The Company leases its office and warehouse facilities under noncancelable
operating lease agreements expiring through July 2002. The leases provide for
aggregate monthly payments of approximately $41,000. The Company also leases
certain equipment under noncancelable operating lease agreements expiring
through August 2000. The equipment leases provide for aggregate monthly payments
of approximately $3,200. Total rental expense included in the consolidated
statements of operations for the years ended December 31, 1995, 1996 and 1997
was approximately $108,000, $212,000 and $396,000, respectively.
Rent expense for the six months ended June 30, 1997 and 1998 totaled
$147,000 and $113,000, respectively.
At December 31, 1997, the approximate aggregate future annual minimum lease
commitments due under noncancelable operating leases are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------------------
1998............................ $ 406,000
1999............................ 373,000
2000............................ 313,000
2001............................ 306,000
2002............................ 116,000
------------
Total minimum lease
payments................ $ 1,514,000
============
F-106
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. BUSINESS ACQUISITIONS
In July 1997 the Company acquired the net assets of Adams Supply Company
(Adams), a distributor of specialty fasteners, located in Torrance, California.
The purchase price of approximately $5,920,000 consisted of cash of
approximately $4,567,000 and notes payable to the sellers of $1,352,000.
In June 1997 the Company acquired the net assets of Paschall International
(Paschall), a distributor of commercial airline internal components, located in
Pasadena, California. The purchase price of approximately $974,000 consisted of
cash of approximately $450,000 and a note payable to the former owner of
$525,000.
In March 1996 the Company acquired the net assets of Barco Aviation, Inc.,
(Barco) a distributor of specialty fasteners to the aerospace industry located
in Santa Monica, California. The purchase price of $6,434,840 was paid in cash.
In June 1995 the Company acquired the net assets of Pollard, a distributor
of specialty fasteners, located in Dallas, Texas. The purchase price consisted
of $236,029 in cash and a promissory note payable to the former owner of
$253,044.
Each of these acquisitions were accounted for as purchase business
combinations with the operations of the acquired business included in the
Company's consolidated financial statements subsequent to the acquisition date.
Barco, Paschall and Adams are operating as divisions of the Company.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the acquired divisions as
if the acquisitions had occurred January 1, 1996.
1996 1997
-------------- --------------
Net sales............................ $ 39,949,000 $ 61,931,000
Net income........................... 2,283,000 6,690,000
Earnings per common share............ 20,204 57,292
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional amortization
expense as a result of goodwill and other intangible assets, and an increased
interest expense on acquisition debt. They do not purport to be indicative of
the results of operations which actually would have resulted had the
combinations been in effect on January 1, 1996, or of the results of operations
of the consolidated entities.
NOTE 10. REDEEMABLE PREFERRED STOCK
The Company has 1,800 shares of mandatory redeemable preferred stock
authorized, issued and outstanding which is redeemable by the holder on April 1,
2001 at $1,000 per share.
During the year ended December 31, 1995, the Company, with the approval of
the preferred stockholders, amended the articles of incorporation to waive the
preferred stock 12% accrued dividends and any future dividends on preferred
stock until May 1, 1996. Payments on the dividends resumed in May 1997 and will
continue annually thereafter. The majority of WCAPHC's common stockholders are
also preferred stockholders. The Company declared and paid dividends of $216,000
($120 per share) to stockholders of record during the year ended December 31,
1997.
NOTE 11. BENEFIT PLAN
The Company has a 401(k) plan for those employees who meet the eligibility
requirements set forth in the Plan. The Company is required to match a minimum
of 50% of the employees' elective deferral contributions up to 10% of
compensation. The Company contributed $57,906 and $117,341 to the Plan for the
years ended December 31, 1996 and 1997, respectively. During the six month
periods ended June 30, 1997 and 1998, the Company contributed $49,669 and
$79,875 to the Plan.
F-107
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and tax purposes. Significant components of the Company's net deferred tax
assets at December 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997
------------ ------------ ------------
Deferred tax assets:
Inventory....................... $ 552,300 $ 670,500 $ 1,038,300
Accounts receivable............. 2,100 31,000 21,600
Accrued expenses and other...... 61,800 31,200 62,400
State income taxes.............. 500 -- 210,400
Net operating loss
carryforwards................. 329,000 24,900 --
------------ ------------ ------------
945,700 757,600 1,332,700
Less valuation allowance........ (944,700) (334,900) --
------------ ------------ ------------
1,000 422,700 1,332,700
------------ ------------ ------------
Deferred tax liabilities, other...... (1,000) (73,400) (76,700)
------------ ------------ ------------
Net deferred tax assets.... $ -- $ 349,300 $ 1,256,000
============ ============ ============
The provision for income taxes consists of the following for the years
ended December 31, 1995, 1996 and 1997:
1995 1996 1997
--------- ---------- ------------
Current:
Federal income tax.............. $ -- $ 386,700 $ 2,469,000
State income tax................ 1,600 12,300 618,700
Deferred:
Federal deferred tax
(benefit)..................... -- (174,600) (674,700)
State deferred tax (benefit).... -- 129,400 (207,100)
Benefit of utilization of net
operating losses.............. -- (304,100) (24,900)
--------- ---------- ------------
$ 1,600 $ 49,700 $ 2,181,000
========= ========== ============
The provisions for income taxes for the six-month periods ended June 30,
1997 and 1998 were calculated using the Company's effective tax rate expected to
be applicable for the full year.
Realization of deferred tax assets is dependent upon sufficient future
taxable income during the period that deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. Based upon
the Company's current level of profitability, management is reasonably certain
the Company will generate taxable income in future years sufficient to realize
the full benefit of its deferred taxes. Accordingly, no valuation allowance was
recorded as of December 31, 1997. In the event the Company does not generate
sufficient future taxable income, the amount of deferred tax assets will be
reduced.
The Company is a member of a group that files consolidated federal and
unitary state tax returns. Accordingly, income taxes payable to the tax
authorities is recognized on the financial statements of the parent company who
is the taxpayer for income tax purposes. The members of the consolidated group
generally record a benefit (expense) for any member of the group for the income
tax reductions (additions) resulting from the members' inclusion in the
consolidated return. This allocation approximates the amounts that would be
reported if the Company was separately filing its tax returns. The parent
company, WCAPHC, and affiliate have unequivocally and irrevocably foregone their
rights to receive payments from
F-108
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company for such benefits. Accordingly, the results of these intercorporate
tax allocations is reported on the accompanying consolidated statements of
stockholders' equity as a credit to additional paid-in capital for the years
ended December 31, 1996 and 1997.
A reconciliation of the effective tax rates with the federal statutory rate
is as follows:
DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Income tax at 34% statutory rate..... $ (152,900) $ 563,100 $ 2,138,600
Nondeductible expenses............... 3,800 19,800 30,600
State income taxes, net of federal
tax benefit........................ (25,400) 103,300 354,300
Effect of operating loss with no
current year tax benefit........... 171,000 -- --
Change in valuation allowance,
including effect of net
operating loss carryover........... -- (609,800) (334,900)
Other................................ 5,100 (26,700) (7,600)
------------ ------------ ------------
$ 1,600 $ 49,700 $ 2,181,000
============ ============ ============
NOTE 13. SUBSEQUENT EVENT
On August 14, 1998, Pentacon, Inc. (Pentacon) and the stockholders of the
Company signed a definitive agreement for the acquisition of all of the
outstanding shares of the Company. All rights and obligations of the parties are
subject to obtaining all required corporate and regulatory approvals.
F-109
<PAGE>
==============================================================================
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THE PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR
BUY ANY SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN
THIS PROSPECTUS IS CURRENT AS OF APRIL 27, 1999.
-----------------------------
TABLE OF CONTENTS
-----------------------------
PAGE
----
Available Information................ i
Summary.............................. 1
Risk Factors......................... 11
The Exchange Offer................... 17
Use of Proceeds...................... 26
Capitalization....................... 27
Selected Financial Data.............. 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
Business............................. 39
Management........................... 48
Certain Transactions................. 53
Principal Stockholders............... 55
Description of Bank Credit
Facility........................... 56
Description of the Notes............. 58
Book Entry; Delivery and Form........ 89
Registration Rights.................. 90
Plan of Distribution................. 91
Certain United States Federal Income
Tax Considerations................. 91
Legal Matters........................ 94
Experts.............................. 94
Index to Financial Statements........ F-1
[PENTACON LOGO]
OFFER TO EXCHANGE 12 1/4% SENIOR
SUBORDINATED NOTES
DUE 2009, SERIES B
FOR ALL OUTSTANDING 12 1/4% SENIOR
SUBORDINATED NOTES
DUE 2009, SERIES A
-----------------
PROSPECTUS
-----------------
, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
Article 7 of the Company's Amended and Restated Certificate of
Incorporation states that:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or
II-1
<PAGE>
(iv) for any transaction from which the director derived an improper personal
benefit. If the DGCL is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the DGCL, as so amended. Any repeal or modification of this
Section by the stockholders of the Corporation shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification.
The Company has entered into indemnification agreements with each of its
executive officers and directors.
In November 1997, Messrs. Grossman and Pugh, each principals in MGCV,
became officers of Alatec in order to assist in, facilitate and expedite the
audit process in connection with the Offering. Alatec and Mr. List, its sole
stockholder, have agreed to indemnify Messrs. Grossman and Pugh against various
claims, damages, costs and expenses that might be incurred by them as officers
of Alatec, including their execution of representation letters to Alatec's
accountants.
These limitations on liability would apply to violations of the federal
securities laws. However, the registrant has been advised that in the opinion of
the SEC, indemnification for liabilities under the Securities Act of 1933 is
against public policy and therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
2.1 -- Plan of Merger and Stock Purchase
Agreement dated as of August 14, 1998
among Pentacon, Inc., Pentacon Aerospace
Acquisition, Inc., West Coast Aero
Products Holding Corp. and the common
stockholders of West Coast and Steve
Riggs and Joel Jacks (incorporated
herein by reference to Exhibit 2.1 to
the Company's Form 8-K filed September
18, 1998).
2.2 -- Agreement and Plan of Merger dated as of
July 17, 1998 among Pentacon, Inc., TIA
Acquisition Corp., Texas International
Aviation, Inc. and James B. Cassels,
James W. Cassels, Frances Cassels,
Gregory S. Cassels, the James Boyakin
Cassels Trust, The Gregory Scott Cassels
Trust, and Merritt B. Horrell
(incorporated herein by reference to
Exhibit 2.1 to the Company's Form 8-K
filed July 31, 1998).
3.1 -- Second Amended and Restated Certificate
of Incorporation (incorporated herein by
reference to Exhibit 3.1 to Company's
Registration Statement on Form S-1/A
(No. 333-41383)).
3.2 -- Bylaws (incorporated herein by reference
to Exhibit 3.2 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
4.1* -- Indenture, dated March 30, 1999, by and
among Pentacon, Inc. and the
subsidiaries named therein and State
Street Bank and Trust Company covering
up to $100,000,000 12 1/4% Senior
Subordinated Notes due 2009.
4.2* -- Registration Rights Agreement dated
March 30, 1999 by and among Pentacon,
Inc., the Guarantors named therein,
Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC and Sanders
Morris Mundy Inc.
4.3* -- Form of Pentacon, Inc. 12 1/4% Senior
Subordinated Note due 2009. (Included in
Exhibit 4.1).
5.1* -- Opinion of Andrews & Kurth L.L.P.
10.1 -- Agreement and Plan of Organization
respecting Alatec Products, Inc. dated
as of December 1, 1997 (incorporated
herein by reference to Exhibit 10.1 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.2 -- Pentacon, Inc. 1998 Stock Plan
(incorporated herein by reference to
Exhibit 10.10 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.3 -- Form of Waiver of Termination Rights and
Schedule of Signatories (incorporated
herein by reference to Exhibit 10.11 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
II-2
<PAGE>
10.4 -- Form of Waiver and Schedule of
Signatories (incorporated herein by
reference to Exhibit 10.12 to Company's
Registration Statement on Form S-1/A
(No. 333-41383)).
10.5 -- Form of Recontribution Agreement and
Schedule of Signatories (incorporated
herein by reference to Exhibit 10.13 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.6 -- Employment Agreement with James Jackson
(incorporated herein by reference to
Exhibit 10.14 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.7 -- Agreement and Plan of Organization
respecting AXS Solutions, Inc. dated as
of December 1, 1997 (incorporated herein
by reference to Exhibit 10.2 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.8 -- Agreement and Plan or Organization
respecting Capitol Bolt & Supply, Inc.
dated as of December 1, 1997
(incorporated herein by reference to
Exhibit 10.3 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.9 -- Agreement and Plan of Organization
respecting Maumee Industries, Inc. dated
as of December 1, 1997 (incorporated
herein by reference to Exhibit 10.4 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.10 -- Agreement and Plan of Organization
respecting Sales Systems, Limited dated
as of December 1, 1997 (incorporated
herein by reference to Exhibit 10.5 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.11 -- Employment Agreement with Mark Baldwin
(incorporated herein by reference to
Exhibit 10.6 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.12 -- Employment Agreement with Bruce Taten
(incorporated herein by reference to
Exhibit 10.7 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.13 -- Employment Agreement with Brian Fontana
(incorporated herein by reference to
Exhibit 10.8 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.14 -- Form of Officer and Director
Indemnification Agreement (incorporated
herein by reference to Exhibit 10.9 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.15 -- Amended and Restated Credit Agreement
with NationsBank (incorporated herein by
reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K405
for the year ended September 30, 1998).
10.16 -- First Amendment to Amended and Restated
Credit Agreement (incorporated herein by
reference to Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended December 31,
1998).
10.17 -- Second Amendment to Amended and Restated
Credit Agreement (incorporated herein by
reference to Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended December 31,
1998).
10.18* -- Third Amendment to Amended and Restated
Credit Agreement.
10.19* -- Fourth Amendment to Amended and Restated
Credit Agreement.
12.1* -- Computation of Ratio of Earnings to
Fixed Charges.
21.1* -- Subsidiaries of the Registrant.
23.1* -- Consent of Ernst & Young LLP.
23.2* -- Consent of McGladrey & Pullen, LLP.
23.3* -- Consent of Grant Thornton LLP.
23.4* -- Consent of Andrews & Kurth L.L.P.
(Included in Exhibit 5.1).
24.1* -- Powers of Attorney. (Included in the
signature pages hereto).
25.1* -- Statement of Eligibility of State Street
Bank and Trust Company, Trustee on Form
T-1.
99.1 -- Press Release, dated August 17, 1998
(incorporated herein by reference to
Exhibit 99.1 to the Company's Form 8-K
filed August 24, 1998).
II-3
<PAGE>
99.2 -- Press Release, dated May 26, 1998
(incorporated herein by reference to
Exhibit 99.1 to the Company's Form 8-K
filed June 11, 1998).
99.3* -- Form of Letter of Transmittal.
99.4* -- Form of Notice of Guaranteed Delivery.
99.5* -- Form of Letter to Clients.
99.6* -- Form of Letter to Nominees.
99.7* -- Form of Instruction to Registered
Holders from Beneficial Owner.
- ------------
* Filed herewith.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This
II-4
<PAGE>
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on April 27, 1999.
PENTACON, INC.
By: /s/ MARK E. BALDWIN
MARK E. BALDWIN
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of Pentacon, Inc., hereby constitutes and appoints Brian Fontana and
Bruce M. Taten (with full power to each of them to act alone) his true and
lawful attorney-in-fact and agent, with full power of substitution, for him and
on his behalf and in his name, place and stead, in any and all capacities, to
sign, execute and file this registration statement under the Securities Act of
1933, as amended, and any or all amendments (including, without limitation,
post-effective amendments), with all exhibits and any and all documents required
to be filed with respect thereto, with the Securities and Exchange Commission or
any regulatory authority, granting unto such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- --------------------------------------
/s/MARK E. BALDWIN Chairman of the Board and Chief
MARK E. BALDWIN Executive Officer (Principal
Executive Officer)
/s/BRIAN FONTANA Senior Vice President and Chief
BRIAN FONTANA Financial Officer (Principal
Financial and Accounting Officer)
/s/JACK L. FATICA Director
JACK L. FATICA
/s/ROBERT M. CHISTE Director
ROBERT M. CHISTE
/s/CARY M. GROSSMAN Director
CARY M. GROSSMAN
II-6
<PAGE>
SIGNATURES -- (CONTINUED)
SIGNATURE TITLE
- ------------------------------------- --------------------------------------
/s/DONALD B. LIST Director
DONALD B. LIST
/s/MARY E. MCCLURE Director
MARY E. MCCLURE
/s/MICHAEL W. PETERS Director
MICHAEL W. PETERS
/s/BENJAMIN E. SPENCE, JR. Director
BENJAMIN E. SPENCE, JR.
Director
______________________________________
CLAYTON K. TRIER
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrants
set forth below have duly caused this registration statement to be signed on
their behalf by the undersigned, thereunto duly authorized, in the City of
Chatsworth, State of California, on the 27th day of April, 1999.
EACH OF THE GUARANTORS
NAMED ON SCHEDULE A-1
HERETO (the "Guarantors")
By: /s/ DONALD B. LIST
DONALD B. LIST
PRESIDENT OF EACH
OF THE GUARANTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- -----------------------------------------------------------------
/s/DONALD B. LIST Chairman, President, Chief
DONALD B. LIST Financial Officer and Director
of each of the Guarantors
(Principal Executive, Financial
and Accounting Officer)
/s/BRUCE M. TATEN Director of each of the
BRUCE M. TATEN Guarantors
II-8
<PAGE>
SCHEDULE A-1
Alatec Cable Harness & Assembly Division, Inc.
Alatec Fastener and Component Group, Inc.
Alatec Race, Inc.
Trace Alatec Supply Company, Inc.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrants
set forth below have duly caused this registration statement to be signed on
their behalf by the undersigned, thereunto duly authorized, in the City of
Chatsworth, State of California, on the 27th day of April, 1999.
EACH OF THE GUARANTORS
NAMED ON SCHEDULE A-2
HERETO (the "Guarantors")
By: /s/ DONALD B. LIST
DONALD B. LIST
PRESIDENT OF EACH
OF THE GUARANTORS
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- -------------------------------------- --------------------------------------
/s/DONALD B. LIST President and Director of each of the
DONALD B. LIST Guarantors (Principal Executive
Officer)
/s/STEVE GREENE Vice President & Treasurer of each
STEVE GREENE of the Guarantors (Principal
Financial and Accounting Officer)
/s/BRUCE M. TATEN Director of each of the Guarantors
BRUCE M. TATEN
II-10
<PAGE>
SCHEDULE A-2
ASI Aerospace Group, Inc.
Pollard Acquisition Corp.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on the 27th day of April, 1999.
ALATEC INTERNATIONAL SALES, INC.
By: /s/ DONALD B. LIST
DONALD B. LIST
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON APRIL 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/DONALD B. LIST President, Chief Financial Officer
DONALD B. LIST and Director (Principal
Executive, Financial and
Accounting Officer)
/s/RUTH LIST PERL Director
RUTH LIST PERL
/s/RONALD I. BRANCH Director
RONALD I. BRANCH
/s/GABI S. RIVERA Director
GABI S. RIVERA
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on the 27th day of April, 1999.
ALATEC PRODUCTS, INC.
By: /s/ DONALD B. LIST
DONALD B. LIST
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/DONALD B. LIST President and Director
DONALD B. LIST (Principal Executive Officer)
/s/BRIAN FONTANA Vice President (Principal
BRIAN FONTANA Financial and Accounting
Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Erie, State
of Pennsylvania, on the 27th day of April, 1999.
AXS SOLUTIONS, INC.
By: /s/ JACK L. FATICA
JACK L. FATICA
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- -----------------------------------------------------------------
/s/JACK L. FATICA Chief Executive Officer and
JACK L. FATICA Director (Principal Executive
Officer)
/s/BRIAN FONTANA Vice President (Principal Financial
BRIAN FONTANA and Accounting Officer)
/s/ROBERT HOYT Director
ROBERT HOYT
/s/JEFF FATICA Director
JEFF FATICA
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stoughton,
State of Massachusetts, on the 27th day of April, 1999.
CAPITOL BOLT & SUPPLY, INC.
By: /s/ MARY E. MCCLURE
MARY E. MCCLURE
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/MARY E. MCCLURE President and Director
MARY E. MCCLURE (Principal Executive Officer)
/s/BRIAN FONTANA Vice President (Principal
BRIAN FONTANA Financial and Accounting
Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort Wayne,
State of Indiana, on the 27th day of April, 1999.
MAUMEE INDUSTRIES, INC.
By: /s/ MICHAEL W. PETERS
MICHAEL W. PETERS
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/MICHAEL W. PETERS President, Chief Executive
MICHAEL W. PETERS Officer and Director
(Principal Executive Officer)
/s/BADIE A. BADIE Vice President and Chief Financial
BADIE A. BADIE Officer (Principal Financial
Officer)
/s/BRIAN FONTANA Vice President and Treasurer
BRIAN FONTANA (Principal Accounting Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Austin,
State of Texas, on the 27th day of April, 1999.
PACE PRODUCTS, INC.
By: /s/ LARRY LEE LAND
LARRY LEE LAND
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/LARRY LEE LAND President (Principal Executive
LARRY LEE LAND Officer)
/s/BRIAN FONTANA Vice President (Principal Financial
BRIAN FONTANA and Accounting Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on the 27th day of April, 1999.
PENTACON AEROSPACE GROUP, INC.
By: /s/ DONALD B. LIST
DONALD B. LIST
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------------------------------
/s/DONALD B. LIST President and Director
DONALD B. LIST (Principal Executive Officer)
/s/STEVE GREENE Vice President of Finance
STEVE GREENE (Principal Financial
and Accounting Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort Wayne,
State of Indiana, on the 27th day of April, 1999.
PENTACON INDUSTRIAL GROUP, INC.
By: /s/ MICHAEL W. PETERS
MICHAEL W. PETERS
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/MICHAEL W. PETERS President and Director
MICHAEL W. PETERS (Principal Executive Officer)
/s/BRIAN FONTANA Vice President & Treasurer
BRIAN FONTANA (Principal Financial
and Accounting Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Allentown,
State of Pennsylvania, on the 27th day of April, 1999.
SALES SYSTEMS, LIMITED
By: /s/ BENJAMIN E. SPENCE, JR.
BENJAMIN E. SPENCE, JR.
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
------------- --------------
/s/ BENJAMIN E. SPENCE, JR. President and Director
BENJAMIN E. SPENCE, JR. (Principal Executive Officer)
/s/ BRIAN FONTANA Vice President
BRIAN FONTANA (Principal Financial Officer)
/s/ RICHARD D. KNORR Vice President, Treasurer,
RICHARD D. KNORR Assistant Secretary and Director
(Principal Accounting Officer)
/s/ BRUCE M. TATEN Director
BRUCE M. TATEN
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth,
State of California, on the 27th day of April, 1999.
TEXAS INTERNATIONAL AVIATION, INC.
By: /s/ DONALD B. LIST
DONALD B. LIST
CHAIRMAN
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ----------------------------------
/s/DONALD B. LIST Chairman and Director
DONALD B. LIST (Principal Executive Officer)
/s/BRIAN FONTANA Vice President and Treasurer
BRIAN FONTANA (Principal Financial and
Accounting Officer)
/s/BRUCE M. TATEN Director
BRUCE M. TATEN
II-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Grand
Prairie, State of Texas, on the 27th day of April, 1999.
TIA INTERNATIONAL, INC.
By: /s/ JAMES B. CASSELS
JAMES B. CASSELS
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------------------------------
/s/JAMES B. CASSELS President and Director
JAMES B. CASSELS (Principal Executive,
Financial
and Accounting Officer)
____________________________ Director
GREGORY S. CASSELS
/s/MARY M. BUSENBURG Director
MARY M. BUSENBURG
II-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
set forth below has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on the 27th day of April, 1999.
WEST COAST AERO PRODUCTS
HOLDING CORP.
By: /s/ BRUCE M. TATEN
BRUCE M. TATEN
PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian Fontana and Bruce M. Taten (with
full power to each of them to act alone) his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf and in his
name, place and stead, in any and all capacities, to sign, execute and file this
registration statement under the Securities Act of 1933, as amended, and any or
all amendments (including, without limitation, post-effective amendments), with
all exhibits and any and all documents required to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same, as fully to all intents and purposes as he himself might or
could do, if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 27, 1999.
SIGNATURE TITLE
- ------------------------------------- ------------------------------------
/s/BRUCE M. TATEN President, Secretary and Director
BRUCE M. TATEN (Principal Executive, Financial
and Accounting Officer)
/s/DONALD B. LIST Director
DONALD B. LIST
II-23
<PAGE>
EXHIBIT INDEX
(a) Exhibits
2.1 -- Plan of Merger and Stock Purchase
Agreement dated as of August 14, 1998
among Pentacon, Inc., Pentacon Aerospace
Acquisition, Inc., West Coast Aero
Products Holding Corp. and the common
stockholders of West Coast and Steve
Riggs and Joel Jacks (incorporated
herein by reference to Exhibit 2.1 to
the Company's Form 8-K filed September
18, 1998).
2.2 -- Agreement and Plan of Merger dated as of
July 17, 1998 among Pentacon, Inc., TIA
Acquisition Corp., Texas International
Aviation, Inc. and James B. Cassels,
James W. Cassels, Frances Cassels,
Gregory S. Cassels, the James Boyakin
Cassels Trust, The Gregory Scott Cassels
Trust, and Merritt B. Horrell
(incorporated herein by reference to
Exhibit 2.1 to the Company's Form 8-K
filed July 31, 1998).
3.1 -- Second Amended and Restated Certificate
of Incorporation (incorporated herein by
reference to Exhibit 3.1 to Company's
Registration Statement on Form S-1/A
(No. 333-41383)).
3.2 -- Bylaws (incorporated herein by reference
to Exhibit 3.2 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
4.1* -- Indenture, dated March 30, 1999, by and
among Pentacon, Inc. and the
subsidiaries named therein and State
Street Bank and Trust Company covering
up to $100,000,000 12 1/4% Senior
Subordinated Notes due 2009.
4.2* -- Registration Rights Agreement dated
March 30, 1999 by and among Pentacon,
Inc., the Guarantors named therein,
Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC and Sanders
Morris Mundy Inc.
4.3* -- Form of Pentacon, Inc. 12 1/4% Senior
Subordinated Note due 2009. (Included in
Exhibit 4.1).
5.1* -- Opinion of Andrews & Kurth L.L.P.
10.1 -- Agreement and Plan of Organization
respecting Alatec Products, Inc. dated
as of December 1, 1997 (incorporated
herein by reference to Exhibit 10.1 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.2 -- Pentacon, Inc. 1998 Stock Plan
(incorporated herein by reference to
Exhibit 10.10 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.3 -- Form of Waiver of Termination Rights and
Schedule of Signatories (incorporated
herein by reference to Exhibit 10.11 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.4 -- Form of Waiver and Schedule of
Signatories (incorporated herein by
reference to Exhibit 10.12 to Company's
Registration Statement on Form S-1/A
(No. 333-41383)).
10.5 -- Form of Recontribution Agreement and
Schedule of Signatories (incorporated
herein by reference to Exhibit 10.13 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.6 -- Employment Agreement with James Jackson
(incorporated herein by reference to
Exhibit 10.14 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.7 -- Agreement and Plan of Organization
respecting AXS Solutions, Inc. dated as
of December 1, 1997 (incorporated herein
by reference to Exhibit 10.2 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.8 -- Agreement and Plan or Organization
respecting Capitol Bolt & Supply, Inc.
dated as of December 1, 1997
(incorporated herein by reference to
Exhibit 10.3 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.9 -- Agreement and Plan of Organization
respecting Maumee Industries, Inc. dated
as of December 1, 1997 (incorporated
herein by reference to Exhibit 10.4 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.10 -- Agreement and Plan of Organization
respecting Sales Systems, Limited dated
as of December 1, 1997 (incorporated
herein by reference to Exhibit 10.5 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
<PAGE>
10.11 -- Employment Agreement with Mark Baldwin
(incorporated herein by reference to
Exhibit 10.6 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.12 -- Employment Agreement with Bruce Taten
(incorporated herein by reference to
Exhibit 10.7 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.13 -- Employment Agreement with Brian Fontana
(incorporated herein by reference to
Exhibit 10.8 to Company's Registration
Statement on Form S-1/A (No.
333-41383)).
10.14 -- Form of Officer and Director
Indemnification Agreement (incorporated
herein by reference to Exhibit 10.9 to
Company's Registration Statement on Form
S-1/A (No. 333-41383)).
10.15 -- Amended and Restated Credit Agreement
with NationsBank (incorporated herein by
reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K405
for the year ended September 30, 1998).
10.16 -- First Amendment to Amended and Restated
Credit Agreement (incorporated herein by
reference to Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended December 31,
1998).
10.17 -- Second Amendment to Amended and Restated
Credit Agreement (incorporated herein by
reference to Exhibit 10.18 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended December 31,
1998).
10.18* -- Third Amendment to Amended and Restated
Credit Agreement.
10.19* -- Fourth Amendment to Amended and Restated
Credit Agreement.
12.1* -- Computation of Ratio of Earnings to
Fixed Charges.
21.1* -- Subsidiaries of the Registrant.
23.1* -- Consent of Ernst & Young LLP.
23.2* -- Consent of McGladrey & Pullen, LLP.
23.3* -- Consent of Grant Thornton LLP.
23.4* -- Consent of Andrews & Kurth L.L.P.
(Included in Exhibit 5.1).
24.1* -- Powers of Attorney. (Included in the
signature pages hereto).
25.1* -- Statement of Eligibility of State Street
Bank and Trust Company, Trustee on Form
T-1.
99.1 -- Press Release, dated August 17, 1998
(incorporated herein by reference to
Exhibit 99.1 to the Company's Form 8-K
filed August 24, 1998).
99.2 -- Press Release, dated May 26, 1998
(incorporated herein by reference to
Exhibit 99.1 to the Company's Form 8-K
filed June 11, 1998).
99.3* -- Form of Letter of Transmittal.
99.4* -- Form of Notice of Guaranteed Delivery.
99.5* -- Form of Letter to Clients.
99.6* -- Form of Letter to Nominees.
99.7* -- Form of Instruction to Registered
Holders from Beneficial Owner.
- ------------
* Filed herewith.
EXHIBIT 4.1
PENTACON, INC.,
as Issuer
THE GUARANTORS named herein,
as Guarantors
and
STATE STREET BANK AND TRUST COMPANY,
as Trustee
---------------------
INDENTURE
Dated as of March 30, 1999
--------------------
$100,000,000
12 1/4% Senior Subordinated Notes due 2009, Series A
12 1/4% Senior Subordinated Notes due 2009, Series B
<PAGE>
TRUST INDENTURE INDENTURE
ACT SECTION SECTION
ss.310(a)(1)....................................... 6.09
(a)(2)........................................ 6.09
(a)(3)........................................ Not Applicable
(a)(4)........................................ Not Applicable
(b)........................................... 6.08, 6.10
ss. 311(a)......................................... 6.13
(b)........................................... 6.13
(c)........................................... Not Applicable
ss.312(a).......................................... 3.06, 7.01
(b)........................................... 7.02
(c)........................................... 7.02
ss.313(a).......................................... 7.03
(b)........................................... 7.03
(c)........................................... 7.03
(d)........................................... 7.03
ss.314(a).......................................... 10.10
(a)(4)........................................ 10.13
(b)........................................... Not Applicable
(c)(1)........................................ 1.04, 4.04, 12.05
(c)(2)........................................ 1.04, 4.04, 12.05
(c)(3)........................................ Not Applicable
(d)........................................... Not Applicable
(e)........................................... 1.04
ss.315(a).......................................... 6.01(a)
(b)........................................... 6.02
(c)........................................... 6.01(b)
(d)........................................... 6.01(c)
(e)........................................... 5.14
ss.316(a) (last sentence) ......................... 3.14
(a)(1)(A)..................................... 5.12
(a)(1)(B)..................................... 5.13
(a)(2)........................................ Not Applicable
(b)........................................... 5.08
(c)........................................... 9.07
ss.317(a)(1)....................................... 5.03
(a)(2)........................................ 5.04
(b)........................................... 10.03
ss.318(a).......................................... 1.08
- --------------------
Note: This Cross-Reference Table shall not, for any purpose, be deemed a part
of the Indenture.
<PAGE>
TABLE OF CONTENTS
PAGE
PARTIES......................................................................1
RECITALS.....................................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions....................................................1
Section 1.02. Other Definitions.............................................20
Section 1.03. Rules of Construction.........................................21
Section 1.04. Form of Documents Delivered to Trustee........................21
Section 1.05. Acts of Holders...............................................22
Section 1.06. Notices, etc., to the Trustee, the Company and the Guarantors.22
Section 1.07. Notice to Holders; Waiver.....................................23
Section 1.08. Conflict with Trust Indenture Act.............................23
Section 1.09. Effect of Headings and Table of Contents......................24
Section 1.10. Successors and Assigns........................................24
Section 1.11. Separability Clause...........................................24
Section 1.12. Benefits of Indenture.........................................24
Section 1.13. GOVERNING LAW.................................................24
Section 1.14. No Recourse Against Others....................................24
Section 1.15. Independence of Covenants.....................................24
Section 1.16. Exhibits......................................................25
Section 1.17. Counterparts..................................................25
Section 1.18. Duplicate Originals...........................................25
ARTICLE TWO
NOTE AND GUARANTEE FORMS
Section 2.01. Form and Dating...............................................25
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms...............................................26
Section 3.02. Optional Redemption...........................................27
Section 3.03. Registrar and Paying Agent....................................27
Section 3.04. Execution and Authentication..................................28
Section 3.05. Temporary Notes...............................................29
Section 3.06. Transfer and Exchange.........................................29
Section 3.07. Mutilated, Destroyed, Lost and Stolen Notes...................30
Section 3.08. Payment of Interest; Interest Rights Preserved................31
i
<PAGE>
Section 3.09. Persons Deemed Owners.........................................32
Section 3.10. Cancellation..................................................32
Section 3.11. Legal Holidays................................................33
Section 3.12. CUSIP and CINS Numbers........................................33
Section 3.13. Paying Agent To Hold Money in Trust...........................33
Section 3.14. Treasury Notes................................................33
Section 3.15. Deposits of Monies............................................34
Section 3.16. Book-Entry Provisions for Global Notes........................34
Section 3.17. Special Transfer Provisions...................................35
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance..38
Section 4.02. Defeasance and Discharge......................................38
Section 4.03. Covenant Defeasance...........................................38
Section 4.04. Conditions to Defeasance or Covenant Defeasance...............39
Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in
Trust; Other Miscellaneous Provisions.........................41
Section 4.06. Reinstatement.................................................42
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.............................................42
Section 5.02. Acceleration of Maturity; Rescission and Annulment............44
Section 5.03. Collection of Indebtedness and Suits..........................45
Section 5.04. Trustee May File Proofs of Claims.............................46
Section 5.05. Trustee May Enforce Claims Without Possession of Notes........47
Section 5.06. Application of Money Collected................................47
Section 5.07. Limitation on Suits...........................................47
Section 5.08. Unconditional Right of Holders To Receive Principal, Premium
and Interest..................................................48
Section 5.09. Restoration of Rights and Remedies............................48
Section 5.10. Rights and Remedies Cumulative................................48
Section 5.11. Delay or Omission Not Waiver..................................49
Section 5.12. Control by Majority...........................................49
Section 5.13. Waiver of Past Defaults.......................................49
Section 5.14. Undertaking for Costs.........................................49
Section 5.15. Waiver of Stay, Extension or Usury Laws.......................50
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities...........................50
Section 6.02. Notice of Defaults............................................51
ii
<PAGE>
Section 6.03. Certain Rights of Trustee.....................................51
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Notes or
Application of Proceeds Thereof...............................52
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc...........53
Section 6.06. Money Held in Trust...........................................53
Section 6.07. Compensation and Indemnification of Trustee and Its Prior
Claim.........................................................53
Section 6.08. Conflicting Interests.........................................54
Section 6.09. Corporate Trustee Required; Eligibility.......................54
Section 6.10. Resignation and Removal; Appointment of Successor Trustee.....54
Section 6.11. Acceptance of Appointment by Successor........................55
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession
to Business...................................................56
Section 6.13. Preferential Collection of Claims Against Company and
Guarantors....................................................57
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish Trustee Names
and Addresses of Holders......................................57
Section 7.02. Communications of Holders.....................................57
Section 7.03. Reports by Trustee............................................58
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms..........58
Section 8.02. Successor Substituted.........................................59
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers Without
Consent of Holders............................................60
Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent
of Holders....................................................61
Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers..62
Section 9.04. Effect of Supplemental Indentures.............................63
Section 9.05. Conformity with Trust Indenture Act...........................63
Section 9.06. Reference in Notes to Supplemental Indentures.................63
Section 9.07. Record Date...................................................63
Section 9.08. Revocation and Effect of Consents.............................63
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest...................64
Section 10.02. Maintenance of Office or Agency..............................64
iii
<PAGE>
Section 10.03. Money for Note Payments To Be Held in Trust..................64
Section 10.04. Corporate Existence..........................................66
Section 10.05. Payment of Taxes and Other Claims............................66
Section 10.06. Maintenance of Properties....................................66
Section 10.07. Insurance....................................................67
Section 10.08. Books and Records............................................67
Section 10.09. Guarantees...................................................67
Section 10.10. Provision of Financial Statements............................67
Section 10.11. Change of Control............................................68
Section 10.12. Limitation on Indebtedness...................................70
Section 10.13. Statement by Officers as to Default..........................72
Section 10.14. Limitation on Restricted Payments............................72
Section 10.15. Limitation on Transactions with Affiliates...................76
Section 10.16. Limitation on Sale of Assets.................................77
Section 10.17. Limitation on Liens..........................................79
Section 10.18. Limitation on Incurrence of Senior Subordinated
Indebtedness.................................................80
Section 10.19. Limitation on Sale of Capital Stock of Restricted
Subsidiaries.................................................81
Section 10.20. Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries............................81
Section 10.21. Limitations on Unrestricted Subsidiaries.....................82
Section 10.22. Compliance Certificates and Opinions.........................83
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture......................84
Section 11.02. Application of Trust Money...................................85
ARTICLE TWELVE
GUARANTEE OF NOTES
Section 12.01. Unconditional Guarantee......................................85
Section 12.02. Subordination of Guarantees..................................86
Section 12.03. Execution and Delivery of Guarantee..........................86
Section 12.04. Additional Guarantors........................................87
Section 12.05. Release of a Guarantor.......................................87
Section 12.06. Waiver of Subrogation........................................87
Section 12.07. Reliance on Judicial Order or Certificate of Liquidating
Agent Regarding Dissolution, etc. of Guarantors..............88
Section 12.08. Article Twelve Applicable to Paying Agents...................88
Section 12.09. No Suspension of Remedies....................................88
Section 12.10. Limitation of Subsidiary Guarantor's Liability...............89
Section 12.11. Contribution from Other Guarantors...........................89
Section 12.12. Obligations Reinstated.......................................89
iv
<PAGE>
Section 12.13. No Obligation To Take Action Against the Company.............89
Section 12.14. Dealing with the Company and Others..........................90
ARTICLE THIRTEEN
REDEMPTIONS AND OFFERS TO PURCHASE
Section 13.01. Notice to Trustee............................................90
Section 13.02. Selection of Notes to Be Redeemed or Purchased..............91
Section 13.03. Notice of Redemption........................................91
Section 13.04. Effect of Notice of Redemption..............................92
Section 13.05. Deposit of Redemption Price.................................92
Section 13.06. Notes Redeemed in Part......................................92
Section 13.07. Optional Redemption.........................................93
Section 13.08. Procedures Relating to Mandatory Offers.....................93
ARTICLE FOURTEEN
SUBORDINATION
Section 14.01. Agreement to Subordinate.....................................94
Section 14.02. Liquidation; Dissolution; Bankruptcy.........................94
Section 14.03. Default on Designated Senior Indebtedness....................96
Section 14.04. Acceleration of Notes........................................97
Section 14.05. When Distributions Must Be Paid Over.........................97
Section 14.06. Notice.......................................................97
Section 14.07. Subrogation..................................................98
Section 14.08. Relative Rights..............................................98
Section 14.09. The Company and Holders May Not Impair Subordination.........99
Section 14.10. Distribution or Notice to Representative.....................99
Section 14.11. Rights of Trustee and Paying Agent..........................100
Section 14.12. Authorization to Effect Subordination.......................100
Section 14.13. Payment.....................................................100
v
<PAGE>
Exhibit A-1 - Form of Series A Note
Exhibit A-2 - Form of Series B Note
Exhibit B - Form of Legend for Book-Entry Securities
Exhibit C - Form of Certificate To Be Delivered in Connection with Transfers
Pursuant to Regulation S
Exhibit D - Form of Guarantee
Exhibit E - Registration Rights Agreement
- ---------------
Note: This Table of Contents shall not, for any purpose, be deemed a part of
the Indenture.
vi
<PAGE>
INDENTURE, dated as of March 30, 1999, among PENTACON, INC., a
Delaware corporation (the "Company"), as issuer, the GUARANTORS NAMED HEREIN, as
guarantors (the "Guarantors"), and STATE STREET BANK AND TRUST COMPANY, as
trustee (the "Trustee").
RECITALS
The Company has duly authorized the creation of an issue of (i) 12
1/4% Senior Subordinated Notes due 2009, Series A (the "Initial Notes") and (ii)
12 1/4% Senior Subordinated Notes due 2009, Series B (the "Exchange Notes") to
be issued in exchange for the Initial Notes pursuant to the Registration Rights
Agreement (as defined herein). The Initial Notes, the Exchange Notes and the
Private Exchange Notes (as defined herein), if any, are collectively referred to
as the "Notes" and are treated as a single class of securities under this
Indenture. To provide therefor, the Company has duly authorized the execution
and delivery of this Indenture.
The Guarantors have duly authorized their senior subordinated
guarantees of the Notes and to provide therefor, the Guarantors have duly
authorized the execution and delivery of this Indenture and their Guarantees (as
defined herein) under the terms set forth herein.
All things necessary have been done to make the Notes and the
Guarantees, when executed by the Company and the Guarantors, respectively, and
authenticated and delivered hereunder and duly issued by the Company and the
Guarantors, respectively, the valid obligations of the Company and the
Guarantors and to make this Indenture a valid agreement of each of the Company,
the Guarantors and the Trustee in accordance with the terms hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Notes by the holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of all Holders (as hereinafter defined) of the
Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. DEFINITIONS.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (i) assumed
in connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person becomes a Restricted Subsidiary of any other Person (other than
any Indebtedness incurred in connection with, or in contemplation of, such Asset
Acquisition or such Person becoming such a Restricted Subsidiary). Acquired
Indebtedness shall be deemed to be incurred on the date of the
<PAGE>
related acquisition of assets from any Person or the date the acquired Person
becomes a Restricted Subsidiary, as the case may be.
"AFFILIATE" means with respect to any specified Person: (i) any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person; or (ii) any other Person
that owns, directly or indirectly, 10% or more of such specified Person's
Capital Stock. For the purposes of this definition, "control" when used with
respect to any specified Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through ownership of
voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"ASSET ACQUISITION" means (i) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person will
become a Restricted Subsidiary or will be merged or consolidated with or into
the Company or any Restricted Subsidiary or (ii) the acquisition by the Company
or any Restricted Subsidiary of the assets of any Person which constitute
substantially all of the assets of such Person, or any division or line of
business of such Person, or which is otherwise outside of the ordinary course of
business.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease
or other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback transaction) (collectively, for purposes of
this definition, a "transfer"), directly or indirectly, in one or a series of
related transactions, of: (i) any Capital Stock of any Restricted Subsidiary;
(ii) all or substantially all of the properties and assets of any division or
line of business of the Company or any Restricted Subsidiary; or (iii) any other
properties or assets of the Company or any Restricted Subsidiary other than in
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include any transfer of properties and assets (a) that is
governed by the provisions of Section 8.01; (b) that is by the Company to any
Restricted Subsidiary, or by any Subsidiary to the Company or any Restricted
Subsidiary in accordance with the terms of this Indenture, (c) that is of
obsolete, damaged or used equipment or inventory in the ordinary course of
business, (d) that constitutes a sale, lease or other disposition of inventory,
accounts receivable or other assets in the ordinary course of business including
for purposes of financing, (e) that constitutes a Capitalized Lease Obligation,
(f) having a fair market value that does not exceed $500,000 or (g) that is made
the subject of an Investment consummated in compliance with Section 10.14 of
this Indenture.
"AVERAGE LIFE TO STATED MATURITY" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by dividing
(i) the sum of the products of (a) the number of years from such date to the
date or dates of each successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness multiplied by
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments.
"BANKRUPTCY LAW" means Title 11, United States Code or any similar
federal or state law relating to bankruptcy, insolvency, receivership,
winding-up, liquidation, reorganization
2
<PAGE>
or relief of debtors or the law of any other jurisdiction relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"BANKRUPTCY ORDER" means any court order made in a proceeding
pursuant to or within the meaning of any Bankruptcy Law, containing an
adjudication of bankruptcy or insolvency, or providing for liquidation,
receivership, winding-up, dissolution, "concordate" or reorganization, or
appointing a Custodian of a debtor or of all or any substantial part of a
debtor's property, or providing for the staying, arrangement, adjustment or
composition of indebtedness or other relief of a debtor.
"BOARD OF DIRECTORS" means the board of directors of the Company or
any Guarantor, as the case may be, or any duly authorized committee of such
board.
"BOARD RESOLUTION" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company or any Guarantor, as the case
may be, to have been duly adopted by its respective Board of Directors and to be
in full force and effect on the date of such certification, and delivered to the
Trustee.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York,
The State of New York, The State of Connecticut or The Commonwealth of
Massachusetts are authorized or obligated by law, regulation or executive order
to close.
"CAPITAL STOCK" means, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated) of such Person's capital stock, and any rights (other than debt
securities convertible into capital stock), warrants, options or rights
exchangeable or exercisable for or convertible into such capital stock, whether
now outstanding or issued after the date of this Indenture.
"CAPITALIZED LEASE OBLIGATION" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the purpose
of this Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP
consistently applied.
"CASH EQUIVALENTS" means, at any time, (i) any evidence of
Indebtedness with a maturity of not more than one year issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) demand or time deposits,
certificates of deposit or acceptances with a maturity of not more than one year
of any financial institution that is a member of the Federal Reserve System
having combined capital and surplus and undivided profits of not less than
$250.0 million; (iii) commercial paper with a maturity of not more than one year
issued by a corporation that is not an Affiliate of the Company organized under
the laws of any state of the United States or the District of Columbia
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and rated at least A-1 by Standard & Poor's Corporation or at least P-1 by
Moody's Investors Service, Inc.; and (iv) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (i) and (ii) above entered into with any financial institution meeting
the qualifications specified in clause (ii) above.
"CEDEL" means Cedel Bank, SOCIETE ANONYME.
"CHANGE OF CONTROL" means the occurrence of any of the following
events (whether or not approved by the Board of Directors of the Company): (i)
any "person" or "group" (as such terms are used in Section 13(d) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of 50% or more of the total voting power of the then
outstanding Voting Stock of the Company; (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election to such board or whose nomination for election by the stockholders of
the Company was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for any
reason to constitute a majority of such board of directors then in office; (iii)
the Company consolidates with or merges with or into any Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any corporation consolidates
with or merges into or with the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is changed into
or exchanged for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the Company is not changed or
exchanged at all (except to the extent necessary solely to reflect a change in
the jurisdiction of incorporation of the Company) or where (A) the outstanding
Voting Stock of the Company is changed into or exchanged for (x) Voting Stock of
the surviving corporation which is not Redeemable Capital Stock or (y) cash,
securities and other property (other than Capital Stock of the surviving
corporation) in an amount which could be paid by the Company as a Restricted
Payment as described in Section 10.14 (and such amount shall be treated as a
Restricted Payment subject to the provisions of Section 10.14), (B) no "person"
or "group" owns immediately after such transaction, directly or indirectly, 50%
or more of the total outstanding Voting Stock of the surviving corporation and
(C) the holders of the Voting Stock of the Company immediately prior to such
transaction own, directly or indirectly, not less than a majority of the total
voting power of the then outstanding Voting Stock of the surviving or transferee
corporation immediately after such transaction; or (iv) any order, judgment or
decree shall be entered against the Company decreeing the dissolution or split
up of the Company and such order shall remain undischarged or unstayed for a
period in excess of sixty days.
"COMMISSION" means the Securities and Exchange Commission, as from
time to time constituted, or if at any time after the execution of this
Indenture such Commission is not existing and performing the applicable duties
now assigned to it, then the body or bodies performing such duties at such time.
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"COMPANY" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"COMPANY REQUEST" or "COMPANY ORDER" means a written request or
order signed in the name of the Company by any one of its Chief Executive
Officer, its President or a Vice President, and by its Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer or its chief financial
officer, and delivered to the Trustee.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" means, for any
period, (i) the sum of, without duplication, the amounts for such period, taken
as a single accounting period, of (a) Consolidated Net Income, (b) to the extent
reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to the
extent reducing Consolidated Net Income, Consolidated Interest Expense, and (d)
to the extent reducing Consolidated Net Income, Consolidated Income Tax Expense
less (ii) other non-cash items increasing Consolidated Net Income for such
period.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means the ratio of the
aggregate amount of Consolidated Cash Flow Available for Fixed Charges of the
Company for the four full fiscal quarters immediately preceding the date of the
transaction (the "Transaction Date") giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio for which consolidated financial
information of the Company is available (such four full fiscal quarter period
being referred to herein as the "Four Quarter Period") to the aggregate amount
of Consolidated Fixed Charges of the Company for such Four Quarter Period. For
purposes of this definition, "Consolidated Cash Flow Available for Fixed
Charges" and "Consolidated Fixed Charges" will be calculated, without
duplication, after giving effect on a PRO FORMA basis for the period of such
calculation to (i) the incurrence of any Indebtedness of the Company or any of
the Restricted Subsidiaries during the period commencing on the first day of the
Four Quarter Period to and including the Transaction Date (the "Reference
Period"), including, without limitation, the incurrence of the Indebtedness
giving rise to the need to make such calculation, as if such incurrence occurred
on the first day of the Reference Period, (ii) an adjustment to eliminate or
include, as applicable, the Consolidated Cash Flow Available for Fixed Charges
and Consolidated Fixed Charges of the Company directly attributable to assets
which are the subject of any Asset Sale or Asset Acquisition (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring Acquired Indebtedness) occurring during the
Reference Period, as if such Asset Sale or Asset Acquisition occurred on the
first day of the Reference Period and (iii) the retirement of Indebtedness
during the Reference Period which cannot thereafter be reborrowed occurring as
if retired on the first day of the Reference Period. For purposes of this
definition, whenever pro forma effect is to be given to an Asset Sale or Asset
Acquisition such pro forma calculations shall be determined in accordance with
Article 11 of Regulation S-X under the Securities Act. In calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on Indebtedness determined on a fluctuating basis as of the
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Transaction Date and which will continue to be so determined thereafter will be
deemed to accrue at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date shall be deemed to have been in effect during the
Reference Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by Interest Rate Agreements, will be deemed to accrue at the rate per
annum resulting after giving effect to the operation of such agreements. If the
Company or any Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the above definition will give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any Restricted
Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness.
"CONSOLIDATED FIXED CHARGES" means, for any period, the sum of,
without duplication, the amounts for such period of (i) Consolidated Interest
Expense and (ii) the aggregate amount of cash dividends and other distributions
paid or accrued during such period in respect of Redeemable Capital Stock.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the
provision for federal, state, local and foreign income taxes payable by the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, without
duplication, the sum of (a) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (i) any amortization of
debt discount attributable to such period (other than amortization of debt
issuance costs), (ii) the net cost under or otherwise associated with Interest
Rate Agreements and Currency Agreements (in each case, including any
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, (iv) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and (v) all
capitalized interest and all accrued interest, and (b) all but the principal
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and the Restricted Subsidiaries during such
period and as determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated
net income (or loss) of the Company and the Restricted Subsidiaries for such
period on a consolidated basis as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (or loss), by excluding,
without duplication, (i) all extraordinary gains or losses (net of all fees and
expenses relating thereto), (ii) the portion of net income (or loss) of the
Company and the Restricted Subsidiaries on a consolidated basis allocable to
minority interests of Persons in Restricted Subsidiaries or of the Company and
the Restricted Subsidiaries in unconsolidated Persons, except (in the case of
unconsolidated Persons) to the extent that cash dividends or distributions are
actually received by the Company or a Restricted Subsidiary, (iii) income of the
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Company and the Restricted Subsidiaries derived from or in respect of
Investments in Unrestricted Subsidiaries, except to the extent that cash
dividends or distributions are actually received by the Company or a Restricted
Subsidiary, (iv) for purposes of Section 10.14 net income (or loss) of any
Person combined with the Company or any of the Restricted Subsidiaries on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (v) any gain or loss realized upon the termination of any employee
pension benefit plan, (vi) gains (or losses), net of all fees and expenses
relating thereto, in respect of any Asset Sales by the Company or a Restricted
Subsidiary, (vii) the net income of any Restricted Subsidiary to the extent that
the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, and (viii) any gain, arising from the
acquisition of any securities, or the extinguishment, under GAAP, of any
Indebtedness of the Company or any Restricted Subsidiary.
"CONSOLIDATED NON-CASH CHARGES" means, for any period, the aggregate
depreciation, amortization and other non-cash expenses of the Company and the
Restricted Subsidiaries reducing Consolidated Net Income for such period (other
than any non-cash item requiring an accrual or reserve for cash disbursements in
any future period), determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATION" means, with respect to any Person, the consolidation
of the accounts of its Restricted Subsidiaries with those of such Person, all in
accordance with GAAP; PROVIDED, HOWEVER, that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of such Person. The term "consolidated" has a correlative meaning to the
foregoing.
"CONTROL" means, with respect to any specified Person, the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"CORPORATE TRUST OFFICE" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Indenture is located
at Goodwin Square, 225 Asylum Street, 23rd Floor, Hartford, Connecticut 06103,
Attention: Susan Merker/Corporate Trust Administration, Reference: Pentacon
1999, except for purposes of Section 3.03 and Section 10.02. For purposes of
Section 3.03 and Section 10.02, the Corporate Trust Office is located at 61
Broadway, 15th Floor, New York, New York, Attention:
Corporate Trust.
"COVENANT DEFEASANCE" has the meaning set forth in Section 4.03.
"CREDIT FACILITY" means the Amended and Restated Credit Agreement
dated as of September 3, 1998 among the Company, the lenders named therein and
NationsBank, N.A. as administrative agent, as such agreement may be amended,
modified, supplemented, extended, restated, replaced (including replacement
after the termination of such agreement), restructured,
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increased, renewed or refinanced from time to time in one or more credit
agreements, loan agreements, instruments or similar agreements, as such may be
further amended, modified, supplemented, extended, restated, replaced (including
replacement after the termination of such agreement), restricted, increased,
renewed or refinanced from time to time, in each case in accordance with and as
permitted by this Indenture and whether or not with the same lenders or agents.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect the
Company or its Restricted Subsidiaries against fluctuations in currency values.
"CUSTODIAN" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other law respecting secured
creditors and the enforcement of their security or any other Person with like
powers whether appointed judicially or out of court and whether pursuant to an
interim or final appointment.
"DEFAULT" means any event that is, or after notice or passage of
time or both would be, an Event of Default.
"DEFEASANCE" has the meaning set forth in Section 4.02.
"DEPOSITORY" means The Depository Trust Company, its nominees and
successors.
"DESIGNATED SENIOR INDEBTEDNESS" means (a) all Senior Indebtedness,
liquidated or contingent, outstanding under the Credit Facility and (b) any
other Senior Indebtedness of the Company which, at the time of determination, is
in an aggregate principal amount outstanding or committed for of at least $50.0
million and is specifically designated in the instrument governing such Senior
Indebtedness as "Designated Senior Indebtedness" by the Company.
"DESIGNATION" has the meaning set forth in Section 10.21.
"DESIGNATION AMOUNT" has the meaning set forth in Section 10.21.
"DISINTERESTED DIRECTOR" means, with respect to any transaction or
series of related transactions, a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to such transaction or series of related transactions.
"EUROCLEAR" means Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euroclear System.
"EVENT OF DEFAULT" has the meaning set forth in Section 5.01.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the Commission thereunder.
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"EXCHANGE NOTES" means the 12 1/4% Senior Subordinated Notes due
2009, Series B, to be issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement.
"EXCHANGE OFFER" shall have the meaning specified in the
Registration Rights Agreement.
"FAIR MARKET VALUE" means, with respect to any asset or property,
the price which could be negotiated in an arm's-length transaction, for cash,
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer under no compulsion to buy. Fair Market Value shall
be determined by the Board of Directors of the Company acting in good faith
evidenced by a Board Resolution thereof delivered to the Trustee.
"FOUR QUARTER PERIOD" has the meaning set forth in the definition
of "Consolidated Fixed Charge Coverage Ratio."
"GAAP" means, at any date of determination, generally accepted
accounting principles in effect in the United States which are applicable at the
date of determination and which are consistently applied for all applicable
periods.
"GLOBAL NOTES" means one or more Notes in the form of Exhibit A-1 or
A-2 bearing the legend set forth in Exhibit B.
"GUARANTEE" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other Person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
"GUARANTEE" means the guarantee by any Guarantor of both the
Company's obligations under this Indenture and the Notes pursuant to a guarantee
given in accordance with this Indenture.
"GUARANTOR" means (i) each of Alatec Products, Inc., AXS Solutions,
Inc., Capitol Bolt & Supply, Inc., Maumee Industries, Inc., Sales Systems,
Limited, Texas International Aviation, Inc., Pace Products, Inc., West Coast
Aero Products Holding Corporation, Inc., ASI Aerospace Group, Inc., Pollard
Acquisition Corp., Alatec Cable Harness & Assembly Division, Inc., Alatec
Fastener and Component Group, Inc., Alatec International Sales, Inc., Alatec
Race, Inc., Trace Alatec Supply Company, Inc., TIA International, Inc., Pentacon
Aerospace Group, Inc. and Pentacon Industrial Group, Inc. and (ii) each other
Subsidiary of the Company that in the future becomes a Guarantor in accordance
with Section 10.18.
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"HOLDER" or "NOTEHOLDER" means a Person in whose name a Note is
registered in the Note Register.
"INCUR" has the meaning set forth in Section 10.12.
"Incurrence," "incurred" and "incurring" shall have the meanings correlative
to the foregoing.
"INDEBTEDNESS" means, with respect to any Person, without
duplication, (i) all indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services, excluding (a) indemnities in
connection with the disposition of assets of businesses not to exceed the
purchase price for such assets, (b) customary agreements for purchase price
adjustments, hold backs or similar obligations in connection with an Asset
Acquisition and (c) any trade payables and other accrued current liabilities
incurred or arising in the ordinary course of business, but including, without
limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit, bankers acceptance or other similar
credit transaction and in connection with any agreement to purchase, redeem,
exchange, convert or otherwise acquire for value any Capital Stock of such
Person, or any warrants, rights or options to acquire such Capital Stock, now or
hereafter outstanding, (ii) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (iii) all indebtedness created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising in
the ordinary course of business, (iv) all Capitalized Lease Obligations of such
Person, (v) all Indebtedness referred to in clauses (i) through (iv) above of
other Persons and all dividends of other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or with respect to
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness, (vi) all guarantees of Indebtedness by such
Person, (vii) except for purposes of Section 10.14, all Redeemable Capital Stock
issued by such Person valued at the greater of its voluntary or involuntary
maximum fixed repurchase price plus accrued and unpaid dividends, (viii) all
obligations under Interest Rate Agreements and Currency Agreements of such
Person, and (ix) any amendment, supplement, modification, deferral, renewal,
extension, refunding or refinancing of any liability of the types referred to in
clauses (i) through (viii) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on
any date on which Indebtedness shall be required to be determined pursuant to
this Indenture, and if such price is based upon, or measured by, the Fair Market
Value of such Redeemable Capital Stock, such Fair Market Value shall be
determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"INDENTURE" means this instrument as originally executed (including
all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
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"INDENTURE OBLIGATIONS" means the obligations of the Company and any
other obligor under this Indenture or under the Notes, to pay principal of,
premium, if any, and interest on the Notes when due and payable, whether at
maturity, by acceleration, call for redemption or repurchase or otherwise, and
all other amounts due or to become due under or in connection with this
Indenture, the Notes or the Guarantees and the performance of all other
obligations to the Trustee (including, but not limited to, payment of all
amounts due the Trustee under Section 6.07 hereof) and the Holders of the Notes
under this Indenture, the Notes and the Guarantees, according to the terms
thereof.
"INDEPENDENT FINANCIAL ADVISOR" means a nationally recognized
accounting, appraisal or investment banking firm (i) which does not, and whose
directors, officers and employees or Affiliates do not have, a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INITIAL NOTES" means the 12 1/4% Senior Subordinated Notes due
2009, Series A, of the Company.
"INITIAL PURCHASERS" means Bear, Stearns & Co. Inc., NationsBank
Montgomery Securities LLC and Sanders Morris Mundy Inc.
"INTEREST" means, when used with respect to any Note, the amount of
all interest accruing on such Note, including all liquidated damages payable on
the Notes pursuant to the Registration Rights Agreement and all interest
accruing subsequent to the occurrence of any events specified in Sections
5.01(h), (i) and (j) or which would have accrued but for any such event, whether
or not such claims are allowable under applicable law.
"INTEREST PAYMENT DATE" means, when used with respect to any Note,
the Stated Maturity of an installment of interest on such Note, as set forth in
such Note.
"INTEREST RATE AGREEMENTS" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
obligations of any Person pursuant to any arrangement with any other Person
whereby, directly or indirectly, such Person is entitled to receive from time to
time periodic payments calculated by applying either a floating or a fixed rate
of interest on a stated notional amount in exchange for periodic payments made
by such Person calculated by applying a fixed or a floating rate of interest on
the same notional amount or any other arrangement involving payments by or to
such Person based upon fluctuations in interest rates (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
and/or other types of interest rate hedging agreements from time to time.
"INVESTMENT" means, with respect to any Person, any direct or
indirect advance, loan or other extension of credit (including by means of a
guarantee) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others or otherwise), or any purchase or acquisition by such Person of
any Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person and all other items that would be
classified as
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investments on a balance sheet prepared in accordance with GAAP. Investments
shall exclude extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices. In addition to the foregoing, any
Currency Agreement, Interest Rate Agreement or similar agreement shall
constitute an Investment. Notwithstanding the foregoing, the acquisition of
assets, businesses or securities to the extent such Acquisition is for
consideration consisting of Qualified Capital Stock of the Company shall not be
an Investment.
"ISSUE DATE" means the original issue date of the Notes hereunder.
"LIEN" means any mortgage or deed of trust, charge, pledge, lien
(statutory or other), privilege, security interest, hypothecation, cessation and
transfer, assignment for security, claim, deposit arrangement, or preference or
priority or other encumbrance upon or with respect to any property of any kind
(including any conditional sale, capital lease or other title retention
agreement, any leases in the nature thereof, and any agreement to give any
security interest), whether real, personal or mixed, movable or immovable, now
owned or hereafter acquired. A Person shall be deemed to own subject to a Lien
any property which it has acquired or holds subject to the interest of a vendor
or lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"MATERIAL SUBSIDIARY" means each Restricted Subsidiary of the
Company that is a "significant subsidiary" as defined in Rule 1-02 of Regulation
S-X under the Securities Act and the Exchange Act (as such regulation is in
effect on the Issue Date).
"MATURITY DATE" means, with respect to any Note, the date on which
any principal of such Note becomes due and payable as therein or herein
provided, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale by any
Person, the proceeds thereof (without duplication in respect of all Asset Sales)
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) net of (i) brokerage commissions and other reasonable
fees and expenses (including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a
result of such Asset Sale, (iii) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets or properties the subject
of such Asset Sale, (iv) amounts required to be paid to any Person (other than
the Company or any Restricted Subsidiary) owning a beneficial interest in or
having a Lien on the assets subject to the Asset Sale and (v) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale (provided that
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the amount of any such reserves shall be deemed to constitute Net Cash Proceeds
at the time such reserves shall have been released or are not otherwise required
to be retained as a reserve), all as reflected in an Officers' Certificate
delivered to the Trustee and (b) with respect to any issuance or sale of Capital
Stock that have been converted into or exchanged for Capital Stock as referred
to Section 10.14, the proceeds of such issuance or sale in the form of cash or
Cash Equivalents including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed of for,
cash or Cash Equivalents (except to the extent that such obligations are
financed or sold with recourse to the Company or any Restricted Subsidiary), net
of attorney's fees, accountant's fees and brokerage, consultation, underwriting
and other fees and expenses actually incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
"NON-U.S. PERSON" has the meaning assigned to such term in
Regulation S.
"NOTES" shall have the meaning specified in the Recitals of this
Indenture.
"OFFER" means a Change of Control Offer made pursuant to Section
10.11 or an Asset Sale Offer made pursuant to Section 10.16.
"OFFERING MEMORANDUM" means the offering memorandum dated March 25,
1999 relating to the Notes.
"OFFICER" means, with respect to the Company or any Guarantor, the
Chief Executive Officer, the President, a Vice President, the Secretary, an
Assistant Secretary, the Treasurer, an Assistant Treasurer, or the Chief
Financial Officer.
"OFFICERS' CERTIFICATE" means a certificate signed by the Chief
Executive Officer, the President, the Chief Financial Officer or a Vice
President, and by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer of the Company or any Guarantor, as the case may be, and
delivered to the Trustee.
"144A GLOBAL NOTE" means a permanent global note in registered form
representing the aggregate principal amount of Notes sold in reliance on Rule
144A under the Securities Act.
"OPINION OF COUNSEL" means a written opinion of counsel who may be
counsel for the Company, a Guarantor, or the Trustee, and who shall be
reasonably acceptable to the Trustee.
"OUTSTANDING" means, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture, except:
(i) Notes theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment or redemption money
in the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent
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(other than the Company or any Guarantor or any Affiliate thereof) in
trust or set aside and segregated in trust by the Company or any Guarantor
or any Affiliate thereof (if the Company or such Guarantor or Affiliate
shall act as Paying Agent) for the Holders of such Notes; PROVIDED,
HOWEVER, that if such Notes are to be redeemed, notice of such redemption
has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made;
(iii) Notes with respect to which the Company has effected defeasance
or covenant defeasance as provided in Article Four, to the extent provided
in Sections 4.02 and 4.03; and
(iv) Notes in exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture, other than any
such Notes in respect of which there shall have been presented to the
Trustee proof satisfactory to it that such Notes are held by a bona fide
purchaser in whose hands the Notes are valid obligations of the Company;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company, any Guarantor or any other obligor upon the Notes or any Affiliate
of the Company, any Guarantor or such other obligor shall be disregarded and
deemed not to be Outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Notes that a Responsible Officer of
the Trustee knows to be so owned shall be so disregarded. The Company shall
notify the Trustee, in writing, when it repurchases or otherwise acquires Notes,
of the aggregate principal amount of such Notes so repurchased or otherwise
acquired. Notes so owned which have been pledged in good faith may be regarded
as Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act as a Holder with respect to such Notes and that the
pledgee is not the Company, any Guarantor or any other obligor upon the Notes or
any Affiliate of the Company, any Guarantor or such other obligor. If the Paying
Agent holds, in its capacity as such, on any Maturity Date or on any optional
redemption date money sufficient to pay all accrued interest and principal with
respect to such Notes payable on that date and is not prohibited from paying
such money to the Holders thereof pursuant to the terms of this Indenture, then
on and after that date such Notes cease to be Outstanding and interest on them
ceases to accrue. Notes may also cease to be outstanding to the extent expressly
provided in Article Four.
"PARI PASSU INDEBTEDNESS" means (a) any Indebtedness of the Company
which ranks PARI PASSU in right of payment to the Notes and (b) with respect to
any Guarantor, Indebtedness which ranks PARI PASSU in right of payment to the
Guarantee of such Guarantor.
"PERMITTED INDEBTEDNESS" has the meaning set forth in Section
10.12.
"PERMITTED INVESTMENTS" means (a) Cash Equivalents; (b) Investments
in prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (c)
loans and advances to employees made in the
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ordinary course of business not to exceed $1.0 million in the aggregate at any
one time outstanding, (d) Interest Rate Agreements and Currency Agreements
permitted under clause (vi) or (vii) of the second paragraph of Section 10.12,
(e) Investments represented by accounts receivable created or acquired in the
ordinary course of business, (f) loans or advances to vendors in the ordinary
course of business in an amount not to exceed $1.0 million at any time, (g)
Investments existing on the Issue Date and any renewal or replacement thereof on
terms and conditions no less favorable in any respect than that existing on the
Issue Date, (h) any Investment to the extent that the consideration therefor is
Qualified Capital Stock of the Company, (i) bonds, notes, debentures or other
securities received in connection with an Asset Sale permitted under Section
10.16 not to exceed 25% of the total consideration in such Asset Sale, (j)
shares of Capital Stock or other securities received in settlement of debts owed
to the Company or any of the Restricted Subsidiaries as a result of foreclosure,
perfection or enforcement of any Lien or indebtedness or in connection with any
good faith settlement of a bankruptcy proceeding, (k) the acceptance of notes
payable from employees of the Company or its Subsidiaries in payment for the
purchase of Capital Stock by such employees and (1) Investments in the Company,
any Restricted Subsidiary or any Person that as a result of such Investment
becomes a Restricted Subsidiary or is merged with or into or consolidated with
the Company or a Restricted Subsidiary (provided the Company or a Restricted
Subsidiary is the survivor) as a result of or in connection with such
Investment.
"PERMITTED JUNIOR SECURITIES" means Capital Stock of the Company or
debt securities that are subordinated to all Senior Indebtedness (and any debt
securities issued in exchange for Senior Indebtedness) to at least the same
extent as the Notes are subordinated to Senior Indebtedness.
"PERSON" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PREDECESSOR NOTE" means, with respect to any particular Note, every
previous Note evidencing all or a portion of the same debt as that evidenced by
such particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.07 hereof in exchange for a
mutilated Note or in lieu of a lost, destroyed or stolen Note shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Note.
"PREFERRED STOCK" means, with respect to any Person, Capital Stock
of any class or, classes (however designated) of such Person which is preferred
as to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"PRIVATE EXCHANGE SECURITIES" shall have the meaning specified in
the Registration Rights Agreement.
"PRIVATE PLACEMENT LEGEND" shall mean the first paragraph of the
legend initially set forth in the Securities in the form set forth on Exhibit
A-1.
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"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien
on assets related to the business of the Company and the Restricted Subsidiaries
and any additions and accessions thereto, which are purchased by the Company or
any Restricted Subsidiary at any time after the Notes are issued; PROVIDED that
(i) the security agreement or conditional sales or other title retention
contract pursuant to which the Lien on such assets is created (collectively, a
"Purchase Money Security Agreement") shall be entered into within 180 days after
the purchase or substantial completion of the construction of such assets and
shall at all times be confined solely to the assets so purchased or acquired,
any additions and accessions thereto and any proceeds therefrom, (ii) at no time
shall the aggregate principal amount of the outstanding Indebtedness secured
thereby be increased, except in connection with the purchase of additions and
accessions thereto and except in respect of fees and other obligations in
respect of such Indebtedness and (iii) (A) the aggregate outstanding principal
amount of Indebtedness secured thereby (determined on a per asset basis in the
case of any additions and accessions) shall not at the time such Purchase Money
Security Agreement is entered into exceed 100% of the purchase price to the
Company and the Restricted Subsidiaries of the assets subject thereto or (B) the
Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"QUALIFIED CAPITAL STOCK" of any Person means any and all Capital
Stock of such Person other than Redeemable Capital Stock.
"QUALIFIED EQUITY OFFERING" means (i) any underwritten public
offering of Capital Stock (other than Redeemable Capital Stock) of the Company
made on a primary basis by the Company pursuant to a registration statement
filed with and declared effective by the Commission in accordance with the
Securities Act or (ii) any sale of Capital Stock (other than Redeemable Capital
Stock) for gross cash proceeds of at least $20.0 million to one or more Persons,
provided that such Persons are not Affiliates of the Company at the time of such
sale.
"QUALIFIED INSTITUTIONAL BUYER" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"REDEEMABLE CAPITAL STOCK" means any class or series of Capital
Stock to the extent that, either by its terms, by the terms of any security into
which it is convertible or exchangeable, or by contract or otherwise, is or upon
the happening of an event or passage of time would be, required to be redeemed
prior to any Stated Maturity of the principal of the Notes or is redeemable at
the option of the holder thereof at any time prior to such Stated Maturity, or
is convertible into or exchangeable for debt securities at any time prior to
such Stated Maturity.
"REFERENCE PERIOD" has the meaning set forth under the definition
of "Consolidated Fixed Charge Coverage Ratio."
"REGISTRABLE SECURITIES" shall have the meaning specified in the
Registration Rights Agreement.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of March 30, 1999 by and among the Company, the Guarantors
and the Initial Purchasers, as
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the same may be amended, supplemented or otherwise modified from time to time in
accordance with the terms thereof attached hereto as Exhibit E.
"REGULAR RECORD DATE" means the Regular Record Date specified in
the Notes.
"REGULATION S" means Regulation S under the Securities Act.
"REGULATION S GLOBAL NOTE" means a permanent global note in
registered form representing the aggregate principal amount of Notes sold in
reliance on Regulation S under the Securities Act.
"REORGANIZATION SECURITIES" means , with respect to any insolvency
or liquidation proceeding involving the Company, Capital Stock or other
securities of the Company as reorganized or readjusted (or Capital Stock or any
other securities of any other Person provided for by a plan of reorganization or
readjustment) that are subordinated, at least to the same extent as the Notes,
to the payment of all outstanding Senior Indebtedness after giving effect to
such plan of reorganization or readjustment; PROVIDED, HOWEVER, that if debt
securities such securities shall not provide for amortization (including sinking
fund and mandatory prepayment provisions) commencing prior to three months
following the final scheduled maturity of all Senior Debt of the Company (as
modified by such plan of reorganization or readjustment).
"RESPONSIBLE OFFICER" means, with respect to the Trustee, the
chairman or vice chairman of the board of directors, the chairman or vice
chairman of the executive committee of the board of directors, the president,
any vice president, the secretary, any assistant secretary, the treasurer, any
assistant treasurer, the cashier, any assistant cashier, any trust officer or
assistant trust officer, the controller and any assistant controller or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer of the Trustee to whom
any corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"RESTRICTED NOTE" means a Note that constitutes a "restricted
security" within the meaning of Rule 144(a)(3) under the Securities Act;
PROVIDED, HOWEVER, that the Trustee shall be entitled to request and
conclusively rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Note.
"RESTRICTED PAYMENT" has the meaning set forth under
Section 10.14.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that has
not been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with Section 10.21. Any such designation may be revoked by a
Board Resolution of the Board of Directors of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"REVOCATION" has the meaning set forth in Section 10.21.
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"RULE 144A" means Rule 144A under the Securities Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"SENIOR INDEBTEDNESS" means, with respect to the Company or any
Guarantor, as applicable, the principal of, premium, if any, interest on any
Indebtedness of the Company or such Guarantor, as the case may be, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to any
Indebtedness of the Company or such Guarantor, as the case may be. Without
limiting the generality of the foregoing, "Senior Indebtedness" will include the
principal of, premium, if any, interest (including interest that would accrue
but for the filing of a petition initiating any proceeding under any state or
federal bankruptcy laws, whether or not such claim is allowable in such
proceeding) on all obligations of every nature of the Company or such Guarantor,
as the case may be, and all indemnity and other payment obligations from time to
time owed to the lenders under the Credit Facility, including, without
limitation, principal of and interest on, and all indemnities, fees and expenses
payable under the Credit Facility. Notwithstanding the foregoing, "Senior
Indebtedness" shall not include, to the extent constituting Indebtedness, (i)
Indebtedness evidenced by the Notes or the Guarantees, (ii) Indebtedness that is
subordinate or junior in right of payment to any Indebtedness of the Company or
any Guarantor, (iii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company or any Guarantor, (iv) Indebtedness which is represented
by Redeemable Capital Stock, (v) Indebtedness for goods, materials or services
purchased in the ordinary course of business or Indebtedness consisting of trade
payables or other current liabilities (other than any current liabilities owing
under the Credit Facility or the current portion of any long-term Indebtedness
which would constitute Senior Indebtedness but for the operation of this clause
(v)), (vi) Indebtedness of or amounts owed by the Company or any Guarantor for
compensation to employees or for services rendered to the Company or such
Guarantor, (vii) any liability for federal, state, local or other taxes owed or
owing by the Company or any Guarantor, (viii) Indebtedness of the Company or any
Guarantor to a Subsidiary of the Company, and (ix) that portion of any
Indebtedness which at the time of issuance is issued in violation of this
Indenture.
"SPECIAL RECORD DATE" means, with respect to the payment of any
Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.08 hereof.
"STATED MATURITY" means, with respect to any Note or any installment
of interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable,
and when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness, or any installment of interest is due and
payable.
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"SUBORDINATED INDEBTEDNESS" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to the Notes or, with respect to any Guarantor, Indebtedness of such Guarantor
which is expressly subordinated in right of payment to the Guarantee of such
Guarantor.
"SUBSIDIARY" means, with respect to any Person, (a) any corporation
of which the outstanding shares of Voting Capital Stock having at least a
majority of the votes entitled to be cast in the election of directors shall at
the time be owned, directly or indirectly, by such Person, or (b) any other
Person of which at least a majority of the shares of Voting Capital Stock are at
the time, directly or indirectly, owned by such first named Person.
"SURVIVING PERSON" means, with respect to any Person involved in any
consolidation or merger, or any sale, assignment, conveyance, transfer, lease or
other disposition of all or substantially all of its properties and assets as an
entirety, the Person formed by or surviving such merger or consolidation or the
Person to which such sale, assignment, conveyance, transfer or lease is made.
"TRANSACTION DATE" has the meaning set forth under the definition
of "Consolidated Fixed Charge Coverage Ratio."
"TRUST INDENTURE ACT" or "TIA" means the Trust Indenture Act of
1939, as amended.
"TRUSTEE" means the Person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"UNRESTRICTED NOTES" means one or more Notes that do not and are not
required to bear the Private Placement Legend in the form set forth in Exhibit
A, including, without limitation, the Exchange Notes.
"UNRESTRICTED SUBSIDIARY" means each Subsidiary of the Company
(other than a Guarantor) designated as such pursuant to and in compliance with
Section 10.21, and each Subsidiary of each such Subsidiary of the Company. Any
such designation may be revoked by a Board Resolution of the Company delivered
to the Trustee, subject to the provisions of such Section 10.21.
"UNUTILIZED NET CASH PROCEEDS" has the meaning set forth in
Section 10.16.
"U.S. GOVERNMENT OBLIGATIONS" means securities that are (i) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof at any
time prior to the Stated Maturity of the Notes, and shall also include a
depository receipt issued by a bank (as
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defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any such U.S. Government Obligation or a specific payment of principal of or
interest on any such U.S. Government Obligation held by such custodian for the
account of the holder of such depository receipt; PROVIDED, HOWEVER, that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of principal of or interest on the U.S.
Government Obligation evidenced by such depository receipt.
"VOTING STOCK" means any class or classes of Capital Stock pursuant
to which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"WHOLLY-OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary
of which 100% of the outstanding Capital Stock is owned by the Company and/or
another Wholly-Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares shall be disregarded in determining the ownership
of a Restricted Subsidiary.
Section 1.02. OTHER DEFINITIONS.
DEFINED IN
TERM SECTION
---- ----------
"Act" 1.05
"Agent Member" 3.16
"Asset Sale Offer" 10.16
"Asset Sale Offer Purchase Date: 10.16
"Change of Control Date" 10.11
"Change of Control Offer" 10.11
"Change of Control Purchase Date" 10.11
"Change of Control Purchase Price" 10.11
"Defaulted Interest" 3.08
"Defeased Notes" 4.01
"EBITDA" 3.01
"EBITDA Target" 3.01
"insolvent Person" 4.04
"Interest Payment Triggering Event" 3.01
"Non-payment Default" 14.03
"Note Register" 3.06
"Registrar" 3.03
"Paying Agent" or "Agent" 3.03
"Payment Blockage Period" 14.03
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"Permitted Payment" 10.14
"Physical Notes" 3.16
"Required Filing Dates" 10.16
"Restricted Payments" 10.14
"Restricted Period" 3.17
Section 1.03. RULES OF CONSTRUCTION.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(e) all references to "$" or "dollars" refer to the lawful currency
of the United States of America; and
(f) the words "include," "included" and "including" as used herein
are deemed in each case to be followed by the phrase "without limitation."
Section 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other Persons as to other matters, and any such Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company or any
Guarantor may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such officer
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to the matters upon which his
certificate or opinion is based are erroneous. Any such certificate or opinion
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of the Company or any
Guarantor stating that the information with respect to such factual matters is
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in the possession of the Company or any Guarantor, unless such counsel knows, or
in the exercise of reasonable care should know, that the certificate or opinion
or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated, with
proper identification of each matter covered therein, and form one instrument.
Section 1.05. ACTS OF HOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in Person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution (as provided below in
subsection (b) of this Section 1.05) of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Indenture
and (subject to Section 6.01 hereof) conclusive in favor of the Trustee and the
Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
(c) The ownership of Notes shall be proved by the Note Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note or the Holder of every Note issued upon the transfer thereof or
in exchange therefor or in lieu thereof to the same extent as the original
Holder, in respect of anything done, suffered or omitted to be done by the
Trustee, any Paying Agent or the Company or any Guarantor in reliance thereon,
whether or not notation of such action is made upon such Note.
Section 1.06. NOTICES, ETC., TO THE TRUSTEE, THE COMPANY AND THE GUARANTORS.
Any request, demand, authorization, direction, notice, consent,
waiver or Act of Holders or other document provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company or any Guarantor
shall be sufficient for every purpose hereunder if made, given, furnished
or filed, in writing, to or with the Trustee at Goodwin Square, 225 Asylum
Street, 23rd Floor, Hartford, CT 06103, Facsimile: (860) 244-1889,
Attention: Susan Merker (Vice President) Reference:
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Pentacon 1999 or at any other address previously furnished in writing to
the Holders, the Company and the Guarantors by the Trustee; or
(b) the Company or a Guarantor by the Trustee or by any Holder shall
be sufficient for every purpose (except as otherwise expressly provided
herein) hereunder if in writing and mailed, first-class postage prepaid,
to the Company or such Guarantor addressed to it at Pentacon, Inc., 10375
Richmond Avenue, Suite 700, Houston, Texas 77042, Facsimile: (713)
860-1001, Attention: Chief Executive Officer and General Counsel, or at
any other address previously furnished in writing to the Trustee by the
Company.
Section 1.07. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any event,
such notice shall be sufficiently given (unless otherwise expressly provided
herein) if in writing and mailed, first-class postage prepaid, to each Holder
affected by such event, at the address of such Holder as it appears in the Note
Register, not later than the latest date, and not earlier than the earliest
date, prescribed for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Any notice when mailed
to a Holder in the aforesaid manner shall be conclusively deemed to have been
received by such Holder whether or not actually received by such Holder. Where
this Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause, it shall be impracticable to mail notice of any event
as required by any provision of this Indenture, then any method of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with any
provision of the Trust Indenture Act or another provision which is required or
deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, such provision or requirement of the Trust Indenture Act shall
control.
If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as so modified or
excluded, as the case may be.
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Section 1.09. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
Section 1.10. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company and
the Guarantors, shall bind their respective successors and assigns, whether so
expressed or not.
Section 1.11. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Notes or any
Guarantee issued pursuant hereto shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section 1.12. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes or in any Guarantee issued
pursuant hereto, express or implied, shall give to any Person (other than the
parties hereto and their successors hereunder, any Paying Agent and the Holders)
any benefit or any legal or equitable right, remedy or claim under this
Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND THE GUARANTEES SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. NO RECOURSE AGAINST OTHERS.
A director, officer, employee or stockholder, as such, of the
Company or of a Guarantor shall not have any liability for any obligations of
the Company or a Guarantor under the Notes, the Guarantees or this Indenture or
for any claim based on, in respect of or by reason of such obligations or their
creation.
Section 1.15. INDEPENDENCE OF COVENANTS.
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or condition exists.
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Section 1.16. EXHIBITS.
All exhibits attached hereto are by this reference made a part
hereof with the same effect as if herein set forth in full.
Section 1.17. COUNTERPARTS.
This Indenture may be executed in any number of counterparts and by
telecopier, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
Section 1.18. DUPLICATE ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
ARTICLE TWO
NOTE AND GUARANTEE FORMS
Section 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication with
respect thereto and the Guarantees shall be in substantially the forms set
forth, or referenced, in Exhibit A-1, Exhibit A-2 and Exhibit D, respectively,
annexed hereto, with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with any applicable law
or with the rules of the Depository, any clearing agency or any securities
exchange or as may, consistently herewith, be determined by the officers
executing such Notes and Guarantees, as evidenced by their execution thereof.
The definitive Notes and Guarantees shall be printed, typewritten,
lithographed or engraved or produced by any combination of these methods or may
be produced in any other manner permitted by the rules of any securities
exchange on which the Notes and such Guarantees may be listed, if any, all as
determined by the officers executing such Notes and Guarantees, as evidenced by
their execution of such Notes and Guarantees.
Each Note shall be dated the date of its issuance and shall show the
date of its authentication. The terms and provisions contained in the Notes
shall constitute, and are expressly made, a part of this Indenture.
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ARTICLE THREE
THE NOTES
Section 3.01. TITLE AND TERMS.
PRINCIPAL AMOUNT. The aggregate principal amount of Notes which may
be authenticated and delivered under this Indenture is limited to $100,000,000
in aggregate principal amount of Notes, except for Notes authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu of,
other Notes pursuant to Section 3.04, 3.05, 3.06, 3.07 or 9.06.
MATURITY AND INTEREST. The Notes will mature on April 1, 2009.
Interest on the Notes will accrue at the rate of 12 1/4% per annum from the
Issue Date through maturity; PROVIDED that in the event either (x) EBITDA (as
defined below) of the Company and the Restricted Subsidiaries does not equal or
exceed $7.25 million (the "EBITDA Target") for the quarter ended March 31, 1999,
the interest rate on the Notes will increase by 0.50% per annum to a rate of 12
3/4% per annum and the Notes will begin accruing interest at such higher rate on
April 1, 1999, or (y) EBITDA of the Company and the Restricted Subsidiaries does
not equal or exceed the EBITDA Target for the quarter ended June 30, 1999, the
interest rate on the Notes will increase by 0.50% per annum to a rate of 12 3/4%
per annum and the Notes would begin accruing interest at such higher rate on
July 1, 1999; PROVIDED, FURTHER, that the interest rate on the Notes will not
exceed 12 3/4% per annum. Following any increase in interest rate as stated
above, no further adjustment (upward or downward) shall be made to the interest
rate on the Notes through maturity. In the event the Company and the Restricted
Subsidiaries meet the EBITDA Target for each of the quarters ended March 31,
1999 and June 30, 1999, no adjustment (upward or downward) will be made to the
interest rate. In the event the interest rate is increased pursuant to this
paragraph, such event shall be referred to as an "Interest Payment Triggering
Event." If the Company fails to file a quarterly report on Form 10-Q for a
quarter when it would otherwise be required by the Commission's rules, whether
or not it is so obligated to do so under Section 10.10 hereof, for which the
EBITDA Target is being determined, EBITDA for such quarter shall be deemed to be
less than the EBITDA Target.
As used in the preceding paragraph, "EBITDA" means Consolidated Cash
Flow Available for Fixed Charges; PROVIDED that all Consolidated Cash Flow
Available for Fixed Changes attributable to any Persons, assets or property that
were the subject of any Asset Acquisition or Investment (without giving effect
to the last sentence of the definition of Investment) made during the quarters
ended March 31, 1999 and June 30, 1999, shall be excluded from EBITDA. EBITDA
shall be derived from the applicable unaudited interim consolidated financial
statements of the Company and shall be determined in good faith by the Company,
consistent with the audited financial statements of the Company as included in
the Offering Memorandum, with all necessary normal recurring adjustments, and
shall be communicated to the Trustee by Officer's Certificate signed by two
officers of the Company on or prior to the date such financial statements are
filed with the Commission.
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Interest will be payable semi-annually on each April 1 and October
1, commencing October 1, 1999, to the holders of record of Notes at the close of
business on the March 15 and September 15, respectively, immediately preceding
such interest payment date. Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the Issue Date. Interest on the Notes shall be computed on the basis of a
360-day year of twelve 30-day months.
Pursuant to the Registration Rights Agreement, the interest rate on
the Notes is subject to increase under certain circumstances if the Company is
not in compliance with its obligations under the Registration Rights Agreement.
The terms and provisions contained in the Notes annexed hereto as
Exhibits A-1 and A-2 (including the Guarantees annexed hereto as Exhibit D)
shall constitute, and are hereby expressly made, a part of this Indenture and,
to the extent applicable, the Company, the Guarantors and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
Section 3.02. OPTIONAL REDEMPTION.
The Notes will be redeemable at the option of the Company as set
forth in the Notes and in Article Thirteen.
Section 3.03. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency (which shall be
located in the Borough of Manhattan in The City of New York, State of New York)
where Notes may be presented for registration of transfer or for exchange (the
"Registrar"), an office or agency (which shall be located in the Borough of
Manhattan in The City of New York, State of New York) where Notes may be
presented for payment (the "Paying Agent" or "Agent") and an office or agency
where notices and demands to or upon the Company in respect of the Notes, the
Guarantees and this Indenture may be served. The Registrar shall keep a register
of the Notes and of their transfer and exchange. The Company may have one or
more co-registrars and one or more additional paying agents. The term "Paying
Agent" or "Agent" includes any additional paying agent. The Company may act as
its own Paying Agent, except for the purposes of payments on account of
principal on the Notes pursuant to Sections 10.11 and 10.16 hereof.
The Company shall enter into an appropriate agency agreement with
any Agent not a party to this Indenture, which shall incorporate the provisions
of the Trust Indenture Act. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of the
name and address of any such Agent. If the Company fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such and shall be entitled to appropriate compensation in accordance with
Section 6.07 hereof.
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The Company initially appoints the Trustee as the Registrar and
Paying Agent and agent for service of notices and demands at the Corporate Trust
Office in connection with the Notes.
Section 3.04. EXECUTION AND AUTHENTICATION.
The Initial Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A-1 hereto. The Exchange Notes and
the Trustee's certificate of authentication relating thereto shall be
substantially in the form of Exhibit A-2 hereto. The Notes may have notations,
legends or endorsements required by law, stock exchange rule or usage. The
Company shall approve the form of the Notes and any notation, legend or
endorsement thereon. Each Note shall be dated the date of issuance and shall
show the date of its authentication. Each Note shall have an executed Guarantee
from each of the Guarantors endorsed thereon substantially in the form of
Exhibit D hereto.
Notes shall be issued initially in the form of one or more Global
Notes, substantially in the form set forth in Exhibit A-1, deposited with the
Trustee, as custodian for the Depository, duly executed by the Company (and
having an executed Guarantee from each of the Guarantors endorsed thereon) and
authenticated by the Trustee as hereinafter provided and shall bear the legend
set forth in Exhibit B. The aggregate principal amount of the Global Notes may
from time to time be increased or decreased by adjustments made on the records
of the Trustee, as custodian for the Depository, as hereinafter provided.
Two Officers shall sign, or one Officer shall sign, and one Officer
(each of whom shall, in each case, have been duly authorized by all requisite
corporate actions) shall attest to, the Notes for the Company, and the
Guarantees for the Guarantors, by manual or facsimile signature.
If an Officer or Assistant Secretary whose signature is on a Note or
a Guarantee, as the case may be, was an Officer or Assistant Secretary at the
time of such execution but no longer holds that office or position at the time
the Trustee authenticates the Note, the Note shall nevertheless be valid.
The Trustee shall authenticate (i) Initial Notes for original issue
in an aggregate principal amount not to exceed $100,000,000, (ii) Private
Exchange Notes from time to time only in exchange for a like principal amount of
Initial Notes and (iii) Unrestricted Notes from time to time only in exchange
for (A) a like principal amount of Initial Notes or (B) a like principal amount
of Private Exchange Notes, in each case upon a written order of the Company in
the form of an Officers' Certificate of the Company. Each such written order
shall specify the amount of Notes to be authenticated and the date on which the
Notes are to be authenticated, whether the Notes are to be Initial Notes,
Private Exchange Notes or Unrestricted Notes and such other information as the
Trustee may reasonably request. The aggregate principal amount of Notes
outstanding at any time may not exceed $100,000,000, except as provided in
Section 3.07.
Notwithstanding the foregoing, all Notes issued under this Indenture
shall vote and consent together on all matters (as to which any of such Notes
may vote or consent) as one
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class and no series of Notes will have the right to vote or consent as a
separate class on any matter.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Notes. Unless otherwise provided in
the appointment, an authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company and Affiliates of the Company.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
Section 3.05. TEMPORARY NOTES.
Until definitive Notes are prepared and ready for delivery, the
Company may execute and upon a Company Order the Trustee shall authenticate and
deliver temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes, in any authorized denominations, but may have variations that
the Company reasonably considers appropriate for temporary Notes as conclusively
evidenced by the Company's execution of such temporary Notes.
If temporary Notes are issued, the Company will cause definitive
Notes to be prepared without unreasonable delay but in no event later than the
date that the Exchange Offer is consummated. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 10.02, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Notes, the
Company shall execute and the Trustee shall authenticate and deliver in exchange
therefor a like principal amount of definitive Notes of like tenor and of
authorized denominations. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes.
Section 3.06. TRANSFER AND EXCHANGE.
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 10.02 being sometimes referred
to herein as the "Note Register") in which, subject to such reasonable
regulations as the Registrar may prescribe, the Company shall provide for the
registration of Notes and of transfers and exchanges of Notes. The Trustee is
hereby initially appointed Registrar for the purpose of registering Notes and
transfers of Notes as herein provided.
Subject to Sections 3.16 and 3.17, when Notes are presented to the
Registrar or a co-Registrar with a request from the Holder of such Notes to
register the transfer or exchange for an equal principal amount of Notes of
other authorized denominations, the Registrar shall
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register the transfer or make the exchange as requested; PROVIDED, HOWEVER, that
every Note presented or surrendered for registration of transfer or exchange
shall be duly endorsed or be accompanied by a written instrument of transfer or
exchange in form satisfactory to the Company and the Registrar, duly executed by
the Holder thereof or his attorney duly authorized in writing. Whenever any
Notes are so presented for exchange, the Company and any Guarantor shall
execute, and the Trustee shall authenticate and deliver, the Notes and
Guarantees which the Holder making the exchange is entitled to receive. No
service charge shall be made to the Noteholder for any registration of transfer
or exchange. The Company may require from the Noteholder payment of a sum
sufficient to cover any transfer taxes or other governmental charge that may be
imposed in relation to a transfer or exchange, but this provision shall not
apply to any exchange pursuant to Sections 9.06, 10.11, 10.16 or 13.06 hereof
(in which events the Company will be responsible for the payment of all such
taxes which arise solely as a result of the transfer or exchange and do not
depend on the tax status of the Holder). The Trustee shall not be required to
exchange or register the transfer of any Note for a period of 15 days
immediately preceding the first mailing of notice of redemption of Notes to be
redeemed or of any Note selected, called or being called for redemption except,
in the case of any Note where public notice has been given that such Note is to
be redeemed in part, the portion thereof not to be redeemed.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same
Indebtedness, and entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such Global Note, agree that transfers of beneficial interests in
such Global Notes may be effected only through a book-entry system maintained by
the Holder of such Global Note (or its agent), and that ownership of a
beneficial interest in the Note shall be required to be reflected in a
book-entry system.
Section 3.07. MUTILATED, DESTROYED, LOST AND STOLEN NOTES.
If a mutilated Note is surrendered to the Trustee or if the Holder
of a Note of claims that the Note has been lost, destroyed or wrongfully taken,
the Company shall execute and upon a Company Order, the Trustee shall
authenticate and deliver a replacement Note of like tenor and principal amount,
bearing a number not contemporaneously outstanding, and the Guarantors shall
execute a replacement Guarantee, if the Holder of such Note furnishes to the
Company and to the Trustee evidence reasonably acceptable to them of the
ownership and the destruction, loss or theft of such Note and an indemnity bond
shall be posted by such Holder, sufficient in the judgment of the Company or the
Trustee, as the case may be, to protect the Company, the Trustee or any Agent
from any loss that any of them may suffer if such Note is replaced. The Company
may charge such Holder for the Company's and any Guarantor's expenses in
replacing such Note (including (i) expenses of the Trustee charged to the
Company and (ii) any tax or other governmental charge that may be imposed) and
the Trustee may charge the Company for the Trustee's expenses in replacing such
Note.
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Every replacement Note and Guarantee issued pursuant to this Section
in lieu of any destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Company and each Guarantor, whether or
not the destroyed, lost or stolen Note shall be at any time enforceable by
anyone, and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Notes duly issued hereunder.
Section 3.08. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Note which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Note (or one or more Predecessor Notes) is registered at the
close of business on the Regular Record Date for such interest.
Any interest on any Note which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date and interest on such
defaulted interest at the then applicable interest rate borne by the Notes, to
the extent lawful (such defaulted interest and interest thereon herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the Regular Record Date; and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in subsection (a) or
(b) below:
(a) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on a Special Record Date
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Note and the date
of the proposed payment, and at the same time the Company shall deposit
with the Trustee an amount of money equal to the aggregate amount proposed
to be paid in respect of such Defaulted Interest or shall make
arrangements satisfactory to the Trustee for such deposit prior to the
date of the proposed payment, such money when deposited to be held in
trust for the benefit of the Persons entitled to such Defaulted Interest
as provided in this subsection (a). Thereupon the Trustee shall fix a
Special Record Date for the payment of such Defaulted Interest which shall
be not more than 15 days and not less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall promptly
notify the Company in writing of such Special Record Date. In the name and
at the expense of the Company, the Trustee shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder at its
address as it appears in the Note Register, not less than 10 days prior to
such Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons in whose names the Notes
(or their respective Predecessor Notes) are registered on such Special
Record Date and shall no longer be payable pursuant to the following
subsection (b).
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(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice
as may be required by such exchange, if, after written notice given by the
Company to the Trustee of the proposed payment pursuant to this subsection
(b), such payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 3.09. PERSONS DEEMED OWNERS.
Prior to and at the time of due presentment for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name any Note is registered in the Note Register
as the owner of such Note for the purpose of receiving payment of principal of,
premium, if any, and (subject to Section 3.08) interest on such Note and for all
other purposes whatsoever, whether or not such Note shall be overdue, and
neither the Company, the Trustee nor any agent of the Company or the Trustee
shall be affected by notice to the contrary.
Section 3.10. CANCELLATION.
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Company and any Guarantor may at
any time deliver to the Trustee for cancellation any Notes previously
authenticated and delivered hereunder which the Company or such Guarantor may
have acquired in any manner whatsoever, and all Notes so delivered shall be
promptly canceled by the Trustee. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer or exchange, redemption or payment. The Trustee and no one else shall
cancel all Notes surrendered for registration of transfer, exchange, payment,
replacement or cancellation. No Notes shall be authenticated in lieu of or in
exchange for any Notes canceled as provided in this Section 3.10, except as
expressly permitted by this Indenture. All canceled Notes held by the Trustee
shall be destroyed and certification of their destruction delivered to the
Company unless by a Company Order the Company shall direct that the canceled
Notes be returned to it. The Trustee shall provide the Company a list of all
Notes that have been canceled from time to time as requested by the Company. If
the Company or any Affiliate of the Company acquires any Notes (other than by
redemption pursuant to Section 13.07 or an Offer pursuant to Section 10.11 or
10.16), such acquisition shall not operate as a redemption or satisfaction of
the Indebtedness represented by such Notes unless and until such Notes are
delivered to the Trustee for cancellation.
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Section 3.11. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date, date
established for the payment of Defaulted Interest or Stated Maturity of any Note
shall not be a Business Day, then (notwithstanding any other provision of this
Indenture or of the Notes) payment of principal, premium, if any, or interest
need not be made on such date, but may be made on the next succeeding Business
Day with the same force and effect as if made on the Interest Payment Date,
Redemption Date, date established for the payment of Defaulted Interest or at
the Stated Maturity, as the case may be. In such event, no interest shall accrue
with respect to such payment for the period from and after such Interest Payment
Date, Redemption Date, date established for the payment of Defaulted Interest or
Stated Maturity, as the case may be, to the next succeeding Business Day and,
with respect to any Interest Payment Date, interest for the period from and
after such Interest Payment Date shall accrue with respect to the next
succeeding Interest Payment Date.
Section 3.12. CUSIP AND CINS NUMBERS.
The Company in issuing the Notes may use "CUSIP" and "CINS" numbers
(if then generally in use), and if so, the Trustee shall use the CUSIP or CINS
numbers, as the case may be, in notices of redemption or exchange as a
convenience to Holders; PROVIDED, HOWEVER, that any such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP or CINS
number, as the case may be, printed in the notice or on the Notes, and that
reliance may be placed only on the other identification numbers printed on the
Notes. The Company shall promptly notify the Trustee in writing of any change in
the CUSIP or CINS number of any type of Notes.
Section 3.13. PAYING AGENT TO HOLD MONEY IN TRUST.
Each Paying Agent shall hold in trust for the benefit of the
Noteholders or the Trustee all money held by the Paying Agent for the payment of
principal of, premium, if any, or interest on the Notes, and shall notify the
Trustee of any default by the Company in making any such payment. Money held in
trust by the Paying Agent need not be segregated except as required by law and
except if the Company, any Guarantor or any of their respective Affiliates is
acting as Paying Agent, and in no event shall the Paying Agent be liable for any
interest on any money received by it hereunder. The Company at any time may
require the Paying Agent to pay all money held by it to the Trustee and account
for any funds disbursed and the Trustee may at any time during the continuance
of any Event of Default, upon a Company Order to the Paying Agent, require such
Paying Agent to pay forthwith all money so held by it to the Trustee and to
account for any funds disbursed. Upon making such payment, the Paying Agent
shall have no further liability for the money delivered to the Trustee.
Section 3.14. TREASURY NOTES.
In determining whether the Holders of the required aggregate
principal amount of Notes have concurred in any direction, waiver, consent or
notice, Notes owned by the Company or an Affiliate of the Company shall be
considered as though they are not outstanding, except
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that for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Notes which the Trustee
actually knows are so owned shall be so considered. The Company shall notify the
Trustee, in writing, when it or any of its Affiliates repurchases or otherwise
acquires Notes, of the aggregate principal amount of such Notes so repurchased
or otherwise acquired.
Section 3.15. DEPOSITS OF MONIES.
Prior to 11:30 a.m. New York City time on each Interest Payment
Date, maturity date, Change of Control Purchase Date and Asset Sale Offer
Purchase Date, the Company shall have deposited with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date, maturity date, Change of Control Purchase Date
and Asset Sale Offer Purchase Date, as the case may be, in a timely manner which
permits the Paying Agent to remit payment to the Holders on such Interest
Payment Date, maturity date, Change of Control Purchase Date and Asset Sale
Offer Purchase Date, as the case may be.
Section 3.16. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES.
(a) The Global Notes initially shall (i) be registered in the name
of the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Exhibit B.
Members of, or participants in, the Depository ("Agent Members")
shall have no rights under this Indenture with respect to any Global Note held
on their behalf by the Depository, or the Trustee as its custodian, or under the
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of the Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Trustee or any agent of the Company or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depository or impair, as between the Depository and its Agent
Members, the operation of customary practices governing the exercise of the
rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in
whole, but not in part, to the Depository, its successors or their respective
nominees. Interests of beneficial owners in the Global Notes may be transferred
or exchanged for Physical Notes in accordance with the rules and procedures of
the Depository. In addition, Notes in the form of Exhibit A-1 or Exhibit A-2, as
the case may be, (without bearing the legends set forth on Exhibit B (the
"Physical Notes")), shall be transferred to all beneficial owners in exchange
for their beneficial interests in Global Notes if (i) the Depository notifies
the Company that it is unwilling or unable to continue as Depository for any
Global Note, or that it will cease to be a "Clearing Agency" under the Exchange
Act, and in either case a successor depositary is not appointed by the Company
within 90 days of such notice or (ii) an Event of Default has occurred and is
continuing and the Registrar has received a written request from the Depository
to issue Physical Notes.
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(c) In connection with the transfer of Global Notes as an entirety
to beneficial owners pursuant to paragraph (b), the Global Notes shall be deemed
to be surrendered to the Trustee for cancellation, and the Company shall
execute, and the Trustee shall authenticate and deliver, to each beneficial
owner identified by the Depository in exchange for its beneficial interest in
the Global Notes, an equal aggregate principal amount at maturity of Physical
Notes of like tenor of authorized denominations.
(d) Any Physical Note constituting a Restricted Note delivered in
exchange for an interest in a Global Note pursuant to subparagraph (b) or (c) of
this Section 3.16 shall, except as otherwise provided by Section 3.17, bear the
Private Placement Legend set forth on Exhibit A-1.
(e) The Holder of any Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Notes.
Section 3.17. SPECIAL TRANSFER PROVISIONS.
(a) TRANSFERS TO NON-U.S. PERSONS. The following additional
provisions shall apply with respect to the registration of any proposed
transfer of an Initial Note to any Non-U.S. Person:
(i) the Registrar shall register the transfer of any Initial Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the second anniversary of the Issue Date;
PROVIDED, HOWEVER, that neither the Company nor any Affiliate of the
Company has held any beneficial interest in such Note, or portion thereof,
at any time on or prior to the second anniversary of the Issue Date and
such transfer can otherwise be lawfully made under the Securities Act
without registering such Initial Notes thereunder or (y) the proposed
transferor has delivered to the Registrar a certificate substantially in
the form of Exhibit C hereto;
(ii) if the proposed transferee is an Agent Member and the Notes to be
transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the Regulation S Global Note upon receipt by
the Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's procedures and (y) the appropriate
certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the
Registrar shall register the transfer and reflect on its books and records
the date and an increase in the principal amount of the Regulation S
Global Note in an amount equal to the principal amount of Physical Notes
to be transferred, and the Trustee shall cancel the Physical Notes so
transferred;
(iii) if the proposed transferor is an Agent Member seeking to transfer
an interest in a Global Note, upon receipt by the Registrar of (x) written
instructions given in accordance with the Depository's and the Registrar's
procedures and (y) the appropriate certificate, if any, required by clause
(y) of paragraph (i) above, together with any
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required legal opinions and certifications, the Registrar shall register
the transfer and reflect on its books and records the date and (A) a
decrease in the principal amount of the Global Note from which such
interests are to be transferred in an amount equal to the principal amount
of the Notes to be transferred and (B) an increase in the principal amount
of the Regulation S Global Note in an amount equal to the principal amount
of the Global Note to be transferred; and
(iv) until the 41st day after the Issue Date (the "Restricted
Period"), an owner of a beneficial interest in the Regulation S Global
Note may not transfer such interest to a transferee that is a U.S. Person
or for the account or benefit of a U.S. Person within the meaning of Rule
902(o) of the Securities Act. During the Restricted Period, all beneficial
interests in the Regulation S Global Note shall be transferred only
through Cedel or Euroclear, either directly if the transferor and
transferee are participants in such systems, or indirectly through
organizations that are participants.
(b) TRANSFERS TO QIBS. The following provisions shall apply with
respect to the registration of any proposed transfer of an Initial Note to a QIB
(excluding Non-U.S. Persons):
(i) the Registrar shall register the transfer of any Initial Note,
whether or not such Note bears the Private Placement Legend, if (x) the
requested transfer is after the second anniversary of the Issue Date;
PROVIDED, HOWEVER, that neither the Company nor any Affiliate of the
Company has held any beneficial interest in such Note, or portion thereof,
at any time on or prior to the second anniversary of the Issue Date and
such transfer can otherwise be lawfully made under the Securities Act
without registering such Initial Note thereunder or (y) such transfer is
being made by a proposed transferor who has checked the box provided for
on the form of Note stating, or has otherwise advised the Company and the
Registrar in writing, that the sale has been made in compliance with the
provisions of Rule 144A to a transferee who has signed the certification
provided for on the form of Note stating, or has otherwise advised the
Company and the Registrar in writing, that it is purchasing the Note for
its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a QIB within the
meaning of Rule 144A, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such
information regarding the Company as it has requested pursuant to Rule
144A or has determined not to request such information and that it is
aware that the transferor is relying upon its foregoing representations in
order to claim the exemption from registration provided by Rule 144A;
(ii) if the proposed transferee is an Agent Member and the Notes to be
transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the 144A Global Note, upon receipt by the
Registrar of written instructions given in accordance with the
Depository's and the Registrar's procedures, the Registrar shall register
the transfer and reflect on its book and records the date and an increase
in the principal amount of the 144A Global Note in an amount equal to the
principal amount
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of Physical Notes to be transferred, and the Trustee shall cancel the
Physical Note so transferred; and
(iii) if the proposed transferor is an Agent Member seeking to transfer
an interest in a Global Note, upon receipt by the Registrar of written
instructions given in accordance with the Depository's and the Registrar's
procedures, the Registrar shall register the transfer and reflect on its
books and records the date and (A) a decrease in the principal amount of
the Global Note from which interests are to be transferred in an amount
equal to the principal amount of the Notes to be transferred and (B) an
increase in the principal amount of the 144A Global Note in an amount
equal to the principal amount of the Global Note to be transferred.
(c) PRIVATE PLACEMENT LEGEND. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the registration of transfer, exchange or replacement of Notes bearing the
Private Placement Legend, the Registrar shall deliver only Notes that bear the
Private Placement Legend unless (i) the circumstances contemplated by paragraph
(a)(i)(x) of this Section 3.17 exist, (ii) there is delivered to the Registrar
an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to
the effect that neither such legend nor the related restrictions on transfer are
required in order to maintain compliance with the provisions of the Securities
Act or (iii) such Note has been sold pursuant to an effective registration
statement under the Securities Act.
(d) OTHER TRANSFERS. If a Holder proposes to transfer a Note
constituting a Restricted Note pursuant to any exemption from the registration
requirements of the Securities Act other than as provided for by Section
3.17(a), (b) and (c), the Registrar shall only register such transfer or
exchange if such transferor delivers an Opinion of Counsel satisfactory to the
Company and the Registrar that such transfer is in compliance with the
Securities Act and the terms of this Indenture; PROVIDED, HOWEVER, that the
Company may, based upon the opinion of its counsel, instruct the Registrar by a
Company Order not to register such transfer in any case where the proposed
transferee is not a QIB or Non-U.S. Person.
(e) GENERAL. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 3.16 or this Section 3.17.
The Company shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time upon the giving
of reasonable prior written notice to the Registrar.
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ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at its option by Board Resolution, at any time,
with respect to the Notes, elect to have either Section 4.02 or Section 4.03 be
applied to all of the Outstanding Notes (the "Defeased Notes"), upon compliance
with the conditions set forth below in this Article Four.
Section 4.02. DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 4.01 of the option
applicable to this Section 4.02, the Company and each Guarantor shall be deemed
to have been discharged from their obligations with respect to the Defeased
Notes and the related Guarantees on the date the conditions set forth below are
satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means
that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the Defeased Notes, which shall thereafter be deemed
to be "Outstanding" only for the purposes of Section 4.05 and the other Sections
of this Indenture referred to in (a) and (b) below, and to have satisfied all
its other obligations under such Notes and this Indenture insofar as such Notes
are concerned (and the Trustee, at the expense of the Company, and, upon Company
Request, shall execute proper instruments acknowledging the same), except for
the following, which shall survive until otherwise terminated or discharged
hereunder: (a) the rights of Holders of Defeased Notes to receive, solely from
the trust funds described in Section 4.04 and as more fully set forth in such
section, payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due, (b) the Company's obligations with
respect to such Defeased Notes under Sections 3.05, 3.06, 3.07, 10.02 and 10.03,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder,
including, without limitation, the Trustee's rights under Section 6.07, and (d)
this Article Four. Subject to compliance with this Article Four, the Company may
exercise its option under this Section 4.02 notwithstanding the prior exercise
of its option under Section 4.03 with respect to the Notes.
Section 4.03. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 4.01 of the option
applicable to this Section 4.03, the Company and each Guarantor shall be
released from their obligations under any covenant or provision contained in
Sections 10.05 through 10.08 and 10.10 through 10.23 and the provisions of
Article Eight and Article Fourteen shall not apply, with respect to the Defeased
Notes, on and after the date the conditions set forth below are satisfied
(hereinafter, "covenant defeasance"), and the Defeased Notes shall thereafter be
deemed not to be "Outstanding" for the purposes of any direction, waiver,
consent or declaration or Act of Holders (and the consequences of any thereof)
in connection with such covenants, but shall continue to be deemed "Outstanding"
for all other purposes hereunder. For this purpose, such covenant defeasance
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means that, with respect to the Defeased Notes, the Company and each Guarantor
may omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in Sections 10.05 through 10.08 and 10.10
through 10.23 or Article Eight, whether directly or indirectly, by reason of any
reference elsewhere herein to any such Section or Article or by reason of any
reference in any such Section or Article to any other provision herein or in any
other document and such omission to comply shall not constitute a Default under
Sections 5.01(c), (d), (e) (other than a Default thereunder arising by reason of
the covenant defeasance itself), (g), or (k), but, except as specified above,
the remainder of this Indenture and such Defeased Notes shall be unaffected
thereby.
Section 4.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE.
The following shall be the conditions to application of either
Section 4.02 or Section 4.03 to the Defeased Notes:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 6.09 who shall agree to comply with the provisions of this
Article Four applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Notes, (a) cash in
United States dollars in an amount, or (b) U.S. Government Obligations
which through the scheduled payment of principal, premium, if any, and
interest in respect thereof in accordance with their terms will provide,
not later than one day before the due date of any payment, money in an
amount, or (c) a combination thereof, in any such case, sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to
pay and discharge, and which shall be applied by the Trustee (or other
qualifying trustee) to pay and discharge, the principal of, premium, if
any, and interest on the Defeased Notes at the Stated Maturity of such
principal or installment of principal, premium, if any, or interest or at
redemption (if a notice of redemption has been duly given in accordance
with Article Thirteen), as the case may be; PROVIDED, however, that the
Company may only make such deposit if Article Fourteen does not prohibit
payments on the Notes at the time of the deposit; PROVIDED FURTHER,
HOWEVER, that the Trustee shall have been irrevocably instructed to apply
such cash or the proceeds of such U.S. Government Obligations to said
payments with respect to the Notes;
(2) No Default shall have occurred and be continuing on the date of
such deposit or, insofar as Sections 5.01(h), (i) or (j) are concerned, at
any time during the period ending on the ninety-first day after the date
of such deposit (it being understood that this condition shall not be
deemed satisfied until the expiration of such period);
(3) Neither the Company nor any Subsidiary of the Company is an
"insolvent Person" within the meaning of any applicable Bankruptcy Law on
the date of such deposit or at any time during the period ending on the
ninety-first day after the date of
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such deposit (it being understood that this condition shall not be deemed
satisfied until the expiration of such period);
(4) Such defeasance or covenant defeasance shall not cause the
Trustee for the Notes to have a conflicting interest in violation of
Section 6.08 and for purposes of the Trust Indenture Act with respect to
any securities of the Company or any Guarantor;
(5) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or
any other material agreement or instrument to which the Company or any
Guarantor is a party or by which it is bound;
(6) Such defeasance or covenant defeasance shall not result in the
trust arising from such deposit constituting an investment company within
the meaning of the Investment Company Act of 1940, as amended, unless such
trust shall be registered under such Act or exempt from registration
thereunder;
(7) The Company shall have delivered to the Trustee an Opinion of
Counsel in the United States to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect
of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally;
(8) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of the Notes or any Guarantee over the
other creditors of the Company or any Guarantor with the intent of
defeating, hindering, delaying or defrauding creditors of the Company, any
Guarantor or others;
(9) No event or condition shall exist that would prevent the Company
from making payments of the principal of, premium, if any, and interest on
the Notes on the date of such deposit on the date of such deposit;
(10) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel (which counsel shall practice in the
United States), each stating that (i) all conditions precedent provided
for relating to either the defeasance under Section 4.02 or the covenant
defeasance under Section 4.03 (as the case may be) have been complied with
as contemplated by this Section 4.04 and (ii) if any other Indebtedness of
the Company or any Guarantor shall then be outstanding or committed, such
defeasance or covenant defeasance will not violate the provisions of the
agreements or instruments evidencing such Indebtedness;
(11) In the case of an election under Section 4.02, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that (x)
the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (y) since the date hereof, there has
been a change in the applicable Federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that, the
Holders of the Outstanding Notes will not recognize income, gain or loss
for Federal
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income tax purposes as a result of such defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; and
(12) In the case of an election under Section 4.03, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such covenant
defeasance and will be subject to Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred.
Opinions required to be delivered under this Section shall be
delivered by independent counsel (other than as set forth above) and may have
such qualifications as are customary for opinions of the type required and
reasonably acceptable to the Trustee, and counsel delivering such opinion may
rely on certificates of the Company or government officials customary for
opinions of the type required.
Section 4.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to the proviso of the last paragraph of Section 10.03, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for purposes of this
Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased
Notes shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (other than the Company) as the Trustee may determine,
to the Holders of such Notes of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law. Money
deposited with the Trustee or a Paying Agent pursuant to this Article Four shall
not be subject to Article Fourteen.
The Company shall pay and indemnify the Trustee and hold it harmless
against any tax, fee or other charge imposed on or assessed against the U.S.
Government Obligations deposited pursuant to Section 4.04 or the principal,
premium, if any, and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of the
Defeased Notes.
Anything in this Article Four to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 4.04 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance.
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Section 4.06. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with Section 4.02 or 4.03, as the case may
be, by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, then the
obligations of the Company and of any Guarantor under this Indenture, the Notes
and the Guarantees shall be revived and reinstated as though no deposit had
occurred pursuant to Section 4.02 or 4.03, as the case may be, until such time
as the Trustee or Paying Agent is permitted to apply all such money and U.S.
Government Obligations in accordance with Section 4.02 or 4.03, as the case may
be; PROVIDED, HOWEVER, that if the Company makes any payment of principal,
premium, if any, or interest on any Note following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money and U.S. Government
Obligations held by the Trustee or Paying Agent.
ARTICLE FIVE
REMEDIES
Section 5.01. EVENTS OF DEFAULT.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(a) default in the payment of the principal of or premium, if any,
when due and payable, on any of the Notes (at its Stated Maturity, upon
optional redemption, acceleration, required purchase, sinking fund,
scheduled principal payment or otherwise) (without regard to the
subordination provisions contained in this Indenture); or
(b) default in the payment of an installment of interest on any of
the Notes, when due and payable, continued for 30 days or more (without
regard to the subordination provisions contained in this Indenture); or
(c) the Company or any Guarantor fails to comply with any of its
obligations described under Article 8 or Sections 10.11 or 10.16; or
(d) the Company or any Guarantor fails to perform or observe any
other term, covenant or agreement contained in the Notes, the Guarantees
or this Indenture (other than a default specified in (a), (b) or (c)
above) for a period of 30 days after written notice of such failure
requiring the Company to remedy the same shall have been given (x) to the
Company by the Trustee or (y) to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Notes then
Outstanding; or
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(e) default or defaults under one or more agreements, indentures or
instruments under which the Company, any Guarantor or any Restricted
Subsidiary then has outstanding Indebtedness in excess of $10.0 million
individually or in the aggregate and either (a) such Indebtedness is
already due and payable in full or (b) such default or defaults result in
the acceleration of the maturity of such Indebtedness; or
(f) (a) any Guarantee ceases to be in full force and effect or is
declared null and void or (b) any Guarantor denies that it has any further
liability under any Guarantee, or gives notice to such effect (other than,
in each case, by reason of the termination of this Indenture or the
release of any such Guarantee in accordance with Section 12.05, provided,
with respect to any Guarantor that is not a Material Subsidiary, if an
event described under subclause (a) or (b) will occur such event will not
be an Event of Default unless such event shall have continued for a period
of 30 days after (x) in the case of subclause (a) of this clause (f),
written notice of such condition shall have been given to the Company and
the Guarantor by the Trustee or to the Company, the Guarantor and the
Trustee by the Holders of 25% in the aggregate principal amount of the
Notes then Outstanding or (y) in the case of subclause (b) of this clause
(f), the date of such denial or notice by the Guarantor; or
(g) one or more judgments, orders or decrees of any court or
regulatory or administrative agency for the payment of money in excess of
$10.0 million either individually or in the aggregate, not covered by
insurance (provided that, to the extent covered by insurance, the insurer
has not disclaimed or indicated an intent to disclaim responsibility for
the payment thereof) shall have been rendered against the Company, any
Guarantor or any Restricted Subsidiary or any of their respective
properties and shall not have been discharged and either (a) any creditor
shall have commenced an enforcement proceeding upon such judgment, order
or decree or (b) there shall have been a period of 60 consecutive days
during which a stay of enforcement of such judgment, order or decree, by
reason of a pending appeal or otherwise, shall not be in effect; or
(h) the Company, any Guarantor or any Material Subsidiary of the
Company pursuant to or under or within the meaning of any Bankruptcy Law:
(i) commences a voluntary case or proceeding;
(ii) consents to the making of a Bankruptcy Order in an
involuntary case or proceeding or the commencement of any case
against it;
(iii) consents to the appointment of a Custodian of it or for any
substantial part of its property;
(iv) makes a general assignment for the benefit of its
creditors;
(v) files an answer or consent seeking reorganization or
relief;
(vi) shall admit in writing its inability to pay its debts
generally; or
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(vii) consents to the filing of a petition in bankruptcy; or
(i) a court of competent jurisdiction in any involuntary case or
proceeding enters a Bankruptcy Order against the Company, any Guarantor or
any Material Subsidiary, and such Bankruptcy Order remains unstayed and in
effect for 60 consecutive days; or
(j) a Custodian shall be appointed out of court with respect to the
Company, any Guarantor or any Material Subsidiary or with respect to all
or any substantial part of the assets or properties of the Company, any
Guarantor or any Material Subsidiary; or
(k) any holder of at least $10.0 million in aggregate principal
amount of Indebtedness of the Company, any Guarantor or any Restricted
Subsidiary shall commence judicial proceedings to foreclose upon assets of
the Company, any Guarantor or any of its Restricted Subsidiaries having an
aggregate Fair Market Value, individually or in the aggregate, in excess
of $10.0 million or shall have exercised any right under applicable law or
applicable security documents to take ownership of any such assets in lieu
of foreclosure.
Section 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default (other than as specified in Sections 5.01(h),
(i) or (j) with respect to the Company) shall occur and be continuing, the
Trustee, by notice to the Company, or the Holders of at least 25% in aggregate
principal amount of the Notes then Outstanding, by notice to the Trustee and the
Company, may declare the principal of, premium, if any, and accrued interest on
all of the Outstanding Notes due and payable immediately, upon which declaration
all such amounts payable in respect of the Notes will become and be immediately
due and payable; PROVIDED that so long as the Credit Facility shall be in full
force and effect, if an Event of Default shall have occurred and be continuing
(other than as specified in Sections 5.01(h), (i) or (j) with respect to the
Company), any such acceleration shall not be effective until the earlier to
occur of (x) five Business Days following delivery of a notice of such
acceleration to the representative under the Credit Facility and (y) the
acceleration of any Indebtedness under the Credit Facility. If an Event of
Default specified in Sections 5.01(h), (i) or (j) with respect to the Company
occurs and is continuing, then the principal of, premium, if any, and accrued
interest on all of the Outstanding Notes will IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes.
Notwithstanding the preceding paragraph, in the event of a
declaration of acceleration in respect of the Notes due to an Event of Default
specified in Section 5.01(e) shall have occurred and be continuing, such
declaration of acceleration will be automatically annulled if the Indebtedness
that is the subject of such Event of Default has been discharged or paid (if
permitted by the terms thereof) or the requisite holders thereof have rescinded
their declaration of acceleration in respect of such Indebtedness, and written
notice of such discharge or rescission, as the case may be, shall have been
given to the Trustee by the Company, within 45 days after
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such acceleration in respect of the Notes and no other Event of Default has
occurred which has not been cured or waived during such 45-day period.
At any time after a declaration of acceleration, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration if:
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under this
Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, (ii) all overdue interest
on all Outstanding Notes, (iii) the principal of and premium, if any, on
any Outstanding Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the
Outstanding Notes, and (iv) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate borne by the
Outstanding Notes, and
(b) all Events of Default, other than the non-payment of principal
of, premium, if any, and interest on the Notes that has become due solely
by such declaration of acceleration, have been cured or waived as provided
in Section 5.13.
No such rescission shall affect any subsequent Default or impair any
right consequent thereon.
Section 5.03. COLLECTION OF INDEBTEDNESS AND SUITS. for Enforcement by Trustee.
The Company and each Guarantor covenant that if an Event of Default
specified in Section 5.01(a) or 5.01(b) shall have occurred and be continuing,
the Company and each Guarantor will, jointly and severally, upon demand of the
Trustee, pay to the Trustee, for the benefit of the Holders of such Notes, the
whole amount then due and payable on such Notes for principal, premium, if any,
and interest, with interest upon the overdue principal, premium, if any, and, to
the extent that payment of such interest shall be legally enforceable, upon
overdue installments of interest, at the rate then borne by the Notes; and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
If the Company and each Guarantor fail to pay such amounts forthwith
upon such demand, the Trustee, in its own name and as trustee of an express
trust, may, but is not obligated under this paragraph to, institute a judicial
proceeding for the collection of the sums so due and unpaid and may, but is not
obligated under this paragraph to, prosecute such proceeding to judgment or
final decree, and may, but is not obligated under this paragraph to, enforce the
same against the Company, any Guarantor or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company or any Guarantor or any other obligor
upon the Notes, wherever situated.
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If an Event of Default occurs and is continuing, the Trustee may in
its discretion but is not obligated under this paragraph to, (i) proceed to
protect and enforce its rights and the rights of the Holders under this
Indenture or any Guarantee by such appropriate private or judicial proceedings
as the Trustee shall deem most effectual to protect and enforce such rights,
whether for the specific enforcement of any covenant or agreement contained in
this Indenture or in aid of the exercise of any power granted herein, including,
without limitation, seeking recourse against any Guarantor or (ii) proceed to
protect and enforce any other proper remedy, including, without limitation,
seeking recourse against any Guarantor. No recovery of any such judgment upon
any property of the Company or any Guarantor shall affect or impair any rights,
powers or remedies of the Trustee or the Holders.
Section 5.04. TRUSTEE MAY FILE PROOFS OF CLAIMS.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or any other obligor upon the
Notes, including each Guarantor or the property of the Company or of such other
obligor or their creditors, the Trustee (irrespective of whether the principal
of the Notes shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have made
any demand on the Company for the payment of overdue principal or interest)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and
to file such other papers or documents as may be necessary or advisable in
order to have the claims of the Trustee (including any claim for the
reasonable compensation, fees, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in such
judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any Custodian, in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.07 hereof.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
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Section 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES.
All rights of action and claims under this Indenture, the Notes or
any Guarantee may be prosecuted and enforced by the Trustee without the
possession of any of the Notes or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name and as trustee of an express trust, and any recovery of
judgment shall, after provision for the payment of the reasonable compensation,
fees, expenses, disbursements and advances of the Trustee, its agents and
counsel, be for the ratable benefit of the Holders of the Notes in respect of
which such judgment has been recovered.
Section 5.06. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, premium, if
any, or interest, upon presentation of the Notes and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to the holders of Senior Indebtedness to the extent
required by Article Fourteen.
Third: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts
due and payable on the Notes for interest;
Fourth: to Holders for principal and premium, if any, amounts
owing under the Notes, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for
principal and premium, if any; and
Fifth: the balance, if any, to the Company.
The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Holders pursuant to this Section
5.06.
Section 5.07. LIMITATION ON SUITS.
No holder of any of the Notes has any right to institute any
proceeding with respect to this Indenture or any remedy thereunder, unless
(i) the Holders of at least 25% in aggregate principal amount of the
Outstanding Notes have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as Trustee under
the Notes and this Indenture,
(ii) the Trustee has failed to institute such proceeding within 60
days after receipt of such notice and offer of indemnity, and
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(iii) the Trustee, within such 60-day period, has not received
directions inconsistent with such written request by Holders of a majority
in aggregate principal amount of the Outstanding Notes. Such limitations
do not apply, however, to a suit instituted by a holder of a Note for the
enforcement of the payment of the principal of, premium, if any, or
interest on such Note on or after the respective due dates expressed in
such Note;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing to, any provision of
this Indenture, any Note or any Guarantee to affect, disturb or prejudice the
rights of any other Holders, or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this Indenture,
any Note or any Guarantee, except in the manner provided in this Indenture and
for the equal and ratable benefit of all the Holders.
Section 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM
AND INTEREST.
Notwithstanding any other provision in this Indenture, but subject
to Article Fourteen, the Holder of any Note shall have the right, which is
absolute and unconditional, to receive cash payment of the principal of,
premium, if any, and (subject to Section 3.08 hereof) interest on such Note on
the respective Stated Maturities expressed in such Note (or, in the case of
redemption, a Change of Control Offer or Asset Sale Offer, on the Redemption
Date, Change of Control Purchase Date or Asset Sale Offer Purchase Date,
respectively) and to institute suit for the enforcement of any such payment, and
such rights shall not be impaired without the consent of such Holder.
Section 5.09. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture, any Note or any Guarantee and
such proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, each of the Guarantor, the Trustee and the Holders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
Section 5.10. RIGHTS AND REMEDIES CUMULATIVE.
No right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
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Section 5.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article Five or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 5.12. CONTROL BY MAJORITY.
The Holders of a majority in aggregate principal amount of the
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, PROVIDED, HOWEVER, that:
(a) such direction shall not be in conflict with any rule of law or
with this Indenture, any Note or any Guarantee or expose the Trustee to
personal liability; and
(b) subject to Section 315 of the TIA, the Trustee may take any
other action deemed proper by the Trustee which is not inconsistent with
such direction.
Section 5.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in aggregate principal
amount of the Outstanding Notes may on behalf of the Holders of all the Notes
waive any past Default hereunder and its consequences, except a Default:
(a) in the payment of the principal of, premium, if any, or
interest on any Note or
(b) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected thereby.
Upon any such waiver, such Default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
Section 5.14. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion
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assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in such suit, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; but the provisions of this
Section 5.14 shall not apply to any suit instituted by the Trustee, to any suit
instituted by any Holder, or group of Holders, holding in the aggregate more
than 10% in principal amount of the Outstanding Notes, or to any suit instituted
by any Holder for the enforcement of the payment of the principal of, premium,
if any, or interest on any Note on or after the respective Stated Maturities
expressed in such Note (or, in the case of redemption, on or after the
respective Redemption Dates).
Section 5.15. WAIVER OF STAY, EXTENSION OR USURY LAWS.
Each of the Company and the Guarantors covenants (to the extent that
it may lawfully do so) that it will not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury or other law wherever enacted, now or at any time
hereafter in force, which would prohibit or forgive the Company or any Guarantor
from paying all or any portion of the principal of, premium, if any, or interest
on the Notes contemplated herein or in the Notes or which may affect the
covenants or the performance of this Indenture; and each of the Company and the
Guarantors (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.
ARTICLE SIX
THE TRUSTEE
Section 6.01. CERTAIN DUTIES AND RESPONSIBILITIES.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture; but
in the case of any such certificates or opinions which by provision hereof
are specifically required to be furnished to the Trustee, the Trustee
shall be under a duty to examine the same to determine whether or not they
conform to the requirements of this Indenture.
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(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise thereof, as
a prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 6.01.
Section 6.02. NOTICE OF DEFAULTS.
Within 30 days after the occurrence of any Default, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Note Register, notice of such Default hereunder known to the Trustee, unless
such Default shall have been cured or waived; PROVIDED, HOWEVER, that, except in
the case of a Default in the payment of the principal of, premium, if any, or
interest on any Note, the Trustee shall be protected in withholding such notice
if and so long as a trust committee of Responsible Officers of the Trustee in
good faith determines that the withholding of such notice is in the interest of
the Holders.
Section 6.03. CERTAIN RIGHTS OF TRUSTEE.
Subject to Section 6.01 hereof and the provisions of Section 315 of
the Trust Indenture Act:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
Board Resolution of the Company or any Guarantor may be sufficiently
evidenced by a Board Resolution thereof;
(c) the Trustee may consult with counsel and any written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and
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protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon in accordance with such
advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by the
Trustee in compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken or omitted
by it in good faith and believed by it to be authorized or within the
discretion, rights or powers conferred upon it by this Indenture other
than any liabilities arising out of its own negligence, bad faith or
willful misconduct;
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
approval, appraisal, bond, debenture, note, coupon, security, other
evidence of indebtedness or other paper or document unless requested in
writing so to do by the Holders of not less than a majority in aggregate
principal amount of the Notes then Outstanding; PROVIDED, HOWEVER, that,
if the payment within a reasonable time to the Trustee of the costs,
expenses or liabilities likely to be incurred by it in the making of such
investigation is, in the opinion of the Trustee, not reasonably assured to
the Trustee by the security afforded to it by the terms of this Indenture,
the Trustee may require reasonable indemnity against such expenses or
liabilities as a condition to proceeding; the reasonable expenses of every
such investigation shall be paid by the Company or, if paid by the Trustee
or any predecessor Trustee, shall be repaid by the Company upon demand;
PROVIDED, FURTHER, the Trustee in its discretion may make such further
inquiry or investigation into such facts or matters as it may deem fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company and its Subsidiaries, personally or by agent or
attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
Section 6.04. TRUSTEE NOT RESPONSIBLE FOR RECITALS, DISPOSITIONS OF NOTES OR
APPLICATION OF PROCEEDS THEREOF.
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company
and the Guarantors, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Notes or of any Guarantee except that
the Trustee represents that it is duly authorized to execute and deliver this
Indenture, authenticate the Notes and perform its obligations hereunder and that
the statements made by it in a Statement of
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Eligibility and Qualification on Form T-1, if any, to be supplied to the Company
are true and accurate subject to the qualifications set forth therein. The
Trustee shall not be accountable for the use or application by the Company of
Notes or the proceeds thereof.
Section 6.05. TRUSTEE AND AGENTS MAY HOLD NOTES; COLLECTIONS; ETC.
The Trustee, any Paying Agent, Registrar or any other agent of the
Company, in its individual or any other capacity, may become the owner or
pledgee of Notes, with the same rights it would have if it were not the Trustee,
Paying Agent, Registrar or such other agent and, subject to Sections 6.08 and
6.13 hereof and Sections 310 and 311 of the Trust Indenture Act, may otherwise
deal with the Company and receive, collect, hold and retain collections from the
Company with the same rights it would have if it were not the Trustee, Paying
Agent, Registrar or such other agent.
Section 6.06. MONEY HELD IN TRUST.
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received,
but need not be segregated from other funds except to the extent required herein
or by law. Except for funds or securities deposited pursuant to Article Four,
the Trustee shall be required to invest all moneys received by it, until used or
applied as herein provided, in Cash Equivalents in accordance with the Company's
directions. The Trustee shall not be under any liability for interest on any
moneys received by it hereunder, except as otherwise agreed in writing with the
Company.
Section 6.07. COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS PRIOR
CLAIM.
The Company and each Guarantor covenant and agree:
(a) to pay to the Trustee from time to time, and the Trustee shall
be entitled to, reasonable compensation for all services rendered by it
hereunder (which shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(b) to reimburse the Trustee and each predecessor Trustee upon its
request for all reasonable expenses, fees, disbursements and advances
incurred or made by or on behalf of it in accordance with any of the
provisions of this Indenture (including the reasonable compensation, fees,
and the expenses and disbursements of its counsel and of all agents and
other Persons not regularly in its employ), except any such expense,
disbursement or advance as may arise from its negligence, bad faith or
willful misconduct; and
(c) to indemnify the Trustee and each predecessor Trustee for, and
to hold it harmless against, any loss, liability or expense incurred
without negligence, bad faith or willful misconduct on its part, arising
out of or in connection with the acceptance or administration of this
Indenture or the trusts hereunder and its duties hereunder, including
enforcement of this Section 6.07.
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The obligations of the Company and each Guarantor under this Section to
compensate and indemnify the Trustee and each predecessor Trustee and to pay or
reimburse the Trustee and each predecessor Trustee for expenses, fees,
disbursements and advances shall constitute an additional obligation hereunder
and shall survive the satisfaction and discharge of this Indenture.
Section 6.08. CONFLICTING INTERESTS.
The Trustee shall be subject to and comply with the provisions of
Section 310(b) of the Trust Indenture Act.
Section 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2)
and which shall have a combined capital and surplus of at least $25,000,000;
provided that, to the extent such capital and surplus is not at least
$100,000,000, such Trustee shall be a direct or indirect subsidiary of a bank
holding company which bank holding company shall have a combined capital and
surplus of at least $100,000,000. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of any
Federal, state, territorial or District of Columbia supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, the Trustee shall resign immediately in the manner
and with the effect hereinafter specified in this Article.
Section 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR TRUSTEE.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee, or any trustee or trustees hereinafter appointed,
may at any time resign by giving written notice thereof to the Company at least
20 Business Days prior to the date of such proposed resignation. Upon receiving
such notice of resignation, the Company shall promptly appoint a successor
trustee by written instrument executed by authority of the Board of Directors of
the Company, a copy of which shall be delivered to the resigning Trustee and a
copy to the successor Trustee. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 20 Business Days
after the giving of such notice of resignation, the resigning Trustee may, or
any Holder who has been a bona fide Holder of a Note for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper, appoint a
successor Trustee.
(c) The Trustee may be removed at any time by an Act of the Holders
of a majority in principal amount of the Outstanding Notes, delivered to the
Trustee and to the Company.
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(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of Section
310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof
after written request therefor by the Company or by any Holder who has
been a bona fide Holder of a Note for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.09 hereof
and shall fail to resign after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Note for at least six
months, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose or
rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) the Holder of any Note who has been a bona fide Holder of a Note for at
least six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee. Such court may thereupon, after such
notice, if any, as it may deem proper and prescribe, remove the Trustee and
appoint a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution of its Board of Directors, shall promptly appoint
a successor Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Notes delivered to the Company and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment, become the successor Trustee and supersede the successor Trustee
appointed by the Company. If no successor Trustee shall have been so appointed
by the Company or the Holders of the Notes and accepted appointment in the
manner hereinafter provided, the Holder of any Note who has been a bona fide
Holder for at least six months may on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of Notes as their names and addresses appear in the Note Register. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Section 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment,
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and thereupon the resignation or removal of the retiring Trustee shall become
effective and such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee as if originally named as Trustee hereunder; but,
nevertheless, on the written request of the Company or the successor Trustee,
upon payment of amounts due it pursuant to Section 6.07, such retiring Trustee
shall duly assign, transfer and deliver to the successor Trustee all moneys and
property at the time held by it hereunder and shall execute and deliver an
instrument transferring to such successor Trustee all the rights, powers, duties
and obligations of the retiring Trustee. Upon request of any such successor
Trustee, the Company shall execute any and all instruments for more fully and
certainly vesting in and confirming to such successor Trustee all such rights
and powers.
No successor Trustee with respect to the Notes shall accept
appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under this
Article.
Upon acceptance of appointment by any successor Trustee as provided
in this Section 6.11, the successor, at the expense of the Company, shall give
notice thereof to the Holders of the Notes, by mailing such notice to such
Holders at their addresses as they shall appear on the Note Register. If the
acceptance of appointment is substantially contemporaneous with the resignation,
then the notice called for by the preceding sentence may be combined with the
notice called for by Section 6.10.
Section 6.12. MERGER, CONVERSION, AMALGAMATION, CONSOLIDATION OR SUCCESSION
TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated or amalgamated, or any corporation resulting
from any merger, conversion, amalgamation or consolidation to which the Trustee
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of the Trustee, shall be the successor of the
Trustee hereunder without the execution or filing of any paper or any further
act on the part of any of the parties hereto, provided such corporation shall be
eligible under this Article Six to serve as Trustee hereunder.
In case at the time such successor to the Trustee under this Section
6.12 shall succeed to the trusts created by this Indenture any of the Notes
shall have been authenticated but not delivered, any such successor to the
Trustee may adopt the certificate of authentication of any predecessor Trustee
and deliver such Notes so authenticated; and, in case at that time any of the
Notes shall not have been authenticated, any successor to the Trustee under this
Section 6.12 may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificate shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have been
authenticated.
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Section 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY AND
GUARANTORS.
If and when the Trustee shall be or become a creditor of the Company
or any Guarantor (or other obligor on the Notes), the Trustee shall be subject
to the provisions of the TIA regarding the collection of claims against the
Company or any such Guarantor (or any such other obligor). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
set forth therein.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. PRESERVATION OF INFORMATION; COMPANY TO FURNISH TRUSTEE NAMES
AND ADDRESSES OF HOLDERS.
(a) The Trustee shall preserve the names and addresses of the
Noteholders and otherwise comply with TIA Section 312(a). If the Trustee is not
the Registrar, the Company shall furnish or cause the Registrar to furnish to
the Trustee before each Interest Payment Date, and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Noteholders.
Neither the Company nor the Trustee shall be under any responsibility with
regard to the accuracy of such list.
(b) The Company will furnish or cause to be furnished to the Trustee
(i) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of such Regular Record Date; and
(ii) at such other times as the Trustee may reasonably request in
writing, within 30 days after receipt by the Company of any such request,
a list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished;
PROVIDED, HOWEVER, that if and so long as the Trustee shall be the Registrar, no
such list need be furnished pursuant to this Subsection 7.01(b).
Section 7.02. COMMUNICATIONS OF HOLDERS.
Holders may communicate with other Holders with respect to their
rights under this Indenture or under the Notes pursuant to Section 312(b) of the
Trust Indenture Act. The Company and the Trustee and any and all other Persons
benefited by this Indenture shall have the protection afforded by Section 312(c)
of the Trust Indenture Act.
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Section 7.03. REPORTS BY TRUSTEE.
Within 60 days after May 15 of each year commencing with the first
May 15 following the date of this Indenture, the Trustee shall mail to all
Holders, as their names and addresses appear in the Note Register, a brief
report dated as of such May 15, in accordance with, and to the extent required
under Section 313 of the Trust Indenture Act. At the time of its mailing to
Holders, a copy of each such report shall be filed by the Trustee with the
Company, the Commission and with each stock exchange on which the Notes are
listed. The Company shall notify the Trustee when the Notes are listed on any
stock exchange.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company will not, in any transaction or series of related
transactions, merge or consolidate with or into, or sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties and assets as an entirety to, any Person or Persons, and the Company
will not permit any of the Restricted Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries (taken
as a whole) to any Person or Persons, unless at the time and after giving effect
thereto
(i) either (A)(1) if the transaction or transactions is a merger or
consolidation involving the Company, the Company shall be the Surviving
Person of such merger or consolidation or (2) if the transaction or
transactions is a merger or consolidation involving a Restricted
Subsidiary, such Restricted Subsidiary shall be the Surviving Person of
such merger or consolidation, or (B)(1) the Surviving Person shall be a
corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia, and (2)(x) in the
case of a transaction involving the Company, the Surviving Person shall
expressly assume, by a supplemental indenture executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations of
the Company under the Notes, this Indenture and the Registration Rights
Agreement and, in each case, the Notes, this Indenture and the
Registration Rights Agreement shall remain in full force and effect, or
(y) in the case of a transaction involving a Restricted Subsidiary that is
a Guarantor, the Surviving Person shall expressly assume by a supplemental
indenture executed and delivered to the Trustee, in form satisfactory to
the Trustee, all the obligations of such Restricted Subsidiary under its
Guarantee and this Indenture and the Registration Rights Agreement and, in
each case, such Guarantee and this Indenture and the Registration Rights
Agreement shall remain in full force and effect;
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(ii) immediately after giving effect to such transaction or series of
related transactions on a PRO FORMA basis, no Default or Event of Default
shall have occurred and be continuing; and
(iii) the Company, or the Surviving Person, as the case may be,
immediately after giving effect to such transaction or series of related
transactions on a PRO FORMA basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under
Section 10.12 hereof.
No Guarantor (other than a Guarantor whose Guarantee is to be
released in accordance with the terms of its Guarantee and this Indenture as
provided in Section 12.05) shall, in any transaction or series of related
transactions, consolidate with or merge with or into another Person, whether or
not such Person is affiliated with such Guarantor and whether or not such
Guarantor is the Surviving Person, unless (i) the Surviving Person (if other
than such Guarantor) is a corporation organized and validly existing under the
laws of the United States, any State thereof or the District of Columbia; (ii)
the Surviving Person (if other than such Guarantor) expressly assumes by a
supplemental indenture all the obligations of such Guarantor under its Guarantee
and the performance and observance of every covenant of this Indenture and the
Registration Rights Agreement to be performed or observed by such Guarantor; and
(iii) immediately after giving effect to such transaction or series of related
transactions on a PRO FORMA basis, no Default shall have occurred and be
continuing.
In connection with any consolidation, merger, transfer, lease or
other disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the requirements of this
Indenture. In addition, each Guarantor, in the case of a transaction described
in the first paragraph of this Section 8.01, unless it is the other party to the
transaction or unless its Guarantee will be released and discharged in
accordance with its terms as a result of the transaction, will be required to
confirm, by supplemental indenture, that its Guarantee will continue to apply to
the obligations of the Company or the Surviving Person under this Indenture.
Section 8.02. SUCCESSOR SUBSTITUTED.
Upon any consolidation or merger of the Company or any Guarantor, or
any sale, assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Company or any Guarantor
in accordance with Section 8.01 hereof in which the Company or a Guarantor is
not the Surviving Person, the Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company, under
this Indenture, the Notes and the Registration Rights Agreement or such
Guarantor under this Indenture, the Guarantee of such Guarantor and the
Registration Rights Agreement, as the case may be, with the same effect as if
such successor corporation had been named as the
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Company or such Guarantor, as the case may be, herein, and in the Notes and in
the Registration Rights Agreement and, thereafter, except in the case of (a) a
lease or (b) any sale, assignment, conveyance, transfer, lease or other
disposition to a Restricted Subsidiary of the Company or such Guarantor, the
Company shall be discharged from all obligations and covenants under this
Indenture, the Notes and the Registration Rights Agreement and such Guarantor
shall be discharged from all obligations and covenants under this Indenture, the
Registration Rights Agreement and the Guarantee of such Guarantor, as the case
may be.
For all purposes of this Indenture and the Notes (including this
Article Eight and Sections 10.12, 10.14 and 10.17 hereof), Subsidiaries of any
Surviving Person will, upon such transaction or series of related transactions
described in this Article Eight, become Restricted Subsidiaries unless and until
designated as Unrestricted Subsidiaries pursuant to and in accordance with
Section 10.21 and all Indebtedness, and all Liens on property or assets, of the
Company and the Restricted Subsidiaries in existence immediately prior to such
transaction or series of related transactions will be deemed to have been
incurred upon such transaction or series of related transactions.
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS WITHOUT
CONSENT OF HOLDERS.
Without the consent of any Holders, the Company and the Guarantors,
when authorized by a Board Resolution of the Board of Directors of the Company
and each Guarantor, and the Trustee, at any time and from time to time, may
amend, waive, modify or supplement this Indenture or the Notes or the Guarantees
for any of the following purposes:
(a) to evidence the succession of another Person to the Company or a
Guarantor, and the assumption by any such successor of the covenants of
the Company or such Guarantor herein and in the Notes and/or in any
Guarantee, as the case may be, in accordance with Article Eight;
(b) to add to the covenants of the Company or any Guarantor for the
benefit of the Holders, or to surrender any right or power herein
conferred upon the Company or any Guarantor, as applicable, herein, in the
Notes or in any Guarantee, as the case may be;
(c) to cure any ambiguity or to correct or supplement any provision
herein which may be defective or inconsistent with any other provision
herein, in the Notes, or in any Guarantee;
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(d) to comply with the requirements of the Commission in order to
maintain the qualification of this Indenture under the Trust Indenture
Act;
(e) to secure the Notes pursuant to the requirements of Section
10.17 hereof or otherwise or to add a Guarantor pursuant to the
requirements of Section 10.18 hereof or otherwise;
(f) to evidence and provide the acceptance of the appointment of a
successor Trustee hereunder; or
(g) to make any other provisions with respect to matters or
questions arising under this Indenture, the Notes or any Guarantee;
PROVIDED, that, in any case, such provisions shall not materially adversely
affect the interests or rights of any of the Holders of the Notes and the
Company shall have delivered to the Trustee an Opinion of Counsel to such
effect.
Section 9.02. SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS WITH CONSENT
OF HOLDERS.
Amendments and modifications of this Indenture or the Notes may be
made by the Company, the Guarantors and the Trustee with the consent of the
Holders of not less than a majority of the aggregate principal amount of the
outstanding Notes; PROVIDED, HOWEVER, that no such modification or amendment
may, without the consent of the holder of each outstanding Note affected
thereby,
(a) change the maturity of the principal of, or any installment of
interest on, any such Note or alter the optional redemption or repurchase
provisions of any such Note or this Indenture in a manner adverse to the
Holders of the Notes;
(b) reduce the principal amount of (or the premium of) any such
Note;
(c) reduce the rate of or extend the time for payment of interest on
any such Note;
(d) change the place or currency of payment of principal of (or
premium), or interest on, any such Note;
(e) modify any provisions of this Indenture relating to the waiver
of past defaults (other than to add sections of this Indenture or the
Notes subject thereto) or the right of the Holders of Notes to institute
suit for the enforcement of any payment on or with respect to any such
Note or any Guarantee or the modification and amendment provisions of this
Indenture and the Notes (other than to add sections of this Indenture or
the Notes which may not be amended, supplemented or waived without the
consent of each Holder therein affected);
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(f) reduce the percentage of the principal amount of outstanding
Notes necessary for amendment to or waiver of compliance with any
provision of this Indenture or the Notes or for waiver of any Default in
respect thereof;
(g) waive a default in the payment of principal of, premium, if any,
or interest on, or redemption payment with respect to, the Notes (except a
rescission of acceleration of the Notes by the Holders thereof as provided
in this Indenture and a waiver of the payment default that resulted from
such acceleration);
(h) modify the ranking or priority of any Note or the Guarantee of
any Guarantor or make any change to Article Fourteen;
(i) following the occurrence of a Change of Control or Asset Sale,
modify the provisions of any covenant (or the related definitions) in this
Indenture requiring the Company to make and consummate a Change of Control
Offer in respect of such Change of Control or Asset Sale Offer in respect
of an Asset Sale or modify any of the provisions or definitions with
respect thereto in a manner materially adverse to the Holders of Notes
affected thereby otherwise than in accordance with this Indenture; or
(j) release any Guarantor from any of its obligations under its
Guarantee or this Indenture otherwise than in accordance with this
Indenture.
Upon the written request of the Company and each Guarantor
accompanied by a copy of a Board Resolution of the Board of Directors of the
Company and each Guarantor authorizing the execution of any such supplemental
indenture or other agreement, instrument or waiver, and upon the filing with the
Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall
join with the Company and each Guarantor in the execution of such supplemental
indenture or other agreement, instrument or waiver.
It shall not be necessary for any Act of Holders under this Section
to approve the particular form of any proposed supplemental indenture or other
agreement, instrument or waiver, but it shall be sufficient if such Act shall
approve the substance thereof.
Section 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES, AGREEMENTS AND WAIVERS.
In executing, or accepting the additional trusts created by, any
supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and
an Officers' Certificate from each obligor under the Notes entering into such
supplemental indenture, agreement, instrument or waiver, each stating that the
execution of such supplemental indenture, agreement, instrument or waiver (a) is
authorized or permitted by this Indenture and (b) does not violate the
provisions of any agreement or instrument evidencing any other Indebtedness of
the Company, any Guarantor or any other Subsidiary of the Company. The Trustee
may, but shall not be obligated to, enter into any such supplemental indenture,
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agreement, instrument or waiver which affects the Trustee's own rights, duties
or immunities under this Indenture, the Notes, any Guarantee or otherwise.
Section 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article
Nine, this Indenture, the Notes, if applicable, and/or the applicable Guarantee
shall be modified in accordance therewith, and such supplemental indenture shall
form a part of this Indenture, the Notes, if applicable, and/or the applicable
Guarantee, as the case may be, for all purposes; every Holder of Notes
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.
Section 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.06. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the Board
of Directors of the Company, to any such supplemental indenture may be prepared
and executed by the Company and each Guarantor and authenticated and delivered
by the Trustee upon a Company Order in exchange for Outstanding Notes.
Section 9.07. RECORD DATE.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Holders entitled to consent to any
supplemental indenture, agreement or instrument or any waiver, and shall
promptly notify the Trustee of any such record date. If a record date is fixed,
those Persons who were Holders at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to consent to such
supplemental indenture, agreement or instrument or waiver or to revoke any
consent previously given, whether or not such Persons continue to be Holders
after such record date. No such consent shall be valid or effective with respect
to such supplemental indenture, agreement or instrument or waiver which is
entered into more than 90 days after such record date.
Section 9.08. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Note is a continuing consent by the Holder and every subsequent
Holder of a Note or portion of a Note that evidences the same debt as the
consenting Holder's Note, even if a notation of the consent is not made on any
Note. However, any such Holder or subsequent Holder may revoke the consent as to
his Note or portion of a Note if the Trustee receives the notice of revocation
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before the date the amendment or waiver becomes effective. An amendment or
waiver shall become effective in accordance with its terms and thereafter bind
every Holder.
ARTICLE TEN
COVENANTS
Section 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company will duly and punctually pay the principal of, premium,
if any, and interest on the Notes in accordance with the terms of the Notes,
this Indenture and the Registration Rights Agreement.
Section 10.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain, in the Borough of Manhattan in The City
of New York, State of New York, an office or agency where Notes may be presented
or surrendered for payment, where Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The office of the Trustee
at its Corporate Trust Office will be such office or agency of the Company,
unless the Company shall designate and maintain some other office or agency for
one or more of such purposes. The Company will give prompt written notice to the
Trustee of any change in the location of any such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York, State of New York)
where the Notes may be presented or surrendered for any or all such purposes,
and may from time to time rescind such designation; PROVIDED, HOWEVER, that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York, State of New
York for such purposes. The Company will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such other office or agency.
Section 10.03. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST.
If the Company or any of its Affiliates shall at any time act as its
own Paying Agent, it will, on or before each due date of the principal of,
premium, if any, or interest on any of the Notes, segregate and hold in trust
for the benefit of the Holders entitled thereto a sum sufficient to pay the
principal, premium, if any, or interest so becoming due until such sums shall
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be paid to such Persons or otherwise disposed of as herein provided, and will
promptly notify the Trustee of its action or failure so to act.
If the Company or any of its Affiliates is not acting as Paying
Agent, the Company will, on or before each due date of the principal of,
premium, if any, or interest on, any Notes, deposit with a Paying Agent a sum in
same day funds sufficient to pay the principal, premium, if any, or interest so
becoming due, such sum to be held in trust for the benefit of the Holders
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Company will promptly notify the Trustee of such action or
any failure so to act.
If the Company is not acting as Paying Agent, the Company will cause
each Paying Agent other than the Trustee to execute and deliver to the Trustee
an instrument in which such Paying Agent will agree with the Trustee, subject to
the provisions of this Section 10.03, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the
Holders entitled thereto until such sums shall be paid to such Holders or
otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company or any
Guarantor (or any other obligor upon the Notes) in the making of any
payment of principal of, premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such Default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and
liabilities of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent will be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company upon receipt of a Company Request therefor, or (if then held by
the Company) will be discharged from such trust; and the Holder of such Note
will thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, will thereupon cease; PROVIDED, HOWEVER, that the Trustee or such
Paying Agent, before being required to make any such
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repayment, may at the expense of the Company cause to be published once, at the
option of the Company in the New York Times or the Wall Street Journal (national
edition), notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining shall be repaid
to the Company.
Section 10.04. CORPORATE EXISTENCE.
Subject to Article Eight, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory), licenses and franchises of the
Company and each of the Restricted Subsidiaries; PROVIDED, HOWEVER, that the
Company will not be required to preserve any such right, license or franchise if
the Board of Directors of the Company shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company and
the Restricted Subsidiaries as a whole and that the loss thereof is not adverse
in any material respect to the Holders; PROVIDED FURTHER, that the foregoing
will not prohibit a sale, transfer or conveyance of a Subsidiary of the Company
or any of its assets in compliance with the terms of this Indenture.
Section 10.05. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed (i) upon the Company or any of its
Restricted Subsidiaries or (ii) upon the income, profits or property of the
Company or any of the Restricted Subsidiaries and (b) all material lawful claims
for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; PROVIDED, HOWEVER, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted and for which appropriate provision has been made.
Section 10.06. MAINTENANCE OF PROPERTIES.
The Company will cause all material properties owned by the Company
or any of the Restricted Subsidiaries or used or held for use in the conduct of
their respective businesses to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; PROVIDED, HOWEVER, that nothing in this Section 10.06
will prevent (a) the Company from discontinuing the maintenance of any of such
properties if such discontinuance is, in the judgment of the Company (as
evidenced, in each instance where the fair market value of such property or
properties exceeds $5.0 million, by a Board Resolution of the Company),
desirable in the conduct of its business or the business of any of the
Restricted Subsidiaries and is not disadvantageous in any material respect to
the Holders or (b) a sale, transfer, merger,
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consolidation or conveyance of assets in compliance with Article Eight or
Section 10.16 and, in each case, otherwise complies with the provisions of this
Indenture.
Section 10.07. INSURANCE.
The Company shall maintain, and shall cause the Restricted
Subsidiaries to maintain, insurance with responsible carriers against such risks
and in such amounts, and with such deductibles, retentions, self-insured amounts
and co-insurance provisions, as are customarily carried by similar businesses of
similar size and type, including property and casualty loss, and workers'
compensation insurance.
Section 10.08. BOOKS AND RECORDS.
The Company will keep proper books of record and account, in which
full and correct entries will be made of all financial transactions and the
assets and business of the Company and each Restricted Subsidiary of the Company
in material compliance with GAAP.
Section 10.09. GUARANTEES.
Each of the Guarantors and the Company will, and the Company will
cause each of the Guarantors to, ensure at all times that, unless otherwise
permitted by this Indenture, each Guarantee will remain in full force and
effect.
Section 10.10. PROVISION OF FINANCIAL STATEMENTS.
For so long as the Notes are outstanding, whether or not the Company
or any Guarantor is subject to Section 13(a) or 15(d) of the Exchange Act, or
any successor provision thereto, the Company will, to the extent permitted by
Commission practice and applicable law and regulations, file with the Commission
the annual reports, quarterly reports and other documents which the Company
would have been required to file with the Commission pursuant to such Section
13(a) or 15(d), or any successor provision thereto, if the Company was so
subject, such documents to be filed with the Commission on or prior to the date
(the "Required Filing Dates") by which the Company would have been required so
to file such documents if the Company was so subject. The Company will also in
any event (x) within 15 days of each Required Filing Date, whether or not
permitted or required to be filed with the Commission, (i) transmit or cause to
be transmitted by mail to all Holders of Notes, as their names and addresses
appear in the security register, without cost to such Holders, as their names
appear on the Note Register, without cost to such Holders and (ii) file with the
Trustee, copies of the annual reports, quarterly reports and other documents
which the Company would have been required to file with the Commission pursuant
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, if the Company was subject to either of such Sections and (y) if filing
such documents by the Company with the Commission is not permitted under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any prospective
holder at the Company's cost. In addition, for so long as any Notes remain
outstanding, the Company will furnish to the Holders of Notes and to securities
analysts and prospective investors, upon their request, the
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information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial Holder of Notes, if not obtainable from
the Commission, information of the type that would be filed with the Commission
pursuant to the foregoing provisions, upon the request of any such Holder.
Section 10.11. CHANGE OF CONTROL.
Following the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall, within 60
days after the Change of Control Date, to make and consummate an offer to
purchase (a "Change of Control Offer") all of the then outstanding Notes at a
purchase price (the "Change of Control Purchase Price") in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
to the purchase date. The Company shall purchase all Notes properly tendered in
the Change of Control Offer and not withdrawn. Failure of the Company to
repurchase all of the Notes properly tendered for purchase and not withdrawn
will constitute an Event of Default under Section 5.01(c).
In order to effect such Change of Control Offer, the Company will,
not later than the 30th day after the Change of Control Date, mail to each
Holder of Notes a notice of the Change of Control Offer, which notice will
govern the terms of the Change of Control Offer and will state, among other
things, the procedures that Holders must follow to accept the Change of Control
Offer. The Change of Control Offer shall be kept open for a period of at least
20 Business Days and until 5:00 p.m., New York City time, on the last day of
such period (the "Change of Control Purchase Date"). The notice, which shall
govern the terms of the Change of Control Offer, shall include such disclosures
as are required by law and shall state:
(a) that the Change of Control Offer is being made pursuant to this
Section 10.11 and that all Notes tendered into the Change of Control Offer
will be accepted for payment; and that the Change of Control Offer shall
remain open for a period of 20 Business Days or such longer period as may
be required by applicable law;
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Change of Control Purchase Date and the date on
which the Change of Control Offer expires;
(c) that any Note not tendered for payment will continue to accrue
interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest after the Change of Control
Purchase Date;
(e) that Holders electing to have Notes purchased pursuant to a
Change of Control Offer will be required to surrender their Notes to the
Paying Agent at the address specified in the notice prior to 5:00 p.m.,
New York City time, on the Change of Control
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Purchase Date and must complete any form letter of transmittal proposed by
the Company and acceptable to the Trustee and the Paying Agent;
(f) that Holders of Notes will be entitled to withdraw their
election if the Paying Agent receives, not later than 5:00 p.m., New York
City time, on the Change of Control Purchase Date, a facsimile
transmission or letter setting forth the name of the Holders, the
principal amount of Notes the Holders delivered for purchase, the Note
certificate number (if any) and a statement that such Holder is
withdrawing his election to have such Notes purchased;
(g) that Holders whose Notes are purchased only in part will be
issued Notes of like tenor equal in principal amount to the unpurchased
portion of the Notes surrendered;
(h) the instructions that Holders must follow in order to tender
their Notes; and
(i) information concerning the business of the Company, the most
recent annual and quarterly reports of the Company filed with the
Commission pursuant to the Exchange Act (or, if the Company is not
permitted to file any such reports with the Commission, the comparable
reports prepared pursuant to Section 10.10), a description of material
developments in the Company's business, information with respect to pro
forma historical financial information after giving effect to such Change
of Control and such other information concerning the circumstances and
relevant facts regarding such Change of Control and Change of Control
Offer as would, in the good faith judgment of the Company, be material to
a Holder of Notes in connection with the decision of such Holder as to
whether or not it should tender Notes pursuant to the Change of Control
Offer.
On the Change of Control Purchase Date, the Company will (i) accept
for payment Notes or portions thereof in integral multiples of $1,000 tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent
money, in immediately available funds, sufficient to pay the purchase price of
all Notes or portions thereof so tendered and accepted and (iii) deliver to the
Trustee the Notes so accepted together with an Officers' Certificate setting
forth the Notes or portions thereof tendered to and accepted for payment by the
Company. The Paying Agent will promptly mail or deliver to the Holders of Notes
so accepted payment in an amount equal to the purchase price, and the Trustee
shall promptly authenticate and mail or deliver to such Holders a new Note of
like tenor equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer not later than the first Business Day
following the Change of Control Purchase Date.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act, and any other securities laws
or regulations and any applicable requirements of any securities exchange on
which the Notes are listed, in connection
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with the repurchase of Notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of this Section 10.11, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section 10.11 by virtue thereof.
Section 10.12. LIMITATION ON INDEBTEDNESS.
The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, create, incur, assume, issue, guarantee
or in any manner become liable for or with respect to, contingently or otherwise
(in each case, to "incur"), the payment of any Indebtedness (including Acquired
Indebtedness), PROVIDED, HOWEVER, that (i) the Company or a Guarantor may incur
Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary
(which is not a Guarantor) may incur Acquired Indebtedness, if, in either case,
immediately after giving PRO FORMA effect thereto, the Consolidated Fixed Charge
Coverage Ratio of the Company is at least equal to 2.0:1.0.
Notwithstanding the foregoing, the Company and, to the extent set
forth below, the Guarantors and the Restricted Subsidiaries may incur each and
all of the following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company or any Guarantor under the Credit
Facility in an aggregate principal amount at any one time outstanding not
to exceed the greater of (x) $100.0 million or (y) the sum of (A) 85% of
the book value of the accounts receivable of the Company and the
Restricted Subsidiaries on a consolidated basis in accordance with GAAP
and (B) 60% of the book value of the inventory of the Company and the
Restricted Subsidiaries on a consolidated basis in accordance with GAAP,
less any voluntary or mandatory prepayments actually made thereunder (to
the extent that the corresponding commitments have been permanently
reduced);
(ii) Indebtedness of the Company pursuant to the Notes and
Indebtedness of any Guarantor pursuant to a Guarantee of the Notes;
(iii) Indebtedness of the Company owing to a Restricted Subsidiary;
PROVIDED that any Indebtedness for borrowed money of the Company owing to
a Restricted Subsidiary is subordinated in accordance with provisions set
forth in this Indenture; PROVIDED, FURTHER, that any disposition, pledge
or transfer of any such Indebtedness to a Person (other than a
disposition, pledge or transfer to a Restricted Subsidiary) shall be
deemed to be an incurrence of such Indebtedness by the Company not
permitted by this clause (iii);
(iv) Indebtedness of a Restricted Subsidiary owing to and held by
the Company or another Restricted Subsidiary which is unsecured; PROVIDED
that (a) any disposition, pledge or transfer of any such Indebtedness to a
Person (other than the Company or a Restricted Subsidiary) shall be deemed
to be an incurrence of such Indebtedness by the obligor not permitted by
this clause (iv), and (b) any transaction pursuant to which any Restricted
Subsidiary, which has Indebtedness owing to the Company or any other
Restricted Subsidiary, ceases to be a
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Restricted Subsidiary shall be deemed to be the incurrence of Indebtedness
by such Restricted Subsidiary that is not permitted by this clause (iv);
(v) Indebtedness of the Company or any Restricted Subsidiary under
Interest Rate Agreements not entered into for speculative purposes and
covering Indebtedness of the Company or such Restricted Subsidiary (which
Indebtedness (a) bears interest at fluctuating interest rates and (b) is
otherwise permitted to be incurred under this Section 10.12);
(vi) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements relating to (a) Indebtedness of the Company or such
Restricted Subsidiary and/or (b) obligations to purchase or sell assets or
properties, in each case, incurred in the ordinary course of business of
the Company; PROVIDED, HOWEVER, that such Currency Agreements do not
increase the Indebtedness or other obligations of the Company outstanding
other than as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities and compensation payable thereunder;
(vii) Indebtedness of the Company or any Guarantor represented by
Capitalized Lease Obligations or Purchase Money Obligations or other
Indebtedness incurred or assumed in connection with the acquisition or
development of real or personal movable or immovable property in each case
incurred for the purpose of financing or refinancing all or any part of
the purchase price or cost of construction or improvement of property used
in the business of the Company or such Guarantor, in an aggregate
principal amount pursuant to this clause (vii) not to exceed $20.0 million
per year; PROVIDED, that the principal amount of any Indebtedness
permitted under this clause (vii) did not in each case at the time of
incurrence exceed the Fair Market Value, as determined by the Company or
such Guarantor in good faith, of the acquired or constructed asset or
improvement so financed;
(viii) reimbursement obligations under letters of credit and letters
of credit, in each case, to support workers compensation obligations and
bankers acceptances and performance bonds, surety bonds and performance
guarantees, of the Company or any Guarantor, in each case, in the ordinary
course of business consistent with past practice;
(ix) any renewals, extensions, substitutions, refundings,
refinancings or replacements (collectively, a "refinancing") of any
Indebtedness outstanding on the Issue Date or incurred under the first
paragraph of this Section 10.12 or clause (ii) above, including any
successive refinancings so long as the aggregate principal amount of
Indebtedness represented thereby is not increased by such refinancing plus
the amount of any stated or reasonably determined prepayment premium paid
in connection with such a refinancing, plus the amount of expenses of the
Company or a Restricted Subsidiary incurred in connection with such
refinancing and (A) in the case of any refinancing of Indebtedness that is
Subordinated Indebtedness, such new Indebtedness is subordinated to the
Notes at least to the same extent as the Indebtedness being refinanced and
(B) such
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new Indebtedness has an Average Life to Stated Maturity equal to or
greater than the Average Life to Stated Maturity of the Subordinated
Indebtedness being repurchased, redeemed, defeased, retired, acquired or
paid; and
(x) Indebtedness of the Company or any Restricted Subsidiary in
addition to that described in clauses (i) through (ix) above, so long as
the aggregate principal amount of all such additional Indebtedness shall
not exceed $25.0 million outstanding at any one time in the aggregate.
Section 10.13. STATEMENT BY OFFICERS AS TO DEFAULT.
The Company will deliver to the Trustee, within 45 days after the
end of the first three fiscal quarters of the Company and 90 days after the end
of each fiscal year of the Company ending after the date hereof, a written
statement signed by the chief executive officer and either the principal
financial officer or principal accounting officer of the Company, stating (i)
that a review of the activities of the Company during the preceding fiscal
quarter or year, as applicable, has been made under the supervision of the
signing officers with a view to determining whether the Company has kept,
observed, performed and fulfilled its obligations under this Indenture, and (ii)
that, to the knowledge of each officer signing such certificate, the Company has
kept, observed, performed and fulfilled each and every covenant and condition
contained in this Indenture and is not in default in the performance or
observance of any of the terms, provisions, conditions and covenants hereof (or,
if a Default shall have occurred, describing all such Defaults of which such
officers may have knowledge, their status and what action the Company is taking
or proposes to take with respect thereto). When any Default has occurred and is
continuing, or if the Trustee or any Holder or the trustee for or the holder of
any other evidence of Indebtedness of the Company or any Restricted Subsidiary
gives any notice or takes any other action with respect to a claimed Default,
the Company will promptly notify the Trustee of such Default, notice or action
and will deliver to the Trustee by registered or certified mail or by telegram,
or facsimile transmission followed by hard copy by registered or certified mail
an Officers' Certificate specifying such event, notice or other action within
five Business Days after the Company becomes aware of such occurrence and what
action the Company is taking or proposes to take with respect thereto.
Section 10.14. LIMITATION ON RESTRICTED PAYMENTS.
The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly:
(i) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any payment to
the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company (other than dividends or distributions to the extent
payable in shares of Qualified Capital Stock of the Company or in options,
warrants or other rights to acquire shares of such Qualified Capital
Stock); or
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(ii) purchase, redeem, defease or otherwise acquire or retire for
value, directly or indirectly, the Company's Capital Stock or any Capital
Stock of any Restricted Subsidiary (other than any such Capital Stock
owned by the Company or any Restricted Subsidiary); or
(iii) make any principal payment on, or purchase, repurchase, redeem,
defease, retire or otherwise acquire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any
Subordinated Indebtedness owed to and held by the Company or a Restricted
Subsidiary); or
(iv) declare or pay any dividend or make any distribution or payment
on or in respect of any Capital Stock of any Restricted Subsidiary or any
payment to the direct or indirect holders (in their capacities as such) of
any Capital Stock of any Restricted Subsidiary (other than to the Company
or any Restricted Subsidiary and other than to minority stockholders of
any Restricted Subsidiary), provided that such dividends, payments or
distributions are made on a pro rata basis to the stockholders of such
Restricted Subsidiary; or
(v) make any Investment (other than any Permitted Investment) in any
Person;
any of the foregoing actions described in clauses (i) through (v), other
than any such action that is a Permitted Payment, collectively, "Restricted
Payments") (the amount of any such Restricted Payment, if other than cash, shall
be the Fair Market Value of the asset(s) proposed to be transferred by the
Company or such Restricted Subsidiary, as the case may be, in each case, as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a Board Resolution), unless (1) immediately
before and immediately after giving effect to such Restricted Payment on a PRO
FORMA basis, no Default shall have occurred and be continuing; (2) immediately
before and immediately after giving effect to such Restricted Payment on a PRO
FORMA basis, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the provisions of Section 10.12, and (3)
immediately after giving effect to the proposed Restricted Payment, the
aggregate amount of all such Restricted Payments (including any Designation
Amounts) declared or made after the Issue Date, does not exceed an amount equal
to the sum of, without duplication:
(A) 50% of the cumulative Consolidated Net Income of the Company
during the period (treated as one accounting period) beginning on January
1, 1999 and ending on the last day of the Company's last fiscal quarter
ending prior to the date of the Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income shall be a deficit, minus 100% of such
deficit); plus
(B) the aggregate Net Cash Proceeds received after the Issue Date by
the Company from the issuance or sale (other than to any of the Restricted
Subsidiaries) of Qualified Capital Stock of the Company or from the
exercise of any options, warrants or rights to purchase such Qualified
Capital Stock of the Company (except, in each case, to the extent such
proceeds are used to purchase, redeem or otherwise retire Capital Stock or
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Subordinated Indebtedness as set forth in clause (ii) or (iii) of the
following paragraph and excluding the net cash proceeds from any issuance
and sale of Capital Stock or from any such exercises, in each case,
financed, directly or indirectly, using funds borrowed from the Company or
any Restricted Subsidiary until and to the extent such borrowing is
repaid); plus
(C) the aggregate Net Cash Proceeds received after the Issue Date by
the Company from the conversion or exchange, if any, of debt securities or
Redeemable Capital Stock of the Company or its Subsidiaries into or for
Qualified Capital Stock of the Company plus, whether or not such debt
securities or Redeemable Capital Stock were issued prior to or after the
Issue Date, the aggregate Net Cash Proceeds from their original issuance,
less any principal and sinking fund payments made thereon; plus
(D) in the case of the disposition or repayment of any Investment
(in whole or in part) constituting a Restricted Payment made after the
Issue Date (other than an Investment made under clause (vi) of the
following paragraph), an amount (to the extent not included in
Consolidated Net Income) equal to the lesser of the return of capital with
respect to such Investment and the initial amount of such Investment which
was treated as a Restricted Payment, in either case, less the cost of
disposition of such Investment; plus
(E) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with Section 10.21, the Fair Market Value of the
Capital Stock of such Subsidiary owned by the Company and the Restricted
Subsidiaries, provided that such amount shall not in any case exceed the
Designation Amount with respect to such Restricted Subsidiary upon its
Designation.
Notwithstanding the foregoing, and in the case of clauses (ii)
through (v) below, so long as no Default shall have occurred and be continuing
or would arise therefrom, the foregoing provisions shall not prohibit the
following actions (each of clauses (i) through (vii) being referred to as a
"Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of this Indenture;
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion
right or privilege in connection with which cash is paid in lieu of the
issuance of fractional shares or scrip), or out of the Net Cash Proceeds
of a substantially concurrent issue and sale for cash to any Person (other
than to a Restricted Subsidiary) of, shares of Qualified Capital Stock of
the Company; PROVIDED, that the Net Cash Proceeds from the issuance of
such shares of Qualified Capital Stock are excluded from clause (B) of the
first paragraph of this Section 10.14;
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(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or out of the Net Cash Proceeds of a substantially
concurrent issuance and sale for cash to any Person (other than to the
Company or any Restricted Subsidiary) of, any Qualified Capital Stock of
the Company; PROVIDED, that the Net Cash Proceeds from the issuance of
such shares of Qualified Capital Stock are excluded from clause (B) of the
first paragraph of this Section 10.14;
(iv) the repurchase, redemption, defeasance, retirement, acquisition
for value or payment of principal of any Subordinated Indebtedness (other
than Redeemable Capital Stock) of the Company in exchange for, or out of
the Net Cash Proceeds of a substantially concurrent issuance and sale for
cash to any Person (other than to a Restricted Subsidiary) of, new
Subordinated Indebtedness of the Company (which may be guaranteed by a
Guarantor on a basis such that it constitutes Subordinated Indebtedness),
PROVIDED that any such new Subordinated Indebtedness (1) shall be in a
principal amount that does not exceed the principal amount so repurchased,
redeemed, defeased, retired, acquired or paid (or, if such Subordinated
Indebtedness provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration thereof, then
such lesser amount as of the date of determination), plus the amount of
any stated or reasonably determined prepayment premium paid in connection
with such repurchase, redemption, defeasance, retirement, acquisition or
payment, plus the amount of expenses of the Company and the Restricted
Subsidiaries incurred in connection with such repurchase, redemption,
defeasance, retirement, acquisition or payment; (2) has an Average Life to
Stated Maturity equal to or greater than the Average Life to Stated
Maturity of the Subordinated Indebtedness being repurchased, redeemed,
defeased, retired, acquired or paid; and (3) is expressly subordinated in
right of payment to the Notes at least to the same extent as the
Subordinated Indebtedness to be repurchased, redeemed, defeased, retired,
acquired or paid;
(v) the repurchase, redemption or other acquisition, cancellation or
retirement for value of any Capital Stock of the Company or similar
securities, held by (a) officers, directors or employees or former
officers, directors or employees of the Company or any of its Subsidiaries
(or their estates or beneficiaries under their estates) pursuant to any
management, stock option agreement or stock option plan, not to exceed
$2.0 million in any fiscal year of the Company and (b) the repurchase,
redemption or other acquisition, cancellation or retirement for value of
any Capital Stock of the Company held by former owners of Subsidiaries of
the Company, that was, as of the date of acquisition of such stock by such
Persons subject to a lock-up agreement or other similar agreement with the
Company restricting the resale of such Capital Stock, so long as the
aggregate amount utilized under this clause (v) does not exceed $7.0
million during the term of the Notes;
(vi) cash payments in lieu of fractional shares issuable as dividends
on preferred securities of the Company, not to exceed $250,000 in any
fiscal year of the Company; and
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(vii) Investments (in addition to Permitted Investments) not to exceed
$10.0 million at any time outstanding.
In computing the amount of Restricted Payments previously made for
purposes of clause (3) of the first paragraph of this covenant, Restricted
Payments under the immediately preceding clause (i) of the immediately preceding
paragraph shall be included. If the Company makes a Restricted Payment which, at
the time of the making of such Restricted Payment would in the good faith
determination of the Company be permitted under the provisions of this
Indenture, such Restricted Payment shall be deemed to have been made in
compliance with this Indenture notwithstanding any subsequent adjustments made
in good faith to the Company's financial statements affecting Consolidated Net
Income of the Company for any period.
Section 10.15. LIMITATION ON TRANSACTIONS WITH AFFILIATES.
The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, conduct any business or
enter into or suffer to exist any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of assets,
property or services) with, or for the benefit of, any Affiliate of the Company
or of a Restricted Subsidiary (other than the Company or a Restricted
Subsidiary) or any officer or director of the Company or any Restricted
Subsidiary unless such transaction or series of related transactions is entered
into in good faith and in writing and (a) such transaction is on terms that are
no less favorable to the Company or such Restricted Subsidiary, as the case may
be, than those that would be available in a comparable transaction in
arm's-length dealings with an unrelated third party and (b) with respect to any
transaction or series of related transactions involving aggregate value in
excess of $5.0 million, the Company delivers an Officers' Certificate to the
Trustee certifying that such transaction or series of related transactions
complies with the requirements of this Section 10.15 and, with respect to any
transaction or series of related transactions involving aggregate value in
excess of $10.0 million, either (i) such transaction or series of transactions
has been approved by a majority of the Board of Directors of the Company,
including a majority of the Disinterested Directors of the Company, or in the
event there is only one Disinterested Director, by such Disinterested Director,
or (ii) the Company delivers to the Trustee a written opinion of an Independent
Financial Advisor stating that the transaction or series of related transactions
is fair to the Company or such Restricted Subsidiary from a financial point of
view.
The requirements of this Section 10.15 shall not apply to (i) any
transaction with an officer, director or employee of the Company entered into in
the ordinary course of business (including compensation and employee benefit
arrangements with any officer or director of the Company, including under any
stock option or stock incentive plans); PROVIDED that such transaction has been
approved in the manner described in clause (b) above if such transaction would,
pursuant to clause (b) above, require such approval, (ii) the payment of
reasonable and customary compensation and fees to directors of the Company or
any Restricted Subsidiary who are not employees of the Company or any Restricted
Subsidiary, (iii) the payment of dividends otherwise in compliance with Section
10.14, (iv) indemnification agreements for the benefit of officers, directors
and employees, (v) transactions with or among the Company and any
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Restricted Subsidiary or between or among Restricted Subsidiaries, so long as no
Person (other than a Restricted Subsidiary) which would otherwise be an
Affiliate, officer or director of the Company or a Restricted Subsidiary has any
direct or indirect interest in any such Restricted Subsidiary, (vi) any
transaction with Affiliates in existence on the Issue Date as in effect on the
Issue Date, and (vii) leases of property or equipment or other agreements
entered into in connection with an Asset Acquisition with Persons that were not
Affiliates, officers or directors of the Company or a Restricted Subsidiary
immediately prior to such Asset Acquisition.
Section 10.16. LIMITATION ON SALE OF ASSETS.
The Company will not, and will not cause or permit any Restricted
Subsidiary to, directly or indirectly, consummate an Asset Sale unless (i) at
least 75% of the consideration from such Asset Sale is received in cash or Cash
Equivalents and (ii) the Company or such Subsidiary receives consideration at
the time of such Asset Sale at least equal to the Fair Market Value of the
shares or assets subject to such Asset Sale.
If all or a portion of the Net Cash Proceeds of any Asset Sale are
not required to be applied to repay permanently any Senior Indebtedness
outstanding as required by the terms thereof, or the Company determines not to
apply such Net Cash Proceeds to the permanent repayment of the Senior
Indebtedness which is required to be prepaid, or if no such Indebtedness under
the Senior Indebtedness is outstanding then, the Company or such Restricted
Subsidiary may within 365 days of such Asset Sale, invest the Net Cash Proceeds
in capital expenditures, properties and other assets or inventories that (as
determined by the Board of Directors of the Company) replace the properties and
assets that were the subject of the Asset Sale or in properties and assets that
will be used in the businesses of the Company or its Subsidiaries existing on
the Issue Date or in businesses reasonably related thereto.
To the extent all or part of the Net Cash Proceeds of any Asset Sale
are not applied, or the Company determines not to so apply such Net Cash
Proceeds, within 365 days of such Asset Sale as described in the immediately
preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash
Proceeds"), the Company shall, within 20 days after such 365th day or at any
earlier time after such Asset Sale, make an offer to purchase (the "Asset Sale
Offer") all outstanding Notes up to a maximum principal amount (expressed as a
multiple of $1,000) of Notes equal to such Unutilized Net Cash Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the Asset Sale Offer Purchase
Date; PROVIDED, HOWEVER, that the Asset Sale Offer may be deferred until there
are aggregate Unutilized Net Cash Proceeds equal to or in excess of $10.0
million, at which time the entire amount of such Unutilized Net Cash Proceeds,
and not just the amount in excess of $10.0 million shall be applied as required
pursuant to this paragraph. An Asset Sale Offer will be required to be kept open
for a period of at least 20 Business Days.
With respect to any Asset Sale Offer effected pursuant to this
Section 10.16, among the Notes, to the extent the aggregate principal amount of
Notes tendered pursuant to such Asset Sale Offer exceeds the Unutilized Net Cash
Proceeds to be applied to the repurchase thereof, such Notes shall be purchased
PRO RATA based on the aggregate principal amount of such
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Notes tendered by each Holder. To the extent the Unutilized Net Cash Proceeds
exceed the aggregate amount of Notes tendered by the Holders of the Notes
pursuant to such Asset Sale Offer, the Company may retain and utilize any
portion of the Unutilized Net Cash Proceeds not applied to repurchase the Notes
for any purpose consistent with the other terms of this Indenture.
Notice of an Asset Sale Offer shall be mailed by the Company not
more than 20 days after the obligation to make such Asset Sale Offer arises to
the Holders of Notes at their last registered addresses with a copy to the
Trustee and the Paying Agent. The Asset Sale Offer shall remain open from the
time of mailing for at least 20 Business Days or such longer period as may be
required by applicable law and until 5:00 p.m., New York City time, on the last
day of the period (the "Asset Sale Offer Purchase Date"). The notice, which
shall govern the terms of the Asset Sale Offer, shall include such disclosures
as are required by law and shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
10.16 and that all Notes in integral multiples of $1,000 tendered into the
Asset Sale Offer shall be accepted for payment; PROVIDED, HOWEVER, that if
the aggregate principal amount of Notes tendered in the Asset Sale Offer
exceeds the Unutilized Net Cash Proceeds, the Company shall select the
Notes to be purchased on a PRO RATA basis based upon the aggregate
principal amount of such Notes tendered by each Holder; and that the Asset
Sale Offer shall remain open for a period of 20 Business Days or such
longer period as may be required by applicable law;
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Asset Sale Offer Purchase Date and the date on
which the Asset Sale Offer expires;
(c) that any Note not tendered for payment shall continue to accrue
interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Asset Sale Offer Purchase
Date;
(e) that Holders electing to have Notes purchased pursuant to an
Asset Sale Offer shall be required to surrender their Notes to the Paying
Agent at the address specified in the notice prior to 5:00 p.m., New York
City time, on the Asset Sale Offer Purchase Date and must complete any
form letter of transmittal proposed by the Company and acceptable to the
Trustee and the Paying Agent;
(f) that any Holder of Notes shall be entitled to withdraw its
election if the Paying Agent receives, not later than 5:00 p.m., New York
City time, on the Asset Sale Offer Purchase Date, a facsimile transmission
or letter setting forth the name of such Holder, the principal amount of
Notes the Holder delivered for purchase, the Note certificate number (if
any) and a statement that such Holder is withdrawing its election to have
such Notes purchased;
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(g) that Holders whose Notes are purchased only in part shall be
issued Notes of like tenor equal in principal amount to the unpurchased
portion of the Notes surrendered;
(h) the instructions that Holders must follow in order to tender
their Notes; and
(i) information concerning the business of the Company, the most
recent annual and quarterly reports of the Company filed with the
Commission pursuant to the Exchange Act (or, if the Company is not
permitted to file any such reports with the Commission, the comparable
reports prepared pursuant to Section 10.10), a description of material
developments in the Company's business, information with respect to pro
forma historical financial position and results of operations after giving
effect to such Asset Sale and such other information concerning the
circumstances and relevant facts regarding such Asset Sale and Asset Sale
Offer as would, in the good faith judgment of the Company, be material to
a Holder of Notes in connection with the decision of such Holder as to
whether or not it should tender Notes pursuant to the Asset Sale Offer.
On the Asset Sale Offer Purchase Date, the Company shall (i) accept
for payment (subject to pro ration as described in the second preceding
paragraph) Notes or portions thereof in integral multiples of $1,000 tendered
pursuant to the Asset Sale Offer, (ii) deposit with the Paying Agent money, in
immediately available funds, sufficient to pay the purchase price of all Notes
or portions thereof so tendered and accepted and (iii) deliver to the Trustee
the Notes so accepted together with an Officers' Certificate setting forth the
Notes or portions thereof tendered to and accepted for payment by the Company.
The Paying Agent shall promptly mail or deliver to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail or deliver to such Holders a new Note of like
tenor equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce the
results of the Asset Sale Offer not later than the first Business Day following
the Asset Sale Offer Purchase Date.
In the event that the Company makes an Asset Sale Offer, the Company
shall comply, to the extent applicable, with the requirements of Section 14(e)
of the Exchange Act, and any other applicable securities laws or regulations and
any applicable requirements of any securities exchange on which the Notes are
listed, and any violations of the provisions of this Section 10.16 relating to
such Asset Offer occurring as a result of such compliance shall not be deemed a
Default.
Section 10.17. LIMITATION ON LIENS.
The Company will not, and will not cause or permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume, suffer to exist or
affirm any Lien of any kind securing any Pari Passu Indebtedness or Subordinated
Indebtedness (including any assumption, guarantee or other liability with
respect thereto by any Restricted Subsidiary) upon any of its property or assets
(including any intercompany notes), whether owned on the Issue Date or
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acquired after the Issue Date, or any proceeds, income or profits therefrom, or
assign or convey any right to receive proceeds, income or profits therefrom,
unless the Notes are directly secured equally and ratably with (or, in the case
of Subordinated Indebtedness, prior or senior to, with the same relative
priority as the Notes shall have with respect to such Subordinated Indebtedness)
the obligation or liability secured by such Lien, except for Liens (A) securing
any Indebtedness which was created prior to (and not created in connection with,
or in contemplation of) the incurrence of such Pari Passu Indebtedness or
Subordinated Indebtedness (including any assumption, guarantee or other
liability with respect thereto by any Restricted Subsidiary) and which
Indebtedness is permitted under Section 10.12 or (B) securing any Indebtedness
incurred in connection with any refinancing, renewal, substitution or
replacement of any such Indebtedness described in clause (A), so long as the
aggregate principal amount of Indebtedness represented thereby is not increased
by such refinancing by an amount greater than the amount of any stated or
reasonably determined prepayment premium paid in connection with such a
refinancing plus the amount of expenses of the Company and the Restricted
Subsidiaries incurred in connection with such refinancing; PROVIDED, HOWEVER,
that in the case of clauses (A) and (B) any such Lien only extends to the assets
that were subject to such Lien securing such Indebtedness prior to the related
acquisition by the Company or the Restricted Subsidiaries.
Section 10.18. LIMITATION ON INCURRENCE OF SENIOR SUBORDINATED INDEBTEDNESS.
The Company will not, and will not permit any Guarantor to, directly
or indirectly, create, incur, issue, assume, guarantee or otherwise in any
manner become directly or indirectly liable for or with respect to or otherwise
permit to exist any Indebtedness that is subordinate or junior in right of
payment to any Indebtedness of the Company or such Guarantor, as the case may
be, unless such Indebtedness is also PARI PASSU with the Notes or the Guarantee
of such Guarantor or subordinate or junior, in right of payment to the Notes or
such Guarantee at least to the same extent as the Notes or such Guarantee are
subordinate or junior in right of payment to Senior Indebtedness or Senior
Indebtedness of such Guarantor, as the case may be.
The Company will not cause or permit any Restricted Subsidiary,
other than the Guarantors, directly or indirectly, to secure the payment of any
Senior Indebtedness of the Company and the Company will not, and will not permit
any Restricted Subsidiary to, pledge any intercompany notes representing
obligations of any Restricted Subsidiary (other than the Guarantors) to secure
the payment of any Senior Indebtedness unless in each case such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to this
Indenture providing for a guarantee of payment of the Notes by such Restricted
Subsidiary, which guarantee shall be on the same terms as the guarantee of the
Senior Indebtedness (if a guarantee of Senior Indebtedness is granted by any
such Restricted Subsidiary) except that the guarantee of the Notes need not be
secured and shall be subordinated to the claims against such Restricted
Subsidiary in respect of Senior Indebtedness to the same extent as the Notes are
subordinated to Senior Indebtedness of the Company under this Indenture.
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Section 10.19. LIMITATION ON SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES.
The Company will not sell and will not cause or permit any
Restricted Subsidiary of the Company to issue, sell or transfer any Preferred
Stock of any Restricted Subsidiary (other than to the Company or to a
Wholly-Owned Restricted Subsidiary) or permit any Person (other than the Company
or a Wholly-Owned Restricted Subsidiary) to own any Preferred Stock of any
Restricted Subsidiary. In addition, the Company will not sell or otherwise
dispose of any Capital Stock of a Restricted Subsidiary, and will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any of its Capital Stock except, subject to compliance with the other
covenants herein, (i) to the Company or a Restricted Subsidiary, (ii) directors'
qualifying shares, (iii) if, immediately after giving effect to such issuance,
sale or other disposition, either (x) neither the Company nor any of its
Subsidiaries own any Capital Stock of such Restricted Subsidiary or (y) such
Restricted Subsidiary would remain a Restricted Subsidiary, and (iv) if,
immediately after giving effect to such issuance, sale or other disposition,
such Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect thereto would
have been permitted to be made (and shall be deemed to have been made) under
Section 10.14 of this Indenture on the date of such issuance, sale or other
disposition.
Section 10.20. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING RESTRICTED SUBSIDIARIES.
The Company will not, and will not cause or permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective or enter into any agreement with any Person that would
cause to become effective, any consensual encumbrance or restriction of any
kind, on the ability of any Restricted Subsidiary to (i) pay dividends, in cash
or otherwise, or make any other distribution on or in respect of its Capital
Stock or any other interest or participation in, or measured by, its profits, to
the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed
to the Company or any other Restricted Subsidiary, (iii) make any Investment in
the Company or any other Restricted Subsidiary or (iv) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for: (a) any encumbrance or restriction existing under any agreement in effect
on the Issue Date; (b) any encumbrance or restriction, with respect to a
Subsidiary that is not a Restricted Subsidiary of the Company on the Issue Date,
in existence at the time such Person becomes a Restricted Subsidiary of the
Company and not incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary; PROVIDED, HOWEVER, that such encumbrances and
restrictions are not applicable to the Company or any other Restricted
Subsidiary, or the properties or assets of the Company or any other Restricted
Subsidiary; (c) any encumbrance or restriction existing under any agreement that
extends, renews, refinances or replaces the agreements containing the
encumbrances or restrictions in the foregoing clauses (a) and (b), or in this
clause (c), PROVIDED that the terms and conditions of any such encumbrances or
restrictions are no more restrictive in any material respect than those under or
pursuant to the agreement evidencing the Indebtedness so extended, renewed,
refinanced or replaced; and (d) with respect to (iv) above, any restriction in
any customary non-assignment provision in any contract or lease governing any
leasehold interest entered into in the ordinary course of business.
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Section 10.21. LIMITATIONS ON UNRESTRICTED SUBSIDIARIES.
The Company will not make, and will not permit the Restricted
Subsidiaries to make, any Investment in Unrestricted Subsidiaries if, at the
time thereof, the aggregate amount of such Investments would exceed the amount
of Restricted Payments then permitted to be made pursuant to Section 10.14 under
this Indenture. Any Investments in Unrestricted Subsidiaries permitted to be
made pursuant to this Section 10.21, (i) will be treated as a Restricted Payment
in calculating the amount of Restricted Payments made by the Company and (ii)
may be made in cash or property.
The Company may designate after the Issue Date any Subsidiary (other
than a Guarantor) as an "Unrestricted Subsidiary" under this Indenture (a
"Designation") only if:
(i) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment at the time
of Designation (assuming the effectiveness of such Designation) pursuant
to the provision described under the first paragraph of Section 10.14 in
an amount (the "Designation Amount") equal to the Fair Market Value of the
interest of the Company or any Restricted Subsidiary in such Subsidiary on
such date calculated in accordance with GAAP; and
(iii) the Company would be permitted under this Indenture to incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to Section 10.12 at the time of such Designation (assuming the
effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to Section
10.14 for all purposes of this Indenture in the Designation Amount.
The Company shall not, and shall not cause or permit any Restricted
Subsidiary to, at any time (x) provide credit support for or subject any of its
property or assets (other than the Capital Stock of any Unrestricted Subsidiary)
to the satisfaction of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary
(including any right to take enforcement action against such Unrestricted
Subsidiary), except any non-recourse guarantee given solely to support the
pledge by the Company or any Restricted Subsidiary of the Capital Stock of an
Unrestricted Subsidiary. No Unrestricted Subsidiary shall at any time guarantee
or otherwise provide credit support for any obligation of the Company or any
Restricted Subsidiary. All Subsidiaries of Unrestricted Subsidiaries shall
automatically be deemed to be Unrestricted Subsidiaries.
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The Company may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation;
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of this
Indenture; and
(iii) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary
was an Unrestricted Subsidiary would be permitted by Section 10.15 as if
such transaction (or series of related transactions) had occurred at the
time of such Revocation.
All Designations and Revocations must be evidenced by Board
Resolutions of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
Section 10.22. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to
take any action under any provision of this Indenture, the Company, the
Guarantors and any other obligor on the Notes will furnish to the Trustee an
Officers' Certificate stating that all conditions precedent, if any, provided
for in this Indenture (including any covenants compliance with which constitutes
a condition precedent) relating to the proposed action have been complied with,
and an Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that, in the case
of any such application or request as to which the furnishing of such documents,
certificates and/or opinions is specifically required by any provision of this
Indenture relating to such particular application or request, no additional
certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture will include:
(i) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(ii) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(iii) a statement that, in the opinion of each such individual, he or
she has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether such covenant or
condition has been complied with; and
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(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall cease to be of further effect (except as to
surviving rights or registration of transfer or exchange of Notes herein
expressly provided for) and the Trustee, on written demand of and at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when either
(i) (a) all Notes theretofore authenticated and delivered (other than
(i) Notes which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3.07 hereof and (ii) Notes for
whose payment money has theretofore been deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.03) have been
delivered to the Trustee for cancellation; or (b) all such Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable and the Company or any Guarantor has irrevocably deposited or
caused to be deposited with the Trustee in trust an amount of money in
dollars sufficient to pay and discharge the entire Indebtedness on such
Notes not theretofore delivered to the Trustee for cancellation, for the
principal of, premium, if any, and interest to the date of such deposit;
(ii) the Company or any Guarantor has paid or caused to be paid all
other sums payable hereunder by the Company and the Guarantor; and
(iii) the Company and each of the Guarantors have delivered to the
Trustee (a) irrevocable instructions to apply the deposited money toward
payment of the Notes at the Stated Maturities and the Redemption Dates
thereof, and (b) an Officers' Certificate and an Opinion of Counsel each
stating that all conditions precedent herein provided for relating to the
satisfaction and discharge of this Indenture have been complied with and
that such satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, this Indenture or any other
material agreement or instrument to which the Company, any Guarantor or
any Subsidiary is a party or by which the Company, any Guarantor or any
Subsidiary is bound.
Notwithstanding the satisfaction and discharge of this Indenture,
the obligations of the Company to the Trustee under Section 6.07 and, if money
shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this
Section 11.01, the obligations of the Trustee under Section 11.02 and the last
paragraph of Section 10.03 shall survive.
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Section 11.02. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 10.03,
all money deposited with the Trustee pursuant to Section 11.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent), as the Trustee may
determine, to the Persons entitled thereto, of the principal of, premium, if
any, and interest on the Notes for whose payment such money has been deposited
with the Trustee.
ARTICLE TWELVE
GUARANTEE OF NOTES
Section 12.01. UNCONDITIONAL GUARANTEE.
Each Guarantor hereby jointly and severally absolutely and
unconditionally guarantees to each Holder of a Note authenticated and delivered
by the Trustee and to the Trustee and its successors and assigns, irrespective
of the invalidity, illegality, or unenforceability of this Indenture, the Notes
or any extension, compromise, waiver or release in respect of any obligation of
the Company or any other Guarantor under any Note, this Indenture or any
modification or amendment of or supplement to this Indenture, that: (a) the
principal of, premium, if any, and interest on the Notes will be duly and
punctually paid in full when due, whether at maturity, upon redemption, by
acceleration or otherwise, and interest on the overdue principal and (to the
extent permitted by law) interest, if any, on the Notes and all other
obligations of the Company or the Guarantor to the Holders or the Trustee
hereunder or thereunder (including fees, expenses or other) and all other
Indenture Obligations will be promptly paid in full or performed, all in
accordance with the terms hereof and thereof; and (b) in case of any extension
of time of payment or renewal of any Notes or any of such other Indenture
Obligations, the same will be promptly paid in full when due or performed in
accordance with the terms of the extension or renewal, whether at Stated
Maturity, by acceleration or otherwise. Failing payment when due of any amount
so guaranteed, or failing performance of any other obligation of the Company to
the Holders, for whatever reason, each Guarantor shall be obligated to pay, or
to perform or cause the performance of, the same immediately. An Event of
Default under this Indenture or the Notes shall constitute an event of default
under this Guarantee, and shall entitle the Holders of Notes to accelerate the
obligations of the Guarantor hereunder in the same manner and to the same extent
as the obligations of the Company.
Each Guarantor hereby agrees that its obligations hereunder shall be
unconditional, irrespective of the validity, regularity or enforceability of the
Notes or this Indenture, the absence of any action to enforce the same, any
waiver or consent by any Holder of the Notes with respect to any provisions
hereof or thereof, any release of any other Guarantor, the recovery of any
judgment against the Company, any action to enforce the same, whether or not a
Guarantee is affixed to any particular Note, or any other circumstance which
might otherwise constitute a legal or equitable discharge or defense of a
guarantor.
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Each Guarantor hereby waives the benefit of diligence, presentment,
demand of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever and covenants that its
Guarantee shall not be discharged except by complete performance of the
obligations contained in the Notes, this Indenture and this Guarantee. This
Guarantee is a guarantee of payment and not of collection. If any Holder or the
Trustee is required by any court or otherwise to return to the Company or to any
Guarantor, or any custodian, trustee, liquidator or other similar official
acting in relation to the Company or such Guarantor, any amount paid by the
Company or such Guarantor to the Trustee or such Holder, this Guarantee, to the
extent theretofore discharged, shall be reinstated in full force and effect.
Each Guarantor further agrees that, as between it, on the one hand, and the
Holders of Notes and the Trustee, on the other hand, (a) subject to this Article
Twelve, the maturity of the obligations guaranteed hereby may be accelerated as
provided in Article Five hereof for the purposes of this Guarantee,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration in respect of the obligations guaranteed hereby, and (b) in the
event of any acceleration of such obligations as provided in Article Five
hereof, such obligations (whether or not due and payable) shall forthwith become
due and payable by the Guarantor for the purpose of this Guarantee.
Section 12.02. SUBORDINATION OF GUARANTEES.
The obligations of any Guarantor under its Guarantee will be
subordinated, to the same extent as the obligations of the Company in respect of
the Notes, to the prior payment in full of all Senior Indebtedness of such
Guarantor, which will include any guarantee issued by such Guarantor of any
Senior Indebtedness; provided that payment blockage periods in respect of the
Guarantees may only be instituted by a holder of Designated Senior Indebtedness
of the Company entitled to the benefit of a guarantee from the applicable
Guarantor at the same time as instituted in respect of Senior Indebtedness of
the Company and for a contemporaneous period.
Section 12.03. EXECUTION AND DELIVERY OF GUARANTEE.
To further evidence the Guarantee set forth in Section 12.01, each
Guarantor hereby agrees that a notation of such Guarantee in the form annexed
hereto as Exhibit D shall be endorsed on each Note authenticated and delivered
by the Trustee and executed by either manual or facsimile signature of an
Officer of each Guarantor.
Each of the Guarantors hereby agrees that its Guarantee set forth in
Section 12.01 shall remain in full force and effect notwithstanding any failure
to endorse on each Note a notation of such Guarantee.
If an Officer of a Guarantor whose signature is on this Indenture or
a Guarantee no longer holds that office at the time the Trustee authenticates
such Note or at any time thereafter, such Guarantor's Guarantee of such Note
shall be valid nevertheless.
The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of any Guarantee set forth in
this Indenture on behalf of each Guarantor.
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Section 12.04. ADDITIONAL GUARANTORS.
Any Person that was not a Guarantor on the date of this Indenture
may become a Guarantor by executing and delivering to the Trustee (a) a
supplemental indenture in form and substance satisfactory to the Trustee, which
subjects such Person to the provisions (including the representations and
warranties) of this Indenture as a Guarantor, (b) in the event that as of the
date of such supplemental indenture any Registrable Securities are outstanding,
an instrument in form and substance satisfactory to the Trustee which subjects
such Person to the provisions of the Registration Rights Agreement with respect
to such outstanding Registrable Securities, and (c) an Opinion of Counsel to the
effect that such supplemental indenture has been duly authorized and executed by
such Person and constitutes the legal, valid and binding obligation of such
Person (subject to such customary assumptions and exceptions as may be
acceptable to the Trustee in its reasonable discretion).
Section 12.05. RELEASE OF A GUARANTOR.
Upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Company's Capital Stock in, or all or
substantially all the assets of, any Subsidiary of the Company that is a
Guarantor, which transaction is in compliance with the terms of this Indenture
(including, but not limited to, Article Eight and Section 10.16 under this
Indenture) and such Subsidiary is simultaneously unconditionally released from
all guarantees, if any, by it of other Indebtedness of the Company or any
Restricted Subsidiaries or (ii) (with respect to any Guarantees created after
the date of this Indenture) the release by the holders of the Indebtedness of
the Company of their security interest or their guarantee by such Restricted
Subsidiary (including any deemed release upon payment in full of all obligations
under such Indebtedness), at a time when (A) no other Indebtedness of the
Company has been secured or guaranteed by, such Restricted Subsidiary, as the
case may be, or (B) the holders of all such other Indebtedness which is secured
or guaranteed by such Restricted Subsidiary also release their security interest
in, or guarantee by such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness), in either
case, such Guarantor shall be automatically and unconditionally released and
discharged from all obligations under this Article Twelve without any further
action required on the part of the Trustee or any Holder. The Trustee shall
deliver an appropriate instrument evidencing such release upon receipt of a
request of the Company accompanied by an Officers' Certificate certifying as to
the compliance with this Section. Any Guarantor not so released will remain
liable for the full amount of principal of, premium, if any, and interest on the
Notes as provided in this Article Twelve.
Section 12.06. WAIVER OF SUBROGATION.
Until this Indenture is discharged and all of the Notes are
discharged and paid in full, each Guarantor hereby irrevocably waives and agrees
not to exercise any claim or other rights which it may now or hereafter acquire
against the Company that arise from the existence, payment, performance or
enforcement of the Company's obligations under the Notes or this Indenture and
such Guarantor's obligations under this Guarantee and this Indenture, in any
such instance including, without limitation, any right of subrogation,
reimbursement, exoneration,
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contribution, indemnification, and any right to participate in any claim or
remedy against the Company, whether or not such claim, remedy or right arises in
equity, or under contract, statute or common law, including, without limitation,
the right to take or receive from the Company, directly or indirectly, in cash
or other property or by set-off or in any other manner, payment or security on
account of such claim or other rights. If any amount shall be paid to any
Guarantor in violation of the preceding sentence and any amounts owing to the
Trustee or the Holders of Notes under the Notes, this Indenture, or any other
document or instrument delivered under or in connection with such agreements or
instruments, shall not have been paid in full, such amount shall have been
deemed to have been paid to such Guarantor for the benefit of, and held in trust
for the benefit of, the Holders of the Notes, and shall forthwith be paid to the
Trustee for the benefit of such Holders to be credited and applied to the Notes,
whether matured or unmatured, in accordance with the terms of this Indenture.
Each Guarantor acknowledges that it will receive direct and indirect benefits
from the financing arrangements contemplated by this Indenture and that the
waiver set forth in this Section 12.06 is knowingly made in contemplation of
such benefits.
Section 12.07. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT
REGARDING DISSOLUTION, ETC. OF GUARANTORS.
Upon any payment or distribution of assets of any Guarantor referred
to in this Article Twelve, the Trustee, subject to the provisions of Section
6.01, and the Holders, shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such insolvency,
bankruptcy, receivership, liquidation, reorganization, dissolution, winding-up
or similar case or proceeding is pending, or a certificate of the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit
of creditors, agent or other Person making such payment or distribution,
delivered to the Trustee or to the Holders, for the purpose of ascertaining the
Persons entitled to participate in such payment or distribution, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Article Twelve; PROVIDED,
HOWEVER, that the foregoing shall apply only if such court has been fully
apprised of the provisions of this Article Twelve.
Section 12.08. ARTICLE TWELVE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall
have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article Twelve shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article Twelve in addition to or in place of the Trustee.
Section 12.09. NO SUSPENSION OF REMEDIES.
Nothing contained in this Article Twelve shall limit the right of
the Trustee or the Holders of Notes to take any action to accelerate the
maturity of the Notes pursuant to Article Five or to pursue any rights or
remedies hereunder or under applicable law.
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Section 12.10. LIMITATION OF SUBSIDIARY GUARANTOR'S LIABILITY.
Each Guarantor, and by its acceptance hereof each Holder, hereby
confirms that it is the intention of all such parties that the Guarantee by such
Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or
conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance
Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To
effectuate the foregoing intention, the Holders and such Guarantor hereby
irrevocably agree that the obligations of such Guarantor under this Guarantee
shall be limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of such Guarantor, and after giving effect to
any collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under this Article Twelve, will result
in the obligations of such Guarantor under its Guarantee not constituting such
fraudulent transfer or conveyance.
Section 12.11. CONTRIBUTION FROM OTHER GUARANTORS.
Each Guarantor that makes a payment or distribution under its
Guarantee shall be entitled to a contribution from each other Guarantor in a pro
rata amount based on the net assets of each Guarantor, determined in accordance
with GAAP, so long as the exercise of such right does not impair the rights of
Holders of Notes under any Guarantee.
Section 12.12. OBLIGATIONS REINSTATED.
The obligations of each Guarantor hereunder shall continue to be
effective or shall be reinstated, as the case may be, if at any time any payment
which would otherwise have reduced the obligations of any Guarantor hereunder
(whether such payment shall have been made by or on behalf of the Company or by
or on behalf of a Guarantor) is rescinded or reclaimed from any of the Holders
upon the insolvency, bankruptcy, liquidation or reorganization of the Company or
any Guarantor or otherwise, all as though such payment had not been made. If
demand for, or acceleration of the time for, payment by the Company is stayed
upon the insolvency, bankruptcy, liquidation or reorganization of the Company,
all such Indebtedness otherwise subject to demand for payment or acceleration
shall nonetheless be payable by each Guarantor as provided herein.
Section 12.13. NO OBLIGATION TO TAKE ACTION AGAINST THE COMPANY.
Neither the Trustee nor any other Person shall have any obligation
to enforce or exhaust any rights or remedies or to take any other steps under
any security for this Indenture Obligations or against the Company or any other
Person or any property of the Company or any other Person before the Trustee is
entitled to demand payment and performance by any or all Guarantors of their
liabilities and obligations under their Guarantees or under this Indenture.
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Section 12.14. DEALING WITH THE COMPANY AND OTHERS.
The Holders, without releasing, discharging, limiting or otherwise
affecting in whole or in part the obligations and liabilities of any Guarantor
hereunder and without the consent of or notice to any Guarantor, may
(a) grant time, renewals, extensions, compromises, concessions,
waivers, releases, discharges and other indulgences to the Company or any
other Person;
(b) take or abstain from taking security or collateral from the
Company or from perfecting security or collateral of the Company;
(c) release, discharge, compromise, realize, enforce or otherwise
deal with or do any act or thing in respect of (with or without
consideration) any and all collateral, mortgages or other security given
by the Company or any third party with respect to the obligations or
matters contemplated by this Indenture or the Notes;
(d) accept compromises or arrangements from the Company;
(e) apply all monies at any time received from the Company or from
any security upon such part of the Indenture Obligations as the Holders
may see fit or change any such application in whole or in part from time
to time as the Holders may see fit; and
(f) otherwise deal with, or waive or modify their right to deal
with, the Company and all other Persons and any security as the Holders or
the Trustee may see fit.
ARTICLE THIRTEEN
REDEMPTIONS AND OFFERS TO PURCHASE
Section 13.01. NOTICE TO TRUSTEE.
If the Company elects to redeem Notes pursuant to Section 13.07 it
shall furnish to the Trustee, at least 30 days but not more than 60 days before
notice of any redemption is to be mailed to Holders (or such shorter times as
may be satisfactory to the Trustee), an Officers' Certificate stating that the
Company has elected to redeem Notes pursuant to Section 13.07, the date notice
of redemption is to be mailed to Holders, the redemption date, the aggregate
principal amount of Notes to be redeemed, the redemption price for such Notes,
the amount of accrued and unpaid interest on such Notes as of the redemption
date and the manner in which Notes are to be selected for redemption if less
than all Outstanding Notes are to be redeemed. If the Trustee is not the
Registrar, the Company shall, concurrently with delivery of its notice to the
Trustee of a redemption, cause the Registrar to deliver to the Trustee a
certificate (upon which the Trustee may rely) setting forth the name of, and the
aggregate principal amount of Notes held by each Holder.
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If the Company is required to offer to purchase Notes pursuant to
Sections 10.11 or 10.16, it shall furnish to the Trustee, at least two Business
Days before notice of the corresponding Offer is to be mailed to Holders, an
Officers' Certificate setting forth that the Offer is being made pursuant to
Sections 10.11 or 10.16, as the case may be, the Change of Control Purchase Date
or the Asset Sale Offer Purchase Date, the maximum principal amount of Notes the
Company is offering to purchase pursuant to such Offer, the purchase price for
such Notes, and the amount of accrued and unpaid interest on such Notes as of
the Change of Control Purchase Date or the Asset Sale Offer Purchase Date, as
the case may be.
The Company will also provide the Trustee with any additional
information that the Trustee reasonably requests in connection with any
redemption or Offer.
Section 13.02. SELECTION OF NOTES TO BE REDEEMED OR PURCHASED.
In the event that less than all of the Notes are to be redeemed at
any time, selection of Notes for redemption shall be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
national securities exchange, on a PRO RATA basis, by lot or by such method as
the Trustee will deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; PROVIDED,
FURTHER, HOWEVER, that any such redemption made with the net proceeds of a
Qualified Equity Offering shall be made on a PRO RATA basis or on as nearly a
PRO RATA basis as practicable (subject to the procedures of The Depository Trust
Company or any other depositary). If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note will state the portion of the
principal amount thereof to be redeemed. A new Note in a principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.
Section 13.03. NOTICE OF REDEMPTION.
(a) At least 30 days but not more than 60 days before any redemption
date, the Company shall mail a notice of redemption by first class mail to each
Holder of Notes or portions thereof that are to be redeemed at its registered
address. With respect to any redemption of Notes, the notice shall identify the
Notes or portions thereof to be redeemed and shall state: (1) the redemption
date; (2) the redemption price for the Notes and the amount of unpaid and
accrued interest on such Notes as of the date of redemption; (3) the paragraph
of the Notes pursuant to which the Notes called for redemption are being
redeemed; (4) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption
date, upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion will be issued; (5) the name and address of the Paying
Agent; (6) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price for, and any accrued and unpaid interest
on, such Notes; (7) that, unless the Company defaults in making such redemption
payment, interest on Notes called for redemption ceases to accrue on and after
the redemption date; and (8) that no representation is made as to the
correctness or accuracy of the CUSIP number listed in such notice and printed on
the Notes.
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(b) At the Company's request, the Trustee shall (at the Company's
expense) give the notice of any redemption to Holders; PROVIDED, HOWEVER, that
the Company shall deliver to the Trustee, at least 45 days prior to the date of
redemption and at least 10 days prior to the date that notice of the redemption
is to be mailed to Holders, an Officers' Certificate that (i) requests the
Trustee to give notice of the redemption to Holders, (ii) sets forth the
information to be provided to Holders in the notice of redemption, as set forth
in the preceding paragraph, and (iii) sets forth the aggregate principal amount
of Notes to be redeemed and the amount of accrued and unpaid interest thereon as
of the redemption date. If the Trustee is not a Registrar, the Company shall,
concurrently with any such request, cause the Registrar to deliver to the
Trustee a certificate (upon which the Trustee may rely) setting forth the name
of, the address of, and the aggregate principal amount of Notes held by, each
Holder; PROVIDED FURTHER that any such Officers' Certificate may be delivered to
the Trustee on a date later than permitted under this Section 13.03(b) if such
later date is acceptable to the Trustee.
Section 13.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed, Notes called for redemption
become due and payable on the redemption date at the price set forth in the
Note.
Section 13.05. DEPOSIT OF REDEMPTION PRICE.
(a) On or prior to any redemption date, the Company shall deposit
with the Trustee or with the Paying Agent money sufficient to pay the redemption
price of, and accrued interest on, all Notes to be redeemed on that date. After
any redemption date, the Trustee or the Paying Agent shall promptly return to
the Company any money that the Company deposited with the Trustee or the Paying
Agent in excess of the amounts necessary to pay the redemption price of, and
accrued interest on, all Notes to be redeemed.
(b) If the Company complies with the preceding paragraph, interest
on the Notes to be redeemed will cease to accrue on such Notes on the applicable
redemption date, whether or not such Notes are presented for payment. If a Note
is redeemed on or after an interest record date but on or prior to the related
interest payment date, then any accrued and unpaid interest shall be paid to the
Person in whose name such Note was registered at the close of business of such
record date. If any Note called for redemption shall not be so paid upon
surrender for redemption because of the failure of the Company to comply with
the preceding paragraph, interest will be paid on the unpaid principal, premium,
if any, and interest from the redemption date until such principal, premium and
interest is paid, at the rate of interest provided in the Notes, the
Registration Rights Agreement and Section 10.01.
Section 13.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall
issue and the Trustee shall authenticate for the Holder at the Company's expense
a new Note equal in principal amount to the unredeemed portion of the Note
surrendered.
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Section 13.07. OPTIONAL REDEMPTION.
Except as set forth below, the Notes are not redeemable at the
Company's option. The Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after April 1, 2004, at the redemption
prices (expressed as percentages of the principal amount) set forth below, plus
accrued and unpaid interest thereon, if any, to the date of redemption, if
redeemed during the 12-month period beginning on April 1 of the years indicated
below:
YEAR REDEMPTION PRICE
---- ----------------
2004........................................ 106.125%
2005........................................ 104.083%
2006........................................ 102.041%
2007 and thereafter......................... 100.000%
On or prior to April 1, 2002, the Company may, at its option, use
the net proceeds of one or more Qualified Equity Offerings to redeem up to 35%
of the originally issued aggregate principal amount of the Notes, at a
redemption price in cash equal to 112.25% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption;
PROVIDED, that at least 65% of the aggregate principal amount of Notes is
outstanding following such redemption. Notice of any such redemption must be
given not later than 60 days after the consummation of any such Qualified Equity
Offering.
On and after the redemption date, interest will cease to accrue on
Notes or portions thereof called for redemption so long as the Company has
deposited with the Paying Agent for the Notes funds in satisfaction of the
applicable redemption price pursuant to this Indenture.
Section 13.08. PROCEDURES RELATING TO MANDATORY OFFERS.
(a) On the Change of Control Purchase Date or the Asset Sale Offer
Purchase Date, as the case may be, for any Offer the Company will (i) in the
case of an Offer resulting from a Change of Control, accept for payment all
Notes or portions thereof tendered pursuant to such Offer and, in the case of an
Offer resulting from one or more Asset Sales, accept for payment the maximum
principal amount of Notes or portions thereof tendered pursuant to such Offer
that can be purchased out of Unutilized Net Cash Proceeds from such Asset Sales
to the extent provided in Section 10.16, (ii) deposit with the Paying Agent the
aggregate purchase price of all Notes or portions thereof accepted for payment
and any accrued and unpaid interest on such Notes as of the Purchase Date, and
(iii) deliver, or cause to be delivered, to the Trustee all Notes tendered
pursuant to the Offer, together with an Officers' Certificate setting forth the
name of each Holder that tendered Notes and the principal amount of the Notes or
portions thereof tendered by each such Holder.
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(b) With respect to any Asset Sale Offer, (i) if less than all of
the Notes tendered pursuant to such Offer are to be accepted for payment by the
Company for any reason consistent with this Indenture, the Trustee shall select
on or prior to the Asset Sale Offer Purchase Date, the Notes or portions thereof
to be accepted for payment pursuant to Section 13.02, and (ii) if the Company
deposits with the Paying Agent on or prior to the Asset Sale Offer Purchase
Date, an amount sufficient to purchase all Notes accepted for payment, interest
shall cease to accrue on such Notes on the Asset Sale Offer Purchase Date;
PROVIDED, HOWEVER, that if the Company fails to deposit an amount sufficient to
purchase all Notes accepted for payment, the deposited funds shall be used to
purchase on a PRO RATA basis all Notes accepted for payment and interest shall
continue to accrue on all Notes not purchased.
(c) Promptly after consummation of an Offer, (i) the Paying Agent
shall mail to each Holder of Notes or portions thereof accepted for payment an
amount equal to the purchase price for, plus any accrued and unpaid interest on,
such Notes, (ii) with respect to any tendered Note not accepted for payment in
whole or in part, the Trustee shall return such Note to the Holder thereof, and
(iii) with respect to any Note accepted for payment in part, the Trustee shall
authenticate and mail to each such Holder a new Note equal in principal amount
to the unpurchased portion of the tendered Note.
(d) The Company will (i) publicly announce the results of the Offer
to Holders not later than the first Business Day after each Change of Control
Purchase Date or Asset Sale Offer Purchase Date, as the case may be, and (ii) as
set forth in Section 10.11 and Section 10.16, comply with the applicable tender
offer rules and all other securities laws and regulations in connection with any
Offer.
ARTICLE FOURTEEN
SUBORDINATION
Section 14.01. AGREEMENT TO SUBORDINATE.
The Company agrees, and each Holder by accepting a Note agrees, any
provisions of this Indenture or the Notes to the contrary notwithstanding, that
all obligations owed under and in respect of the Notes are subordinated in right
of payment, to the extent and in the manner provided in this Article Fourteen,
to the prior payment in full of all Senior Indebtedness of the Company, and that
the subordination of the Notes pursuant to this Article Fourteen is for the
benefit of all holders of all Senior Indebtedness of the Company, whether
outstanding on the Issue Date or incurred thereafter.
Section 14.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
(a) In the event of any insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relating to the Company, or any liquidation,
dissolution or other winding-up of the
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Company, whether voluntary or involuntary, or any assignment for the benefit of
creditors or other marshalling of assets or liabilities of the Company, the
holders of any Senior Indebtedness of the Company will be entitled to receive
payment in full, in cash of all obligations due in respect of such Senior
Indebtedness before the Holders will be entitled to receive any payment,
distribution, repurchase or redemption with respect to the Notes (excluding any
payment, distribution, repurchase or redemption from trusts previously created
pursuant to Section 14.02 and excluding any payment, distribution, repurchase or
redemption of, or repurchase or redemption in exchange for, Permitted Junior
Securities), and until all obligations with respect to such Senior Indebtedness
of the Company are paid in full, in cash, any payment or distribution to which
the Holders would be entitled shall be made to the holders of the Company's
Senior Indebtedness (pro rata to such holders on the basis of the amounts of
Senior Indebtedness held by them). Upon any such insolvency or liquidation
proceeding or other like proceeding referred to above with respect to the
Company, any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities (excluding any payment or
distribution of, or repurchase or redemption in exchange for, securities
permitted by clause (b) of this Section 14.02 and excluding any payment,
distribution, repurchase or redemption for, Permitted Junior Securities), to
which the Holders or the Trustee would be entitled to except for the provisions
of this Indenture shall be paid by the Company, any Custodian or other Person
making such payment or distribution, or by the Holders or by the Trustee if
received by them, directly to the holders of the Company's Senior Indebtedness
(pro rata to such holders on the basis of the amounts of Senior Indebtedness
held by them) or their Representatives, as their interests may appear, for
application to the payment of all outstanding Senior Indebtedness of the Company
until all such Senior Indebtedness has been paid in full in cash, after giving
effect to all other payments or distributions to, or provisions made for,
holders of the Company's Senior Indebtedness.
(b) A distribution may consist of cash, securities or other
property, by set-off or otherwise. For purposes of this Article Fourteen, the
words "cash, securities or other property" shall not include any distribution of
securities of the Company or any other corporation provided for in any
reorganization proceeding under any Bankruptcy Law if (i) such securities
constitute Reorganization Securities, (ii) such distribution was authorized by
an order or decree of a court of competent jurisdiction, and (iii) such order
gives effect to (and states in such order or decree that effect has been given
to) the subordination of such securities to all Senior Indebtedness of the
Company not paid in full in connection with such reorganization; provided that
(a) all such Senior Indebtedness is assumed by the reorganized corporation, and
(b) the rights of the holders of any such Senior Indebtedness are not, without
the consent of such holders, altered by such reorganization, which consent shall
be deemed to have been given if the holders of such Senior Indebtedness (or
their representative), individually or as a class, shall have approved such
reorganization.
(c) Notwithstanding anything to the contrary in this Indenture, any
disposition by or involving the Company, or the liquidation or dissolution of
the Company following any disposition, shall not be deemed a dissolution,
winding-up, liquidation or reorganization for the purposes of this Section 14.02
if such disposition is permitted under Article Eight.
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Section 14.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS.
(a) During the continuance of any default in the payment of any
Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated beyond any applicable grace period and after receipt
by the Trustee from representatives of holders of such Designated Senior
Indebtedness of written notice of such default, no payment or distribution of
any assets of the Company of any kind or character (excluding any payment,
distribution, redemption or repurchase from trusts previously created pursuant
to the provisions set forth in Article Four and excluding any payment or
distribution of Permitted Junior Securities) may be made on account of any of
the Indebtedness represented by, or the purchase, redemption or other
acquisition of, the Notes unless and until such default has been cured or waived
or has ceased to exist or such Designated Senior Indebtedness shall have been
discharged or paid in full.
(b) During the continuance of any non-payment default with respect
to any Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated (a "Non-payment Default") and upon the earlier to
occur of (x) the receipt by the Trustee from the representatives of holders of
such Designated Senior Indebtedness of a written notice of such Non-payment
Default or (y) if such Non-payment Default results from the acceleration of the
Notes, the date of such acceleration, no payment or distribution of any assets
of the Company of any kind or character (excluding any payment or distribution
from trusts previously created pursuant to the provisions set forth in Article
Four and excluding any payment or distribution of Permitted Junior Securities)
may be made by the Company on account of any of the Indebtedness represented by,
or the purchase, redemption or other acquisition of, the Notes for the period
specified below (the "Payment Blockage Period").
(c) The Payment Blockage Period will commence upon the earlier of
the receipt of notice of a Non-payment Default by the Trustee from the
representatives of holders of Designated Senior Indebtedness or the date of
acceleration referred to in clause (y) of Section 14.03(b), as the case may be,
and will end on the earlier to occur of the following events: (i) 179 days shall
have elapsed since the receipt of such notice of a Non-payment Default or the
date of acceleration referred to in clause (y) of Section 14.03(b) (provided
that such Designated Senior Indebtedness shall not theretofore have been
accelerated and the Company has not defaulted with respect to the payment of
such Designated Senior Indebtedness), (ii) such default is cured or waived or
ceases to exist or such Designated Senior Indebtedness is discharged or (iii)
such Payment Blockage Period shall have been terminated by written notice to the
Company or the Trustee from the representatives of holders of Designated Senior
Indebtedness initiating such Payment Blockage Period. After the end of any
Payment Blockage Period the Company shall promptly resume making any and all
required payments in respect of the Notes, including any missed payments.
Notwithstanding anything in the subordination provisions of this Indenture or
the Notes to the contrary, unless the provisions of Section 14.03(a) apply, (x)
in no event shall a Payment Blockage Period extend beyond 179 days from the date
of the receipt by the Trustee of the notice initiating such Payment Blockage
Period, (y) there shall be a period of at least 186 consecutive days in each
365-day period when no Payment Blockage Period is in effect and (z) not more
than one Payment Blockage Period with respect to the Notes may be
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commenced within any period of 365 consecutive days. A Non-payment Default with
respect to Designated Senior Indebtedness that existed or was continuing on the
date of the commencement of any Payment Blockage Period with respect to the
Designated Senior Indebtedness initiating such Payment Blockage Period cannot be
made the basis for the commencement of a second Payment Blockage Period, whether
or not within a period of 365 consecutive days, unless such default has been
cured or waived for a period of not less than 90 consecutive days and
subsequently recurs.
Section 14.04. ACCELERATION OF NOTES.
If payment of the Notes is accelerated because of an Event of
Default, the Company shall promptly notify each holder of the Company's
Designated Senior Indebtedness or their representatives of the acceleration and
provide copies of such notice to the Trustee.
Section 14.05. WHEN DISTRIBUTIONS MUST BE PAID OVER.
If the Company shall make any payment to the Trustee on account of
the principal of, or premium, if any, or interest on, the Notes, or any other
obligation in respect to the Notes, or the Holders shall receive from any source
any payment on account of the principal of, or premium, if any, or interest on,
the Notes or any obligation in respect of the Notes, at a time when such payment
is prohibited by this Article Fourteen, the Trustee or such Holders shall hold
such payment in trust for the benefit of, and shall pay over and deliver to, the
holders of the Company's Senior Indebtedness (PRO RATA as to each of such
holders on the basis of the respective amounts of such Senior Indebtedness held
by them) or their representative or the trustee under the indenture or other
agreement (if any) pursuant to which such Senior Indebtedness may have been
issued, as their respective interests may appear, for application to the payment
of all outstanding Senior Indebtedness of the Company until all such Senior
Indebtedness has been paid in full in cash, after giving effect to all other
payments or distributions to, or provisions made for, the holders of the
Company's Senior Indebtedness.
With respect to the holders of Senior Indebtedness of the Company,
the Trustee undertakes to perform only such obligations on its part as are
specifically set forth in this Article Fourteen, and no implied covenants or
obligations with respect to any holders of the Company's Senior Indebtedness
shall be read into this Indenture against the Trustee. The Trustee shall not be
deemed to owe any fiduciary duty to the holders of the Company's Senior
Indebtedness, and shall not be liable to any holders of such Senior Indebtedness
if the Trustee shall pay over or distribute to, or on behalf of, Holders or the
Company or any other Person money or assets to which any holders of such Senior
Indebtedness are entitled pursuant to this Article Fourteen.
Section 14.06. NOTICE.
Neither the Trustee nor the Paying Agent shall at any time be
charged with the knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee or Paying Agent under this Article
Fourteen, unless the Trustee or the requisite Holders have given notice of
acceleration of the Notes or unless and until the Trustee or Paying Agent shall
have received written notice thereof from the Company or one or more holders of
the
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Company's Senior Indebtedness or a representative of any holders of such Senior
Indebtedness; and, prior to the receipt of any such written notice, the Trustee
or Paying Agent shall be entitled to assume conclusively that no such facts
exist. The Trustee shall be entitled to rely on the delivery to it of written
notice by a Person representing itself to be a holder of the Company's Senior
Indebtedness (or a representative thereof) to establish that such notice has
been given.
The Company shall promptly notify the Trustee and the Paying Agent
in writing of any facts it knows that would cause a payment of principal of, or
premium, if any, or interest on, the Notes or any other obligation in respect of
the Notes to violate this Article Fourteen, but failure to give such notice
shall not affect the subordination of the Notes to the Senior Indebtedness of
the Company provided in this Article Fourteen or the rights of holders of such
Senior Indebtedness under this Article Fourteen.
Section 14.07. SUBROGATION.
After all Senior Indebtedness of the Company has been paid in full
in cash and until the Notes are paid in full, Holders shall be subrogated
(equally and ratably with all other Pari Passu Indebtedness) to the rights of
holders of such Senior Indebtedness to receive distributions applicable to such
Senior Indebtedness to the extent that distributions otherwise payable to the
Holders have been applied to the payment of such Senior Indebtedness. A
distribution made under this Article Fourteen to holders of the Company's Senior
Indebtedness that otherwise would have been made to Holders is not, as between
the Company and Holders, a payment by the Company on its Senior Indebtedness.
Section 14.08. RELATIVE RIGHTS.
The provisions of this Article Fourteen are and are intended solely
for the purpose of defining the relative rights of Holders and holders of the
Company's Senior Indebtedness. Nothing in this Indenture shall: (1) impair, as
between the Company and Holders, the Company's Indenture Obligations, which are
absolute and unconditional, to pay principal of, and premium, if any, and
interest on, the Notes in accordance with their terms; (2) affect the relative
rights of Holders and the Company's creditors other than their rights in
relation to holders of the Company's Senior Indebtedness; or (3) prevent the
Trustee or any Holder from exercising its available remedies upon a Default,
subject to the rights of holders of the Company's Senior Indebtedness, if any,
under this Article Fourteen.
Nothing contained in this Article Fourteen or elsewhere in this
Indenture or in any Note is intended to or shall impair, as between the Company
and the Holders, the Indenture Obligations of the Company, which are absolute
and unconditional, to pay to the Holders the principal of, and premium, if any,
and interest on, the Notes as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the Holders and creditors of the Company other than the holders of the
Company's Senior Indebtedness, nor shall anything herein or therein prevent the
Trustee or any Holder from exercising all remedies otherwise permitted by
applicable law upon Default under this Indenture, subject to the rights, if any,
under this Article Fourteen of the holders of such Senior Indebtedness.
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The failure to make a payment on account of principal of, or
interest on the Notes by reason of any provision of this Article Fourteen shall
not be construed as preventing the occurrence of an Event of Default under
Section 5.01.
Section 14.09. THE COMPANY AND HOLDERS MAY NOT IMPAIR SUBORDINATION.
(a) No right of any holder of the Company's Senior Indebtedness to
enforce the subordination as provided in this Article Fourteen shall at any time
or in any way be prejudiced or impaired by any act or failure to act by the
Company or by any noncompliance by the Company with the terms, provisions and
covenants of this Indenture or the Notes or any other agreement regardless of
any knowledge thereof with which any such holder may have or be otherwise
charged.
(b) Without in any way limiting Section 14.09(a), the holders of any
Senior Indebtedness of the Company may, at any time and from time to time,
without the consent of or notice to any Holders, without incurring any
liabilities to any Holder and without impairing or releasing the subordination
and other benefits provided in this Indenture or the Holders' obligations to the
holders of such Senior Indebtedness, even if any Holder's right of reimbursement
or subrogation or other right or remedy is affected, impaired or extinguished
thereby, do any one or more of the following: (i) amend, renew, exchange,
extend, modify, increase or supplement in any manner such Senior Indebtedness or
any instrument evidencing or guaranteeing or securing such Senior Indebtedness
or any agreement under which such Senior Indebtedness is outstanding (including,
but not limited to, changing the manner, place or terms of payment or changing
or extending the time of payment of, or renewing, exchanging, amending,
increasing or altering, (1) the terms of such Senior Indebtedness, (2) any
security for, or any guarantee of, such Senior Indebtedness, (3) any liability
of any obligor on such Senior Indebtedness (including any guarantor) or any
liability issued in respect of such Senior Indebtedness); (ii) sell, exchange,
release, surrender, realize upon, enforce or otherwise deal with in any manner
and in any order any property pledged, mortgaged or otherwise securing such
Senior Indebtedness or any liability of any obligor thereon, to such holder, or
any liability issued in respect thereof; (iii) settle or compromise any such
Senior Indebtedness or any other liability of any obligor of such Senior
Indebtedness to such holder or any security therefor or any liability issued in
respect thereof and apply any sums by whomsoever paid and however realized to
any liability (including, without limitation, payment of any of the Company's
Senior Indebtedness) in any manner or order; and (iv) fail to take or to record
or otherwise perfect, for any reason or for no reason, any lien or security
interest securing such Senior Indebtedness by whomsoever granted, exercise or
delay in or refrain from exercising any right or remedy against any obligor or
any guarantor or any other Person, elect any remedy and otherwise deal freely
with any obligor and any security for such Senior Indebtedness or any liability
of any obligor to the holders of such Senior Indebtedness or any liability
issued in respect of such Senior Indebtedness.
Section 14.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made, or a notice given, to holders
of Senior Indebtedness of the Company, the distribution may be made and the
notice given to their
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representative, if any. If any payment or distribution of the Company's assets
is required to be made to holders of any of the Company's Senior Indebtedness
pursuant to this Article Fourteen, the Trustee and the Holders shall be entitled
to rely upon any order or decree of any court of competent jurisdiction, or upon
any certificate of a representative of such Senior Indebtedness or a custodian,
in ascertaining the holders of such Senior Indebtedness entitled to participate
in any such payment or distribution, the amount to be paid or distributed to
holders of such Senior Indebtedness and all other facts pertinent to such
payment or distribution or to this Article Fourteen.
Section 14.11. RIGHTS OF TRUSTEE AND PAYING AGENT.
The Trustee or Paying Agent may continue to make payments on the
Notes unless prior to any payment date it or the requisite Holders have given
notice of acceleration of the Notes or it has received written notice of facts
that would cause a payment of principal of, or premium, if any, or interest on,
the Notes to violate this Article Fourteen. Only the Company, a representative
of Senior Indebtedness, or a holder of Senior Indebtedness that has no
representative may give such notice.
To the extent permitted by the TIA, the Trustee in its individual
or any other capacity may hold Indebtedness of the Company (including Senior
Indebtedness) with the same rights it would have if it were not Trustee. Any
Agent may do the same with like rights.
Section 14.12. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of a Note by its acceptance thereof authorizes and
directs the Trustee on its behalf to take such action as may be necessary or
appropriate to effectuate the subordination as provided in this Article
Fourteen, and appoints the Trustee as such Holder's attorney-in-fact for any and
all such purposes (including, without limitation, the timely filing of a claim
for the unpaid balance of the Note that such Holder holds in the form required
in any bankruptcy, reorganization, insolvency or receivership proceeding and
causing such claim to be approved).
If a proper claim or proof of debt in the form required in such
proceeding is not filed by or on behalf of all Holders prior to 30 days before
the expiration of the time to file such claims or proofs, then the holders or a
representative of any Senior Indebtedness of the Company are hereby authorized,
and shall have the right (without any duty), to file an appropriate claim for
and on behalf of the Holders.
Section 14.13. PAYMENT.
A payment on account of or with respect to any Note shall include,
without limitation, any direct or indirect payment of principal, premium or
interest with respect to or in connection with any optional redemption or
purchase provisions, any direct or indirect payment payable by reason of any
other Indebtedness or obligation being subordinated to the Notes, and any direct
or indirect payment or recovery on any claim as a Holder relating to or arising
out of
100
<PAGE>
this Indenture or any Note, or the issuance of any Note, or the transactions
contemplated by this Indenture or referred to herein.
[SIGNATURE PAGES FOLLOW]
101
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
COMPANY: PENTACON, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Senior Vice President
GUARANTORS: ALATEC PRODUCTS, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
AXS SOLUTIONS, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ASI AEROSPACE GROUP, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
CAPITOL BOLT & SUPPLY, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
102
<PAGE>
MAUMEE INDUSTRIES, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
PACE PRODUCTS, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
SALES SYSTEMS, LIMITED
By:/S/ BRUCE M. TATEN
Name:Bruce M. Taten
Title:Vice President
TEXAS INTERNATIONAL AVIATION, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
PENTACON AEROSPACE GROUP, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
PENTACON INDUSTRIAL GROUP, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
103
<PAGE>
TIA INTERNATIONAL, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC CABLE HARNESS & ASSEMBLY DIVISION,
INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC FASTENER AND COMPONENT GROUP, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC INTERNATIONAL SALES, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC RACE, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
TRACE ALATEC SUPPLY COMPANY, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
104
<PAGE>
WEST COAST AERO PRODUCTS HOLDING
CORPORATION, INC.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
POLLARD ACQUISITION CORP.
By:/S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
TRUSTEE: STATE STREET BANK AND TRUST COMPANY
By:/S/ MICHAEL M. HOPKINS
Name: Michael M. Hopkins
Title: Vice President
105
<PAGE>
EXHIBIT A-1
[FORM OF NOTE]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT
(A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT), (B) IT IS ACQUIRING THIS SECURITY IN COMPLIANCE WITH REGULATION
S UNDER THE SECURITIES ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR"
(AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT (AN "IAI"), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE
WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144(k)
UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER
OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR
THE LAST DATE ON WHICH PENTACON, INC. (THE "COMPANY") OR ANY AFFILIATE OF THE
COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND
(Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE
RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY
EXCEPT (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS
BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE
SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT
OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS
BEING MADE IN RELIANCE ON RULE 144A, (D) IN AN OFFSHORE TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 OF REGULATION S, (E) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (F) TO AN IAI OR (G) PURSUANT
TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND;
PROVIDED THAT THE COMPANY, THE TRUSTEE, THE TRANSFER AGENT AND THE REGISTRAR
SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO
CLAUSE (D), (E), (F) OR (G) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN
EACH OF
A-1-1
<PAGE>
THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE
FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
A-1-2
<PAGE>
PENTACON, INC.
-----------------
12 1/4% Senior Subordinated Notes due 2009, SERIES A
CUSIP No. __________
No. ___________ $
This Note is issued with original issue discount for purposes of
Section 1271 et seq. of the Internal Revenue Code. For each $1,000 principal
amount at maturity of this Note, the issue price is $ and the amount of original
issue discount is $ .
PENTACON, INC., a corporation incorporated under the laws of the
State of Delaware (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________ or registered assigns, the
principal sum of _______________ Dollars on April 1, 2009, at the office or
agency of the Company referred to below, and to pay interest thereon on April 1
and October 1 (each an "Interest Payment Date"), of each year, commencing on
October 1, 1999, accruing from the Issue Date or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of 12 1/4% per annum (unless otherwise increased to 12 3/4% pursuant to the
provisions of Section 3.01 of the Indenture), until the principal hereof is paid
or duly provided for. Interest shall be computed on the basis of a 360-day year
of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in the Indenture referred to on
the reverse hereof, be paid to the Person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the March 15
and September 15 (each a "Regular Record Date"), whether or not a Business Day,
as the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts;
A-1-3
<PAGE>
PROVIDED, HOWEVER, that payment of interest may be made at the option of the
Company by check mailed to the address of the Person entitled thereto as such
address shall appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or any
Guarantee described on the reverse side hereof, or be valid or obligatory for
any purpose.
[Remainder of Page Intentionally Left Blank]
A-1-4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated: PENTACON, INC.
By:___________________________
Name:
Title:
By:___________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 12 1/4% Senior Subordinated Notes due 2009,
Series A, referred to in the within-mentioned Indenture.
STATE STREET BANK & TRUST COMPANY, as
Trustee
By:___________________________
Authorized Officer
A-1-5
<PAGE>
[REVERSE OF NOTE]
1. INDENTURE. This Note is one of a duly authorized issue of Notes
of the Company designated as its 12 1/4% Senior Subordinated Notes due 2009,
Series A (herein called the "Initial Notes"). The Notes are limited (except as
otherwise provided in the Indenture referred to below) in aggregate principal
amount to $100,000,000, which may be issued under an indenture (herein called
the "Indenture") dated as of March 30, 1999, by and among the Company, each of
the guarantors named in the Indenture, as guarantors (herein called the
"Guarantors"), and State Street Bank and Trust Company, as trustee (herein
called the "Trustee," which term includes any successor Trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the Trustee, the
Guarantors and the Holders of the Notes, and of the terms upon which the Notes
are, and are to be, authenticated and delivered. The Notes include the Initial
Notes, the Private Exchange Securities and the Unrestricted Notes (including the
Exchange Notes referred to below), issued in exchange for the Initial Notes
pursuant to the Registration Rights Agreement. The Initial Notes, the Private
Exchange Securities and the Unrestricted Notes are treated as a single class of
securities under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note
or of the Indenture shall alter or impair the obligation of the Company or any
Guarantor, which is absolute and unconditional, to pay the principal of,
premium, if any, and interest on this Note at the times, place, and rate, and in
the coin or currency, herein prescribed.
2. GUARANTEES. This Note is initially entitled to the benefits of
the certain senior subordinated Guarantees of the Guarantors and may thereafter
be entitled to certain other senior subordinated Guarantees made for the benefit
of the Holders. Reference is hereby made to Article Twelve of the Indenture and
to the Guarantees endorsed on this Note for a statement of the respective
rights, limitations of rights, duties and obligations thereunder of the
Guarantors, the Trustee and the Holders.
3. REGISTRATION RIGHTS. Pursuant to the Registration Rights
Agreement by and among the Company, the Guarantors and the Initial Purchasers,
the Company will be obligated to consummate an exchange offer pursuant to which
the Holder of this Note shall have the right to exchange this Note together with
the Guarantees hereof endorsed hereon for 12 1/4% Senior Subordinated Notes due
2009, Series B, of the Company (herein called the "Exchange Notes") and the
Guarantees endorsed thereon, which have been registered under the Securities
A-1-6
<PAGE>
Act, in like principal amount and having identical terms as the Notes (other
than as set forth in this paragraph) and the Guarantees endorsed hereon,
respectively. The Holders of Notes shall be entitled to receive certain
liquidated damages in the event such exchange offer is not consummated and upon
certain other conditions, all pursuant to and in accordance with the terms of
the Registration Rights Agreement.
4. REDEMPTION. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after April 1, 2004, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the date of
redemption, if redeemed during the 12-month period beginning on April 1 of the
years indicated below:
YEAR REDEMPTION PRICE
---- ----------------
2004.................................... 106.125%
2005.................................... 104.083%
2006.................................... 102.041%
2007 and thereafter..................... 100.000%
On or prior to April 1, 2002, the Company may, at its option, use
the net proceeds of a Qualified Equity Offering to redeem up to 35% of the
originally issued aggregate principal amount of the Notes, at a redemption price
in cash equal to 112.25% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption; PROVIDED that at
least 65% of the aggregate principal amount of Notes is Outstanding following
such redemption. Notice of any such redemption must be given not later than 60
days after the consummation of any such Qualified Equity Offering.
5. OFFERS TO PURCHASE. Sections 10.11 and 10.16 of the Indenture
provide that upon the occurrence of a Change of Control and following certain
Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
6. DEFAULTS AND REMEDIES. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
7. DEFEASANCE. The Indenture contains provisions (which provisions
apply to this Note) for defeasance at any time of (a) the entire indebtedness of
the Company and the Guarantors on this Note and (b) certain restrictive
covenants and related Defaults, in each case upon compliance by the Company with
certain conditions set forth therein.
8. AMENDMENTS AND WAIVERS. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and
A-1-7
<PAGE>
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes at the time Outstanding. The Indenture
also contains provisions permitting the Holders of specified percentages in
aggregate principal amount of the Notes at the time Outstanding, on behalf of
the Holders of all the Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past Defaults under the Indenture and
this Note and their consequences. Any such consent or waiver by or on behalf of
the Holder of this Note shall be conclusive and binding upon such Holder and
upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.
9. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes are issuable only
in registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note Register
of the Company, upon surrender of this Note for registration of transfer at the
office or agency of the Company maintained for such purpose in the Borough of
Manhattan in The City of New York, State of New York, or at such other office or
agency of the Company as may be maintained for such purpose, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
10. PERSONS DEEMED OWNERS. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the Person in whose name
this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
11. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH GUARANTEE SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture. Requests may be made
to: Pentacon, Inc., 10375 Richmond Avenue, Suite 700, Houston, Texas 77042,
Attention: Secretary.
A-1-8
<PAGE>
ASSIGNMENT FORM
If you, the holder, want to assign this Note, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Note to
________________________________________________________________________________
(Insert assignee's social security or tax ID number)____________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
________________________________________________________________________________
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior to the date
which is the earlier of (i) the date of the declaration by the Commission of the
effectiveness of a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144(k) under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Note (or any Predecessor Note) or the last date on which the Company or
any Affiliate of the Company or any Guarantor was the owner of this Note (or any
Predecessor Note), the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that:
[CHECK ONE]
[ ] (a) this Note is being transferred in compliance with the exemption
from registration under the Securities Act provided by Rule 144A
thereunder.
OR
[ ] (b) this Note is being transferred other than in accordance with (a)
above and documents, including a transferor certificate
substantially in the form of Exhibit C to the Indenture in the case
of a transfer pursuant to Regulation S, are being
A-1-9
<PAGE>
furnished which comply with the conditions of transfer set forth in
this Note and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar shall not be obligated to register this Note in the name of
any Person other than the Holder hereof unless and until the conditions to any
such transfer of registration set forth herein and in Section 3.17 of the
Indenture shall have been satisfied.
________________________________________________________________________________
Date: ______________ Your signature:_________________________________________
(Sign exactly as your name appears on
the other side of this Note)
By:_____________________________________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee:____________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A (including the information
specified in Rule 144A(d)(4)) or has determined not to request such information
and that it is aware that the transferor is relying upon the undersigned's
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
Dated:________________________ By:_____________________________________
NOTICE: To be executed by an
executive officer
A-1-10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.11 or 10.16 of the Indenture, check the appropriate box:
Section 10.11 [ ] Section 10.16 [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.11 or 10.16 of the Indenture, state the amount:
$__________________
Date:______________ Your signature:__________________________
(Sign exactly as your name appears on
the other side of this Note)
By:______________________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee:____________________
A-1-11
<PAGE>
EXHIBIT A-2
[FORM OF NOTE]
PENTACON, INC.
-----------------
12 1/4% Senior Subordinated Notes due 2009, SERIES B
This Note is issued with original issue discount for purposes of
Section 1271 et seq. of the Internal Revenue Code. For each $1,000 principal
amount at maturity of this Note, the issue price is $ and the amount of original
issue discount is $ .
CUSIP No. __________
No. ___________ $
This Note is issued with original issue discount for purposes of
Section 1271 et seq. of the Internal Revenue Code. For each $1,000 principal
amount at maturity of this Note, the issue price is $ and the amount of original
issue discount is $ .
PENTACON, INC., a corporation incorporated under the laws of the
State of Delaware (herein called the "Company," which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________ or registered assigns, the
principal sum of _______________ Dollars on April 1, 2009, at the office or
agency of the Company referred to below, and to pay interest thereon on April 1
and October 1 (each an "Interest Payment Date"), of each year, commencing on
October 1, 1999, accruing from the Issue Date or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of 12 1/4% per annum (unless otherwise increased to 12 3/4% pursuant to the
provisions of Section 3.01 of the Indenture), until the principal hereof is paid
or duly provided for. Interest shall be computed on the basis of a 360-day year
of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in the Indenture referred to on
the reverse hereof, be paid to the Person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the March 15
and September 15 (each a "Regular Record Date"), whether or not a Business Day,
as the case may be, next preceding such Interest Payment Date. Any such interest
not so punctually paid, or duly provided for, and interest on such defaulted
interest at the then applicable interest rate borne by the Notes, to the extent
lawful, shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
A-2-1
<PAGE>
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; PROVIDED,
HOWEVER, that payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as such address shall
appear on the Note Register.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or any
Guarantee described on the reverse side hereof, or be valid or obligatory for
any purpose.
[Remainder of Page Intentionally Left Blank]
A-2-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated: PENTACON, INC.
By:________________________________________
Name:
Title:
By:________________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 12 1/4% Senior Subordinated Notes due 2009,
Series B, referred to in the within-mentioned Indenture.
STATE STREET BANK & TRUST COMPANY, as
Trustee
By:________________________________________
Authorized Officer
A-2-3
<PAGE>
[REVERSE OF NOTE]
1. INDENTURE. This Note is one of a duly authorized issue of Notes
of the Company designated as its 12 1/4% Senior Subordinated Notes due 2009
Series B (herein called the "Unrestricted Notes"). The Notes are limited (except
as otherwise provided in the Indenture referred to below) in aggregate principal
amount to $100,000,000, which may be issued under an indenture (herein called
the "Indenture") dated as of March 30, 1999, by and among the Company, each of
the Guarantors named in the Indenture, as guarantors (herein called the
"Guarantors"), and State Street Bank and Trust Company, as trustee (herein
called the "Trustee," which term includes any successor Trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a statement of the respective rights, limitations of rights,
duties, obligations and immunities thereunder of the Company, the Trustee, the
Guarantors and the Holders of the Notes, and of the terms upon which the Notes
are, and are to be, authenticated and delivered. The Notes include the Initial
Notes, the Private Exchange Securities and the Unrestricted Notes (including the
Exchange Notes), issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement. The Initial Notes, the Private Exchange
Securities and the Unrestricted Notes are treated as a single class of
securities under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note
or of the Indenture shall alter or impair the obligation of the Company or any
Guarantor, which is absolute and unconditional, to pay the principal of,
premium, if any, and interest on this Note at the times, place, and rate, and in
the coin or currency, herein prescribed.
2. GUARANTEES. This Note is initially entitled to the benefits of
the certain senior subordinated Guarantees of the Guarantors and may thereafter
be entitled to certain other senior subordinated Guarantees made for the benefit
of the Holders. Reference is hereby made to Article Twelve of the Indenture and
to the Guarantees endorsed on this Note for a statement of the respective
rights, limitations of rights, duties and obligations thereunder of the
Guarantors, the Trustee and the Holders.
3. REDEMPTION. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after April 1, 2004, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the date of
redemption, if redeemed during the 12-month period beginning on April 1 of the
years indicated below:
A-2-4
<PAGE>
YEAR REDEMPTION PRICE
---- ----------------
2004.................................... 106.125%
2005.................................... 104.083%
2006.................................... 102.041%
2007 and thereafter..................... 100.000%
On or prior to April 1, 2002, the Company may, at its option, use
the net proceeds of a Qualified Equity Offering to redeem up to 35% of the
originally issued aggregate principal amount of the Notes, at a redemption price
in cash equal to 112.25% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption; PROVIDED that at
least 65% of the aggregate principal amount of Notes is Outstanding following
such redemption. Notice of any such redemption must be given not later than 60
days after the consummation of any such Qualified Equity Offering.
4. OFFERS TO PURCHASE. Sections 10.11 and 10.16 of the Indenture
provide that upon the occurrence of a Change of Control and following certain
Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Notes in accordance with the procedures set forth in the Indenture.
5. DEFAULTS AND REMEDIES. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Notes, plus all accrued and
unpaid interest, if any, to and including the date the Notes are paid, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
6. DEFEASANCE. The Indenture contains provisions (which provisions
apply to this Note) for defeasance at any time of (a) the entire indebtedness of
the Company and the Guarantors on this Note and (b) certain restrictive
covenants and related Defaults, in each case upon compliance by the Company with
certain conditions set forth therein.
7. AMENDMENTS AND WAIVERS. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the Notes
at the time Outstanding. The Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Notes at
the time Outstanding, on behalf of the Holders of all the Notes, to waive
compliance by the Company with certain provisions of the Indenture and certain
past Defaults under the Indenture and this Note and their consequences. Any such
consent or waiver by or on behalf of the Holder of this Note shall be conclusive
and binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
A-2-5
<PAGE>
8. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes are issuable only
in registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note Register
of the Company, upon surrender of this Note for registration of transfer at the
office or agency of the Company maintained for such purpose in the Borough of
Manhattan in The City of New York, State of New York, or at such other office or
agency of the Company as may be maintained for such purpose, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar duly executed by, the Holder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
9. PERSONS DEEMED OWNERS. Prior to and at the time of due
presentment of this Note for registration of transfer, the Company, the Trustee
and any agent of the Company or the Trustee may treat the Person in whose name
this Note is registered as the owner hereof for all purposes, whether or not
this Note shall be overdue, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH GUARANTEE SET
FORTH BELOW SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of this Indenture. Requests may be made
to: Pentacon, Inc., 10375 Richmond Avenue, Suite 700, Houston, Texas 77042,
Attention: Secretary.
A-2-6
<PAGE>
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
________________________________________________________________________________
(Insert assignee's social security or tax ID number)____________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
________________________________________________________________________________
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
Date: ______________ Your signature:_________________________________
(Sign exactly as your name appears
on the other side of this Note)
BY:___________________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee: _______________________
A-2-7
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.11 or 10.16 of the Indenture, check the appropriate box:
Section 10.11 [ ] Section 10.16 [ ]
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.11 or 10.16 of this Indenture, state the amount:
$________________
Date:______________ Your signature:________________________________
(Sign exactly as your name
appears on the other side of this Note)
By:___________________________________________
NOTICE: To be executed by an executive
officer
Signature Guarantee:____________________
A-2-8
<PAGE>
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall bear a
legend (which would be in addition to any other legends required in the case of
a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN
THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A
TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE
DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER
NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT,
AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
(AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC). ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
B-1
<PAGE>
EXHIBIT C
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
______________, ____
State Street Bank and Trust
Company
Corporate Trust
Goodwin Square
225 Asylum Street, 23rd Floor
Hartford, CT 06103
Attention: Susan Merker/Vice President
Re: Pentacon, Inc. (the "Company")
12 1/4% Senior Subordinated Notes due 2009 (the "Securities")
Ladies and Gentlemen:
In connection with our proposed sale of $ aggregate principal amount
of the Securities, we confirm that such sale has been effected pursuant to and
in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Securities was not made to a Person in the
United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any Person acting on
our behalf reasonably believed that the transferee was outside the United
States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any Person acting on our behalf knows that the transaction has been
pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United States
in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer restrictions
applicable to the Securities;
C-1
<PAGE>
(6) if the circumstances set forth in Rule 904(c) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or
other notice stating that the Securities may be offered and sold during
the restricted period specified in Rule 903(c)(2) or (3), as applicable,
in accordance with the provisions of Regulation S; pursuant to
registration of the Securities under the Securities Act; or pursuant to an
available exemption from the registration requirements under the
Securities Act; and
(7) if the sale is made during a restricted period and the
provisions of Rule 903(c)(3) are applicable thereto, we confirm that such
sale has been made in accordance with such provisions.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:________________________________________
Authorized Signature
C-2
<PAGE>
EXHIBIT D
FORM OF GUARANTEE
For value received, the undersigned hereby fully and unconditionally
guarantees to the Holder of this Note the cash payments in United States dollars
of principal of, premium, if any, and interest on this Note in the amounts and
at the time when due and interest on the overdue principal, premium, if any, and
interest, if any, on this Note, if lawful, and the payment or performance of all
other obligations of the Company under the Indenture or the Notes, to the Holder
of this Note and the Trustee, all in accordance with and subject to the terms
and limitations of this Note, Article Twelve of the Indenture and this
Guarantee. This Guarantee will become effective in accordance with Article
Twelve of the Indenture and its terms shall be evidenced therein. The validity
and enforceability of any Guarantee shall not be affected by the fact that it is
not affixed to any particular Note. Capitalized terms used but not defined
herein shall have the meanings ascribed to them in the Indenture dated as of
March 30, 1999, by and among Pentacon, Inc., the Guarantors named therein
(including the undersigned) and State Street Bank and Trust Company, as Trustee,
as amended or supplemented (the "Indenture").
The obligations of the undersigned to the Holders of Notes and to
the Trustee pursuant to the Guarantee and the Indenture are expressly set forth
in Article Twelve of the Indenture and reference is hereby made to the Indenture
for the precise terms of the Guarantee and all of the other provisions of the
Indenture to which this Guarantee relates.
THIS GUARANTEE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW. THE GUARANTOR HEREUNDER AGREES TO SUBMIT TO THE NON-EXCLUSIVE JURISDICTION
OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THE INDENTURE, THE NOTES OR THIS GUARANTEE.
This Guarantee is subject to release upon the terms set forth in the
Indenture.
IN WITNESS WHEREOF, the undersigned Guarantors have caused this
Guarantee to be duly executed.
Dated:
[NAME OF GUARANTOR]
By: _______________________________
Name:
Title:
D-1
<PAGE>
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
[See attached]
E-1
EXHIBIT 4.2
==============================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of March 30, 1999
by and among
PENTACON, INC.
and
THE GUARANTORS
named herein
and
BEAR, STEARNS & CO. INC.,
NATIONSBANC MONTGOMERY SECURITIES LLC
and
SANDERS MORRIS MUNDY INC.
==============================================================================
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made and
entered into as of March 30, 1999 by and among PENTACON, INC., a Delaware
corporation (the "COMPANY"), the companies named on Schedule A hereto and any
company which later becomes a party hereto in accordance with this Agreement,
as guarantors (collectively, the "GUARANTORS" and, together with the Company,
the "ISSUERS"), and BEAR, STEARNS & CO. INC. ("BEAR, STEARNS") NATIONSBANC
MONTGOMERY SECURITIES LLC and SANDERS MORRIS MUNDY INC. (together with Bear,
Stearns, the "INITIAL PURCHASERS").
This Agreement is made pursuant to the Purchase Agreement dated as
of March 25, 1999 by and among the Company, the Guarantors and the Initial
Purchasers (the "PURCHASE AGREEMENT"), which provides for, among other things,
the sale by the Company to the Initial Purchasers of an aggregate of
$100,000,000 principal amount of the Company's 12 1/4% Senior Subordinated NoteS
due 2009, Series A (the "NOTES") and the guarantees thereof by the Guarantors
(the "GUARANTEES" and, together with the Notes, the "SECURITIES"). In order to
induce the Initial Purchasers to enter into the Purchase Agreement, the Issuers
have agreed to provide to the Initial Purchasers and their direct and indirect
transferees the registration rights set forth in this Agreement. The execution
and delivery of this Agreement is a condition to the closing under the Purchase
Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following
capitalized defined terms shall have the following meanings:
"ADVICE" shall have the meaning set forth in the last paragraph of
Section 3 hereof.
"APPLICABLE PERIOD" shall have the meaning set forth in
Section 3(s) hereof.
"BEAR, STEARNS" shall have the meaning set forth in the preamble
of this Agreement.
"BUSINESS DAY" shall mean a day that is not a Saturday, a Sunday, or
a day on which banking institutions in New York, New York are required to
be closed.
"COMPANY" shall have the meaning set forth in the preamble to this
Agreement and also includes the Company's successors and permitted
assigns.
"DEPOSITARY" shall mean The Depository Trust Company, or any other
depositary appointed by the Company; PROVIDED, HOWEVER, that such
depositary must have an address in the Borough of Manhattan, in The City
of New York.
"EFFECTIVENESS PERIOD" shall have the meaning set forth in Section
2(b) hereof.
<PAGE>
"EFFECTIVENESS TARGET DATE" shall have the meaning set forth in
Section 2(e) hereof.
"EVENT DATE" shall have the meaning set forth in Section 2(e)
hereof.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXCHANGE OFFER" shall mean the exchange offer by the Issuers of
Exchange Securities for Securities pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION" shall mean a registration under the
Securities Act effected pursuant to Section 2(a) hereof.
"EXCHANGE OFFER REGISTRATION STATEMENT" shall mean an exchange offer
registration statement on an appropriate form under the Securities Act,
and all amendments and supplements to such registration statement, in each
case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"EXCHANGE PERIOD" shall have the meaning set forth in Section
2(a) hereof.
"EXCHANGE SECURITIES" shall mean the 12 1/4% Senior Subordinated
Notes due 2009, Series B, issued by the Company, and the guarantees
thereon of the Guarantors, issued pursuant to and entitled to the benefits
of, the Indenture (which shall be qualified under the TIA) and registered
pursuant to an effective Registration Statement under the Securities Act,
to be offered to Holders of Securities in exchange for Securities pursuant
to the Exchange Offer, which shall be substantially identical to the
Securities (except that (i) interest thereon shall accrue from the last
date on which interest was paid on the Securities or, if no such interest
has been paid, from the Issue Date, (ii) the transfer restrictions thereon
and all registration rights in respect thereof shall be eliminated and
(iii) the provisions relating to Liquidated Damages shall be eliminated).
"HOLDERS" shall mean the Initial Purchasers, for so long as they own
any Transfer Restricted Securities, each of their direct and indirect
successors, assigns and transferees who become registered owners of
Transfer Restricted Securities under the Indenture and each Participating
Broker-Dealer that holds Exchange Securities for so long as such
Participating Broker-Dealer is required to deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of
such Exchange Securities.
"INDENTURE" shall mean the Indenture relating to the Securities
dated as of March 30, 1999 between the Company, the Guarantors and State
Street Bank and Trust Company, as trustee, as the same may be amended from
time to time in accordance with the terms thereof.
"INITIAL PURCHASERS" shall have the meaning set forth in the
preamble to this Agreement.
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<PAGE>
"INSPECTORS" shall have the meaning set forth in Section 3(m)
hereof.
"ISSUE DATE" shall mean the date on which the Securities are
originally issued.
"ISSUERS" See the preamble to this Agreement.
"LIQUIDATED DAMAGES" shall have the meaning set forth in Section
2(e) hereof.
"MAJORITY HOLDERS" shall mean, subject to Section 7(k), the Holders
of a majority of the aggregate principal amount of outstanding Transfer
Restricted Securities.
"PARTICIPATING BROKER-DEALER" shall have the meaning set forth in
Section 3(s) hereof.
"PERSON" shall mean an individual, partnership, corporation, limited
liability company, trust or unincorporated organization, or a government
or agency or political subdivision thereof.
"PRIVATE EXCHANGE" shall have the meaning set forth in Section
2(a) hereof.
"PRIVATE EXCHANGE SECURITIES" shall have the meaning set forth in
Section 2(a) hereof.
"PROSPECTUS" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus
as amended or supplemented by any prospectus supplement, including a
prospectus supplement with respect to the terms of the offering of any
portion of the Transfer Restricted Securities covered by a Shelf
Registration Statement, and by all other amendments and supplements to a
prospectus, including post-effective amendments, and in each case
including all material incorporated by reference therein.
"PURCHASE AGREEMENT" shall have the meaning set forth in the
preamble to this Agreement.
"RECORDS" shall have the meaning set forth in Section 3(m) hereof.
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance by the Issuers with this Agreement, including
without limitation: (i) all applicable SEC, stock exchange or National
Association of Securities Dealers, Inc. (the "NASD") registration and
filing fees, (ii) all fees and expenses incurred in connection with
compliance with state securities or blue sky laws (including reasonable
fees and disbursements of one counsel for Holders that are Initial
Purchasers in connection with blue sky qualification of any of the
Exchange Securities or Transfer Restricted Securities) and compliance with
the rules of the NASD, (iii) all applicable expenses incurred by the
Issuers in preparing or assisting in preparing, word processing, printing
and distributing any Registration Statement, any Prospectus and any
amendments or supplements thereto, and in preparing or assisting in
preparing any other documents relating to the
3
<PAGE>
performance of and compliance with this Agreement, (iv) all rating agency
fees, if any, (v) the fees and disbursements of counsel for the Issuers,
(vii) all fees and expenses incurred in connection with the listing, if
any, of any of the Transfer Restricted Securities on any securities
exchange or exchanges, if the Company, in its discretion, elects to make
any such listing; but excluding fees of counsel to the Holders and
underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of Transfer Restricted Securities by a
Holder.
"REGISTRATION STATEMENT" shall mean any registration statement
(including, without limitation, the Exchange Offer Registration Statement
and the Shelf Registration Statement) of the Issuers which covers any of
the Exchange Securities or Transfer Restricted Securities pursuant to the
provisions of this Agreement, and all amendments and supplements to any
such Registration Statement, including post-effective amendments, in each
case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES" shall have the meaning set forth in the preamble to
this Agreement.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SHELF REGISTRATION" shall mean a registration effected pursuant to
Section 2(b) hereof.
"SHELF REGISTRATION STATEMENT" shall mean a "shelf" registration
statement of the Issuers relating to a "shelf" offering in accordance with
Rule 415 of the Securities Act, or any similar rule that may be adopted by
the SEC, pursuant to the provisions of Section 2(b) hereof which covers
all of the Transfer Restricted Securities or all of the Private Exchange
Securities, as the case may be, on an appropriate form under the
Securities Act, and all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material
incorporated by reference therein.
"SUBSIDIARY GUARANTORS" shall mean each of the Guarantors and each
of the Company's future subsidiaries that has executed a supplemental
indenture pursuant to the Indenture guaranteeing the Notes.
"TIA" shall have the meaning set forth in Section 3(k) hereof.
"TRANSFER RESTRICTED SECURITIES" shall mean each Security and, if
issued, each Private Exchange Security; PROVIDED, HOWEVER, that each
Security or Private Exchange Security, as the case may be, shall cease to
be a Transfer Restricted Security when (i) with respect to a Security
only, such Security has been exchanged by a person other than a
Participating Broker-Dealer for an Exchange Security in the Exchange
Offer, (ii) with respect to a Security only, following the exchange by a
Participating Broker-Dealer in the
4
<PAGE>
Exchange Offer of a Security for an Exchange Security, which such Exchange
Security is sold to a purchaser who receives from such Participating
Broker-Dealer on or prior to the date of such sale a copy of the
Prospectus contained in the Exchange Offer Registration Statement, as
amended or supplemented, (iii) the date on which such Security or Private
Exchange Security, as the case may be, has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (iv) the date on which such Security or Private
Exchange Security, as the case may be, is distributed to the public
pursuant to Rule 144 under the Securities Act (or any similar provision
then in force, but not Rule 144A under the Securities Act) or has become
eligible for resale without restriction pursuant to Rule 144 under the
Securities Act, (v) such Security or Private Exchange Security, as the
case may be, shall have been otherwise transferred by the holder thereof
and a new Security not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent disposition of such new
Security shall not require registration or qualification under the
Securities Act or any similar state law then in force or (vi) such
Security or Private Exchange Security, as the case may be, ceases to be
outstanding.
"TRUSTEE" shall mean the trustee with respect to the Securities
under the Indenture.
2. REGISTRATION UNDER THE SECURITIES ACT.
(a) EXCHANGE OFFER. To the extent not prohibited by any applicable
law or applicable policy of the SEC, the Issuers shall, for the benefit of the
Holders, at the Issuers' cost, (i) cause to be filed with the SEC within 60 days
after the Issue Date an Exchange Offer Registration Statement on an appropriate
form under the Securities Act covering the offer by the Issuers to the Holders
to exchange all of the Transfer Restricted Securities (other than Private
Exchange Securities) for a like principal amount of Exchange Securities, (ii)
use their reasonable best efforts to have such Exchange Offer Registration
Statement declared effective under the Securities Act by the SEC not later than
the date which is 120 days after the Issue Date, (iii) use their reasonable best
efforts to have such Registration Statement remain effective until the closing
of the Exchange Offer and (iv) use their reasonable best efforts to commence the
Exchange Offer and, on or prior to 150 days after the Issue Date, issue Exchange
Securities in exchange for all Securities properly tendered prior thereto in the
Exchange Offer. Upon the effectiveness of the Exchange Offer Registration
Statement, the Issuers shall promptly commence the Exchange Offer, it being the
objective of such Exchange Offer to enable each Holder eligible and electing to
exchange Transfer Restricted Securities (other than Private Exchange Securities)
for Exchange Securities (assuming that such Holder is not an affiliate of the
Issuers within the meaning of Rule 405 under the Securities Act and is not a
broker-dealer tendering Transfer Restricted Securities acquired directly from
the Issuers for its own account, acquires the Exchange Securities in the
ordinary course of such Holder's business and has no arrangements or
understandings with any Person to participate in the Exchange Offer for the
purpose of distributing (within the meaning of the Securities Act) the Exchange
Securities) and to transfer such Exchange Securities from and after their
receipt without any limitations or restrictions under the Securities Act and
under state securities or blue sky laws.
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In connection with the Exchange Offer, the Issuers shall:
(i) mail as promptly as practicable to each Holder a copy of the
Prospectus forming part of the Exchange Offer Registration Statement,
together with an appropriate letter of transmittal and related documents;
(ii) keep the Exchange Offer open for acceptance for a period of not
less than 20 Business Days after the date notice thereof is mailed to the
Holders (or longer if required by applicable law) (such period referred to
herein as the "EXCHANGE PERIOD");
(iii) utilize the services of the Depositary for the Exchange Offer;
(iv) permit Holders to withdraw tendered Securities at any time prior
to 5:00 p.m. (Eastern time) on the last Business Day of the Exchange
Period, by sending to the institution specified in the notice, a facsimile
transmission or letter setting forth the name of such Holder, the
principal amount of Securities delivered for exchange, and a statement
that such Holder is withdrawing his election to have such Securities
exchanged; and
(v) otherwise comply in all material respects with all applicable
laws relating to the Exchange Offer.
If, prior to consummation of the Exchange Offer the Initial
Purchasers hold any Securities acquired by them and having the status of an
unsold allotment in the initial distribution, the Issuers upon the request of
any such Initial Purchaser shall, to the extent not prohibited by any applicable
law or applicable policy of the SEC, use their reasonable best efforts to
simultaneously with the delivery of the Exchange Securities in the Exchange
Offer, issue and deliver to such Initial Purchaser in exchange (the "PRIVATE
EXCHANGE") for the Securities held by such Initial Purchaser, a like principal
amount of debt securities of the Company, guaranteed by the Guarantors, that are
issued pursuant to, and entitled to the benefits of, the Indenture and are
identical in all material respects to the Exchange Securities, except that (i)
such securities shall bear appropriate transfer restrictions and (ii) the
registration rights in respect thereof (other than under this Section 2(a))
shall continue to apply (the "PRIVATE EXCHANGE SECURITIES").
The Exchange Securities and the Private Exchange Securities shall be
issued under (i) the Indenture or (ii) an indenture identical to all material
respects to the Indenture and which, in either case, has been qualified under
the TIA or is exempt from such qualification and shall provide that the Exchange
Securities (other than the Private Exchange Securities) shall not be subject to
the transfer restrictions set forth in the Indenture. The Indenture or such
indenture shall provide that the Exchange Securities, the Private Exchange
Securities and the Securities shall vote and consent together on all matters as
one class and that none of the Exchange Securities, the Private Exchange
Securities or the Securities will have the right to vote or consent as a
separate class on any matter. The Private Exchange Securities shall be of the
same series as, and the Issuers shall use all commercially reasonable efforts to
have the Private Exchange Securities bear the same CUSIP number as, the Exchange
Securities. The Issuers shall not have
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any liability under this Agreement solely as a result of such Private Exchange
Securities not bearing the same CUSIP number as the Exchange Securities.
The Exchange Offer and the Private Exchange shall not be subject to
any conditions, other than that (i) the Exchange Offer or Private Exchange, as
the case may be, does not violate applicable law or any applicable policy of the
SEC, (ii) no action or proceeding shall have been instituted or threatened in
any court or by any governmental agency which might materially impair the
ability of the Issuers to proceed with the Exchange Offer or the Private
Exchange, and no material adverse development shall have occurred in any
existing action or proceeding with respect to any of the Issuers, (iii) all
governmental approvals shall have been obtained, which approvals the Issuers
deem necessary for the consummation of the Exchange Offer or Private Exchange
and (iv) the due tendering of Transfer Restricted Securities in accordance with
the terms of the Exchange Offer. As soon as practicable after the close of the
Exchange Offer and/or the Private Exchange, as the case may be, the Issuers
shall:
(i) accept for exchange all Transfer Restricted Securities or
portions thereof properly tendered and not validly withdrawn pursuant to
the Exchange Offer in accordance with the terms of the Exchange Offer
Registration Statement and the letter of transmittal that is an exhibit
thereto;
(ii) accept for exchange all Securities properly tendered pursuant to
the Private Exchange; and
(iii) deliver, or cause to be delivered, to the Trustee for
cancellation all Transfer Restricted Securities or portions thereof so
accepted for exchange by the Issuers, and issue, and cause the Trustee
under the Indenture to promptly authenticate and deliver to each Holder, a
new Exchange Security or Private Exchange Security, as the case may be,
equal in principal amount to the principal amount of the Transfer
Restricted Securities surrendered by such Holder and accepted for
exchange.
To the extent not prohibited by any law or applicable policy of the
SEC, the Issuers shall use their best efforts to complete the Exchange Offer as
provided above, and shall comply with the applicable requirements of the
Securities Act, the Exchange Act and other applicable laws in connection with
the Exchange Offer. Each Holder of Transfer Restricted Securities (other than
Private Exchange Securities) who wishes to exchange such Transfer Restricted
Securities for Exchange Securities in the Exchange Offer will be required to
make certain customary representations in connection therewith, including
representations that such Holder is not an affiliate of any of the Issuers
within the meaning of Rule 405 under the Securities Act, that it is not a
broker-dealer tendering Transfer Restricted Securities acquired directly from
the Company for its own account, that any Exchange Securities to be received by
it will be acquired in the ordinary course of business, that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any Person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Securities and such other representations as may
be necessary under applicable SEC rules, regulations or interpretations to
render the appropriate form under the Securities Act available. The Issuers
shall inform the
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Initial Purchasers of the names and addresses of the Holders to whom the
Exchange Offer is made, and the Initial Purchasers shall have the right to
contact such Holders and otherwise facilitate the tender of Transfer Restricted
Securities in the Exchange Offer.
Upon consummation of the Exchange Offer in accordance with this
Section 2(a), the registration provisions of this Agreement (other than the
preceding paragraphs of this Section 2(a)) shall continue to apply, MUTATIS
MUTANDIS, solely with respect to Transfer Restricted Securities that are Private
Exchange Securities, Exchange Securities held by Participating Broker-Dealers
and Transfer Restricted Securities entitled to a Shelf Registration pursuant to
the first paragraph of Section 2(b) hereof.
(b) SHELF REGISTRATION. In the event that (i) the Issuers are not
permitted to file the Exchange Offer Registration Statement or to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
SEC policy, (ii) the Exchange Offer is not for any other reason consummated
within 150 days after the Issue Date, (iii) any holder of Securities notifies
the Issuers within 20 Business Days after the commencement of the Exchange Offer
that (a) due to a change in applicable law or SEC policy it is not entitled to
participate in the Exchange Offer, (b) due to a change in applicable law or SEC
policy it may not resell the Exchange Securities to be acquired by it in the
Exchange Offer to the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales by such holder or (c) it is a broker-dealer and owns
Securities acquired directly from the Company for its own account or (iv) the
holders of a majority of the Securities may not resell the Exchange Securities
to be acquired by them in the Exchange Offer to the public without restriction
under the Securities Act and without restriction under applicable blue sky or
state securities laws, then the Issuers shall, at their cost, cause to be filed
as promptly as practicable after such determination or date, as the case may be,
and, in any event, prior to the later of (A) 60 days after the Issue Date or (B)
30 days after such filing obligation arises and use their reasonable best
efforts to cause the Shelf Registration Statement to be declared effective by
the SEC on or prior to 60 days from such required filing date; PROVIDED,
HOWEVER, that if the Issuers have not consummated the Exchange Offer within 150
days of the Issue Date, then the Issuers will file with the SEC on or prior to
the 180th day after the Issue Date, a Shelf Registration Statement providing for
the sale by the Holders of all of the Transfer Restricted Securities, and shall
use their reasonable best efforts to have such Shelf Registration Statement
declared effective by the SEC as soon as practicable and, in any event, no later
than the earlier of 240 days after the Issue Date and 60 days after such Shelf
Registration Statement was first filed with the SEC. No Holder of Transfer
Restricted Securities may include any of its Transfer Restricted Securities in
any Shelf Registration pursuant to this Agreement unless and until such Holder
furnishes to the Company in writing, such information as the Company may
request, after conferring with counsel with regard to information relating to
Holders that would be required by the SEC to be included in such Shelf
Registration Statement or Prospectus included therein, reasonably request for
inclusion in any Shelf Registration Statement or Prospectus included therein.
Each Holder as to which any Shelf Registration is being effected agrees to
furnish to the Issuers all information with respect to such Holder necessary to
make any information previously furnished to the Company by such Holder not
materially misleading.
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The Issuers agree to use their reasonable best efforts to keep the
Shelf Registration Statement continuously effective until the second anniversary
of the effective date of the Shelf Registration Statement (subject to extension
pursuant to the last paragraph of Section 3 hereof) (or such shorter period that
will terminate when all of the Transfer Restricted Securities covered by such
Shelf Registration Statement have been sold pursuant thereto or cease to be
outstanding or otherwise cease to be Transfer Restricted Securities) (the
"EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER, that the Effectiveness Period in
respect of the Shelf Registration Statement shall be extended to the extent
reasonably required to permit dealers to comply with the applicable prospectus
delivery requirements under the Securities Act and as otherwise provided herein.
The Issuers shall not permit any securities other than Transfer Restricted
Securities to be included in the Shelf Registration. The Issuers further agree,
if necessary, to supplement or amend the Shelf Registration Statement, if
required by the rules, regulations or instructions applicable to the
registration form used by the Issuers for such Shelf Registration Statement or
by the Securities Act or by any other rules and regulations thereunder for shelf
registrations, and the Issuers agree to furnish to the Holders of Transfer
Restricted Securities copies of any such supplement or amendment promptly after
its being used or filed with the SEC.
(c) EXPENSES. The Issuers shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) or 2(b) hereof and the
reasonable fees and expenses of one counsel, if any, designated in writing by
the Majority Holders to act as counsel for the Holders of the Transfer
Restricted Securities in connection with a Shelf Registration Statement. Except
as provided in the preceding sentence, each Holder shall pay all expenses of its
own counsel, underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Holder's Transfer Restricted
Securities pursuant to the Shelf Registration Statement.
(d) EFFECTIVE REGISTRATION STATEMENT. An Exchange Offer Registration
Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement
pursuant to Section 2(b) hereof will not be deemed to have become effective
unless it has been declared effective by the SEC; PROVIDED, HOWEVER, that if,
after it has been declared effective, the offering of Transfer Restricted
Securities pursuant to a Shelf Registration Statement is interfered with by any
stop order, injunction or other order or requirement of the SEC or any other
governmental agency or court, such Registration Statement will be deemed not to
have been effective during the period of such interference, until the offering
of Transfer Restricted Securities may legally resume. The Issuers will be deemed
not to have used their reasonable best efforts to cause the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
to become, or to remain, effective during the requisite period if it voluntarily
takes any action that would result in any such Registration Statement not being
declared effective or in the Holders of Transfer Restricted Securities covered
thereby not being able to exchange or offer and sell such Transfer Restricted
Securities during that period, unless (i) such action is required by applicable
law or (ii) such action is taken by the Issuers in good faith and for valid
business reasons (but not including avoidance of the Issuers' obligations
hereunder) including a material corporate transaction, and in any such case,
subject to the second paragraph of Section 2(e) below.
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(e) LIQUIDATED DAMAGES. In the event that (i) the applicable
Registration Statement is not filed with the SEC on or prior to the date
specified herein for such filing, (ii) the applicable Registration Statement is
not declared effective on or prior to the date specified herein for such
effectiveness after such obligation arises (the "EFFECTIVENESS TARGET DATE"),
(iii) if the Exchange Offer is required to be consummated hereunder, the Issuers
fail to consummate the Exchange Offer within 150 days of the Issue Date with
respect to the Exchange Offer Registration Statement or (iv) the applicable
Registration Statement is filed and declared effective prior to the
Effectiveness Target Date but shall thereafter cease to be effective or usable
without being succeeded within 30 days by an additional Registration Statement
covering the Transfer Restricted Securities which has been filed and declared
effective (each such event referred to in clauses (i) through (iv), a
"REGISTRATION DEFAULT"), then the Issuers shall pay liquidated damages to each
Holder of Transfer Restricted Securities as to which such Registration Default
relates ("LIQUIDATED DAMAGES"), with respect to the first 90-day period (or
portion thereof) while a Registration Default is continuing immediately
following the occurrence of such Registration Default, in an amount equal to
0.50% per annum of the principal amount of the Securities. The amount of
Liquidated Damages will increase by an additional 0.50% per annum of the
principal amount of the Securities for each subsequent 90-day period (or portion
thereof) while a Registration Default is continuing until all Registration
Defaults have been cured, up to an aggregate maximum amount of 2.00% per annum
of the principal amount of the Securities. Liquidated Damages shall be computed
based on the actual number of days elapsed during which any such Registration
Defaults exists. Following the cure of a Registration Default, the accrual of
Liquidated Damages with respect to such Registration Default will cease.
If the Company has determined, in its reasonable judgment, upon
advice of counsel, that the continued effectiveness and use of the Shelf
Registration Statement would require the disclosure of material information
concerning, or interfere with, any financing, acquisition, corporate
reorganization or other material transaction involving the Issuers, and the
aggregate number of days in any consecutive twelve-month period for which the
Shelf Registration Statement is unusable exceeds 45 days per occurrence or more
than 60 days in the aggregate, then the Issuers shall pay Liquidated Damages in
an amount equal to 0.50% per annum of the principal amount of the Securities for
the first 90-day period (or portion thereof) beginning on the 45th such date
that such Shelf Registration Statement ceases to be usable, which Liquidated
Damages shall be increased by an additional 0.50% per annum of the principal
amount of the Securities at the beginning of each subsequent 90-day period, up
to a maximum amount (aggregated with Liquidated Damages accruing pursuant to the
first paragraph of this Section 2(e)) of 2.00% of the principal amount of the
Securities. Upon the Shelf Registration Statement once again becoming usable,
the accrual of Liquidated Damages shall cease if the Issuers are otherwise in
compliance with this Agreement at such time; PROVIDED, HOWEVER, that if the
Shelf Registration Statement ceases to be usable beyond the period permitted
above, Liquidated Damages will again accrue and thereafter cease to accrue when
the Shelf Registration Statement becomes usable. Notwithstanding the foregoing,
the Issuers shall cause the Registration Statement to be effective for the
requisite period set forth hereinafter.
The Issuers shall notify the Trustee within three Business Days
after each and every date on which an event occurs in respect of which
Liquidated Damages is required to be
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paid (an "EVENT DATE"). Liquidated Damages shall be paid in arrears by
depositing with the Trustee, in trust, for the benefit of the Holders of
Transfer Restricted Securities, on or before the applicable semiannual interest
payment date, immediately available funds in sums sufficient to pay the
Liquidated Damages then due. The Liquidated Damages due shall be payable in
arrears on each interest payment date to the record Holder of Securities
entitled to receive the interest payment to be paid on such date as set forth in
the Indenture. Each obligation to pay Liquidated Damages shall be deemed to
accrue from and including the day following the applicable Event Date.
3. REGISTRATION PROCEDURES. In connection with the obligations of
the Issuers with respect to the Registration Statements pursuant to Sections
2(a) and 2(b) hereof, the Issuers shall:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements as prescribed by Sections 2(a) and 2(b) hereof
within the relevant time period specified in Section 2 hereof on the
appropriate form under the Securities Act, which form (i) shall be
selected by the Issuers, (ii) shall, in the case of a Shelf Registration,
be available for the sale of the Transfer Restricted Securities by the
selling Holders thereof and (iii) shall comply as to form in all material
respects with the requirements of the applicable form and include all
financial statements required by the SEC to be filed therewith; and use
their reasonable best efforts to cause such Registration Statement to
become effective and remain effective in accordance with Section 2 hereof.
The Issuers shall not file any Registration Statement or Prospectus or any
amendments or supplements thereto in respect of which the Holders must
provide information for inclusion therein without the Holders being
afforded an opportunity to review such documentation a reasonable time
prior to the filing of such document or if the Majority Holders or such
Participating Broker-Dealer, as the case may be, their counsel or the
managing underwriters, if any, shall reasonably object;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary under applicable law to keep such Registration Statement
effective for the Effectiveness Period or the Applicable Period, as the
case may be; and cause each Prospectus to be supplemented by any required
prospectus supplement and as so supplemented to be filed pursuant to Rule
424 (or any similar provision then in force) under the Securities Act, and
comply with the provisions of the Securities Act, the Exchange Act and the
rules and regulations promulgated thereunder applicable to it with respect
to the disposition of all securities covered by each Registration
Statement during the Effectiveness Period or the Applicable Period, as the
case may be, in accordance with the intended method or methods of
distribution by the selling Holders thereof described in this Agreement
(including sales by any Participating Broker-Dealer);
(c) in the case of a Shelf Registration, (i) notify each Holder of
Transfer Restricted Securities, at least three Business Days prior to
filing, that a Shelf Registration Statement with respect to the Transfer
Restricted Securities is being filed and advising
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such Holder that the distribution of Transfer Restricted Securities will
be made in accordance with the method selected by the Majority Holders
participating in the Shelf Registration; (ii) furnish to each Holder of
Transfer Restricted Securities, without charge, as many copies of each
Prospectus, and any amendment or supplement thereto and such other
documents as such Holder may reasonably request, in order to facilitate
the disposition of the Transfer Restricted Securities, (iii) subject to
the last paragraph of Section 3 hereof, hereby consent to the use of the
Prospectus or any amendment or supplement thereto by each of the selling
Holders of Transfer Restricted Securities in connection with the offering
and sale of the Transfer Restricted Securities covered by such Prospectus
or any amendment or supplement thereto subject to the limitations on the
use thereof provided in Sections 2(b) and 2(c);
(d) in the case of a Shelf Registration, use their reasonable best
efforts to register or qualify, as may be required by applicable law, the
Transfer Restricted Securities under all applicable state securities or
"blue sky" laws of such jurisdictions by the time the applicable
Registration Statement is declared effective by the SEC as any Holder of
Transfer Restricted Securities covered by a Registration Statement shall
reasonably request in advance of such date of effectiveness, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such Holder to consummate the disposition in each such
jurisdiction of such Transfer Restricted Securities owned by such Holder;
PROVIDED, HOWEVER, that the Issuers shall not be required to (i) qualify
as a foreign corporation or as a broker or dealer in securities in any
jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (ii) file or subject itself to any general consent to
service of process or (iii) subject itself to taxation in any such
jurisdiction if it is not so subject;
(e) in the case of (1) a Shelf Registration or (2) Participating
Broker-Dealers who have notified the Company that they will be utilizing
the Prospectus contained in the Exchange Offer Registration Statement as
provided in Section 3(s) hereof, notify each Holder of Transfer Restricted
Securities, or such Participating Broker-Dealers, as the case may be,
their counsel, if any, promptly and confirm such notice in writing (which
notices, in the case of (i) below, may take the form of a press release)
(i) when a Registration Statement has become effective and when any
post-effective amendments and supplements thereto become effective, (ii)
of any request by the SEC or any state securities authority for amendments
and supplements to a Registration Statement or Prospectus or for
additional information after the Registration Statement has become
effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (iv) if
the Issuers receives any notification with respect to the suspension of
the qualification of the Transfer Restricted Securities or the Exchange
Securities to be sold by any Participating Broker-Dealer for offer or sale
in any jurisdiction or the initiation of any proceeding for such purpose,
(v) of the happening of any event or the failure of any event to occur or
the discovery of any facts or otherwise, during the period a Shelf
Registration Statement is effective which makes any statement made in such
Registration Statement or the related Prospectus untrue in any material
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respect or which causes such Registration Statement or Prospectus to omit
to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading and
(vi) the Issuers' reasonable determination that a post-effective amendment
to the Registration Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement as soon as
practicable;
(g) in the case of a Shelf Registration, furnish to each Holder of
Transfer Restricted Securities, without charge, at least one conformed
copy of each Registration Statement relating to such Shelf Registration
and any post-effective amendment thereto (without documents incorporated
therein by reference or exhibits thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the selling
Holders of Transfer Restricted Securities to facilitate the timely
preparation and delivery of certificates not bearing any restrictive
legends representing Securities covered by such Shelf Registration to be
sold and relating to the subsequent transfer of such Securities; and cause
such Transfer Restricted Securities to be in such denominations
(consistent with the provisions of the Indenture) and registered in such
names as the selling Holders may reasonably request at least three
Business Days prior to the closing of any sale of Transfer Restricted
Securities;
(i) in the case of a Shelf Registration or an Exchange Offer
Registration, upon the occurrence of any circumstance contemplated by
Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or 3(e)(vi) hereof, use
their reasonable best efforts to prepare a supplement or post-effective
amendment to a Registration Statement or the related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the
Transfer Restricted Securities, such Prospectus will not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and to notify
each Holder to suspend use of the Prospectus as promptly as practicable
after the occurrence of such an event, and each Holder hereby agrees to
suspend use of the Prospectus until the Issuers have amended or
supplemented the Prospectus to correct such misstatement or omission;
(j) obtain a CUSIP number for all Exchange Securities or Private
Exchange or Securities, as the case may be, not later than the effective
date of a Registration Statement, and provide the Trustee with
certificates for the Exchange Securities or the Private Exchange
Securities, as the case may be, in a form eligible for deposit with the
Depositary;
(k) cause the Indenture to be qualified under the Trust Indenture
Act of 1939, as amended, (the "TIA") in connection with the registration
of the Exchange Securities or Transfer Restricted Securities, as the case
may be, cooperate with the Trustee and the
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Holders to effect such changes to the Indenture as may be required for the
Indenture to be so qualified in accordance with the terms of the TIA and
execute, and use their reasonable best efforts to cause the Trustee to
execute, all documents as may be required to effect such changes, and all
other forms and documents required to be filed with the SEC to enable the
Indenture to be so qualified in a timely manner;
(l) in the case of a Shelf Registration, enter into such agreements
(including underwriting agreements) and take all such other appropriate
actions as are reasonably requested in order to expedite or facilitate the
registration or the disposition of such Transfer Restricted Securities,
and in such connection, (i) make such representations and warranties to
Holders of such Transfer Restricted Securities with respect to the
business of the Issuers and their respective subsidiaries as then
conducted and the Registration Statement, Prospectus and documents, if
any, incorporated or deemed to be incorporated by reference therein, in
each case, as are customarily made by issuers to underwriters in
underwritten offerings, and confirm the same if and when requested; (ii)
if requested by the managing underwriters, obtain opinions of counsel to
the Issuers and updates thereof in form and substance reasonably
satisfactory to the Holders of a majority in principal amount of the
Transfer Restricted Securities covered by such Registration Statement,
addressed to each selling Holder and the managing underwriters covering
the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
Holders; (iii) if requested by the managing underwriters obtain "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Issuers (and, if necessary, any other independent
certified public accountants of any subsidiary of the Issuers or of any
business acquired by any of the Issuers for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to the Issuers and the selling Holders of Transfer
Restricted Securities, such letters to be in customary form (meeting the
requirement of Statement of Accounting Standards No. 72) and covering
matters of the type customarily covered in "cold comfort" letters in
connection with underwritten offerings and such other matters as
reasonably requested by such selling Holders; and (iv) if an underwriting
agreement is entered into, the same shall contain indemnification
provisions and procedures substantially identical to those set forth in
Section 4 hereof (or such other provisions and procedures acceptable to
the Issuers and the Holders of a majority in aggregate principal amount of
Transfer Restricted Securities covered by such Registration Statement)
with respect to all parties to be indemnified pursuant to said Section
(including, without limitation, such selling Holders). The above shall be
done at each closing in respect of the sale of Transfer Restricted
Securities, or as and to the extent required thereunder;
(m) if (1) a Shelf Registration is filed pursuant to Section 2(b)
or (2) a Prospectus contained in an Exchange Offer Registration Statement
filed pursuant to Section 2(a) is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Securities during the Applicable Period, make available for
inspection by each such person who would be an "underwriter" as a result
of
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either (i) the sale by such person of Securities covered by such Shelf
Registration Statement or (ii) the sale during the Applicable Period by a
Participating Broker-Dealer of Exchange Securities (provided that a
Participating Broker-Dealer shall not be deemed to be an underwriter
solely as a result of it being required to deliver a prospectus in
connection with any resale of Exchange Securities) and any attorney,
accountant or other agent retained by any such person (collectively, the
"Inspectors"), at the offices where normally kept, during reasonable
business hours, all financial and other records, pertinent corporate
documents and properties of the Issuers and their respective subsidiaries
(collectively, the "RECORDS") as shall be reasonably necessary to enable
them to exercise any applicable due diligence responsibilities, and cause
the officers, directors and employees of the Issuers and their respective
subsidiaries to supply all information in each case reasonably requested
by any such Inspector in connection with such Registration Statement.
Records which the Issuers determine, in good faith, to be confidential and
any Records which they notify the Inspectors are confidential shall not be
disclosed by the Inspectors to any other Person unless (i) the disclosure
of such Records is necessary to avoid or correct a material misstatement
or omission in such Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction or (iii) the information in such Records has been
made generally available to the public through no fault or action of any
selling Holder of such Transfer Restricted Securities, any such
Participating Broker-Dealer or any Inspector. Each such Holder and each
such Participating Broker-Dealer will be required to agree that
information obtained by it as a result of such inspections shall be deemed
confidential and shall not be used by it as the basis for any market
transactions in the securities of the Issuers unless and until such is
made generally available to the public through no fault or action of such
Holder, such Participating Broker-Dealer or any Inspector. Each selling
Holder of such Transfer Restricted Securities and each such Participating
Broker-Dealer will be required to further agree that it will, upon
learning that disclosure of such Records is necessary under (i) or (ii)
above, give notice to the Issuers and allow the Issuers at their expense
to undertake appropriate action to prevent disclosure of the Records
deemed confidential;
(n) comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Transfer Restricted
Securities are sold to underwriters in a firm commitment or best efforts
underwritten offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the
Company after the effective date of a Registration Statement, which
statements shall cover said 12-month periods;
(o) upon consummation of an Exchange Offer or a Private Exchange,
obtain a customary opinion of counsel to the Issuers addressed to the
Trustee for the benefit of all Holders of Transfer Restricted Securities
participating in the Exchange Offer or the
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Private Exchange, as the case may be, and which includes an opinion that
(i) the Issuers have duly authorized, executed and delivered the Exchange
Securities and Private Exchange Securities, and (ii) each of the Exchange
Securities or the Private Exchange Securities, as the case may be,
constitute a legal, valid and binding obligation of the Issuers,
enforceable against the Issuers in accordance with its respective terms
(in each case, with customary exceptions);
(p) if an Exchange Offer or a Private Exchange is to be
consummated, upon proper delivery of the Transfer Restricted Securities by
Holders to the Issuers (or to such other Person as directed by the
Issuers) in exchange for the Exchange Securities or the Private Exchange
Securities, as the case may be, the Issuers shall mark, or cause to be
marked, on such Transfer Restricted Securities and on the books of the
Trustee, the Note Registrar (as defined in the Indenture) and, if
necessary, the Depositary, delivered by such Holders that such Transfer
Restricted Securities are being canceled in exchange for the Exchange
Securities or the Private Exchange Securities, as the case may be; but in
no event shall such Transfer Restricted Securities be marked as paid or
otherwise satisfied solely as a result of being exchanged for Exchange
Securities or Private Exchange Securities in the Exchange Offer or the
Private Exchange, as the case may be;
(q) cooperate with each seller of Transfer Restricted Securities
covered by any Registration Statement participating in the disposition of
such Transfer Restricted Securities and one counsel acting on behalf of
all such sellers in connection with the filings, if any, required to be
made with the NASD;
(r) use their reasonable best efforts to take all other steps
necessary to effect the registration of the Transfer Restricted Securities
covered by a Registration Statement contemplated hereby; and
(s) (A) in the case of the Exchange Offer Registration Statement
(i) include in the Exchange Offer Registration Statement a section
entitled "Plan of Distribution," which section shall be reasonably
acceptable to Bear, Stearns, as representative of the Initial Purchasers,
and which shall contain a summary statement of the positions taken or
policies made by the staff of the SEC with respect to the potential
"underwriter" status of any broker-dealer (a "PARTICIPATING
BROKER-DEALER") that holds Transfer Restricted Securities acquired for its
own account as a result of market-making activities or other trading
activities and that will be the beneficial owner (as defined in Rule 13d-3
under the Exchange Act) of Exchange Securities to be received by such
broker-dealer in the Exchange Offer, whether such positions or policies
have been publicly disseminated by the staff of the SEC or such positions
or policies, in the reasonable judgment of Bear, Stearns, as
representative of the Initial Purchasers or such other representative,
represent the prevailing views of the staff of the SEC, including a
statement that any such Participating Broker-Dealer who receives Exchange
Securities for Transfer Restricted Securities pursuant to the Exchange
Offer may be deemed a statutory underwriter and must deliver a prospectus
meeting the requirements of the Securities Act in connection with any
resale of such Exchange Securities, (ii) furnish to each Participating
Broker-
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Dealer who has delivered to the Issuers the notice referred to in Section
3(e), without charge, as many copies of each Prospectus included in the
Exchange Offer Registration Statement, and any amendment or supplement
thereto, as such Participating Broker-Dealer may reasonably request; (iii)
hereby consent to the use of the Prospectus forming part of the Exchange
Offer Registration Statement or any amendment or supplement thereto, by
any Person subject to the prospectus delivery requirements of the SEC,
including all Participating Broker-Dealers, in connection with the sale or
transfer of the Exchange Securities covered by the Prospectus or any
amendment or supplement thereto, (iv) use their reasonable best efforts to
keep the Exchange Offer Registration Statement effective and to amend and
supplement the Prospectus contained therein in order to permit such
Prospectus to be lawfully delivered by all Persons subject to the
prospectus delivery requirements of the Securities Act for such period of
time as such Persons must comply with such requirements in order to resell
the Exchange Securities; PROVIDED, HOWEVER, that such period shall not be
required to exceed 180 days (or such longer period if extended pursuant to
the last sentence of Section 3 hereof) (the "APPLICABLE PERIOD"), and (iv)
include in the transmittal letter or similar documentation to be executed
by an exchange offeree in order to participate in the Exchange Offer (x)
the following provision:
"If the exchange offeree is a broker-dealer holding Transfer
Restricted Securities acquired for its own account as a result of
market-making activities or other trading activities, it will
deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Securities received in
respect of such Transfer Restricted Securities pursuant to the
Exchange Offer";
and (y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus in
connection with the exchange of Transfer Restricted Securities, such
broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act; and
(B) in the case of any Exchange Offer Registration Statement, the
Issuers agree to deliver, upon request, to the Trustee and to
Participating Broker-Dealers upon consummation of the Exchange Offer (i)
an opinion of counsel substantially in the form attached hereto as Exhibit
A, and (ii) an officers' certificate containing certifications
substantially similar to those set forth in Section 5(c) of the Purchase
Agreement.
The Issuers may require each seller of Transfer Restricted
Securities as to which any registration is being effected to furnish to the
Issuers such information regarding such seller and the proposed distribution of
such Transfer Restricted Securities, as the Issuers may from time to time
reasonably request in writing. The Issuers may exclude from such registration
the Transfer Restricted Securities of any seller who fails to furnish such
information within a reasonable time (not to exceed 10 Business Days) after
receiving such request and shall be under no obligation to compensate any such
seller for any lost income, interest or other opportunity forgone, or any
liability incurred, as a result of the Issuers' decision to exclude such seller.
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In the case of (1) a Shelf Registration Statement or (2)
Participating Broker-Dealers who have notified the Issuers that they will be
utilizing the Prospectus contained in the Exchange Offer Registration Statement
as provided in Section 3(s) hereof, that are seeking to sell Exchange Securities
and are required to deliver Prospectuses, each Holder agrees that, upon receipt
of any notice from the Issuers of the happening of any event of the kind
described in Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or 3(e)(vi) hereof,
such Holder will forthwith discontinue disposition of Transfer Restricted
Securities pursuant to a Registration Statement until such Holder's receipt of
the copies of the supplemented or amended Prospectus contemplated by Section
3(i) hereof or until it is advised in writing (the "ADVICE") by the Issuers that
the use of the applicable Prospectus may be resumed, and, if so directed by the
Issuers, such Holder will deliver to the Issuers (at the Issuers' expense) all
copies in such Holder's possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Transfer Restricted
Securities or Exchange Securities, as the case may be, current at the time of
receipt of such notice. If the Issuers shall give any such notice to suspend the
disposition of Transfer Restricted Securities or Exchange Securities, as the
case may be, pursuant to a Registration Statement, the Issuers shall use their
reasonable best efforts to file and have declared effective (if an amendment) as
soon as practicable an amendment or supplement to the Registration Statement
and, in the case of an amendment, have such amendment declared effective as soon
as practicable and shall extend the period during which such Registration
Statement shall be maintained effective pursuant to this Agreement by the number
of days in the period from and including the date of the giving of such notice
to and including the date when the Issuers shall have made available to the
Holders (x) copies of the supplemented or amended Prospectus necessary to resume
such dispositions or (y) the Advice.
4. INDEMNIFICATION AND CONTRIBUTION. (a) Each of the Issuers shall
indemnify and hold harmless each Initial Purchaser, each Holder, each
Participating Broker-Dealer, each underwriter who participates in an offering of
Transfer Restricted Securities, their respective affiliates, each Person, if
any, who controls any of such parties within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment or supplement thereto), covering
Transfer Restricted Securities or Exchange Securities, including all
documents incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any court or governmental agency or
18
<PAGE>
body, commenced or threatened, or of any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission; PROVIDED that (subject to Sections 4(c) and 4(d) below) any such
settlement is effected with the prior written consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
reasonable fees and disbursements of one counsel (in addition to any local
counsel) chosen as provided in Section 4(c) below) reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any court or governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under
subparagraph (i) or (ii) of this Section 4(a);
PROVIDED, HOWEVER, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission (i) made in reliance upon and
in conformity with written information furnished in writing to the Issuers by or
on behalf of such Initial Purchaser, such Holder, such Participating
Broker-Dealer or any underwriter with respect to such Initial Purchaser, Holder,
Participating Broker-Dealer or underwriter, as the case may be, expressly for
use in the Registration Statement (or any amendment or supplement thereto) or
any Prospectus (or any amendment or supplement thereto) or (ii) contained in any
preliminary Prospectus or the final Prospectus if such Initial Purchaser, such
Holder, such Participating Broker-Dealer or such underwriter failed to send or
deliver a copy of the final Prospectus (or any amendment or supplement thereto)
to the Person asserting such losses, claims, damages or liabilities on or prior
to the delivery of written confirmation of any sale of securities covered
thereby to such Person in any case where the Issuers shall have previously
furnished copies thereof to such Initial Purchaser, such Holder, such
Participating Broker-Dealer or such underwriter, as the case may be, in
accordance with this Agreement, at or prior to the written confirmation of the
sale of such Securities to such Person and the untrue statement contained in or
the omission from the preliminary Prospectus or the final Prospectus was
corrected in the final Prospectus (or any amendment or supplement thereto). Any
amounts advanced by the Issuers to an indemnified party pursuant to this Section
4 as a result of such losses shall be returned to the Issuers if it shall be
finally determined by a court of competent jurisdiction in a judgment not
subject to appeal or final review that such indemnified party was not entitled
to indemnification by any of the Issuers.
(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Issuers, each Initial Purchaser, each underwriter who
participates in an offering of Transfer Restricted Securities and the other
selling Holders and each of their respective directors and each Person, if any,
who controls any of the Issuers, the Initial Purchasers, any underwriter or any
other selling Holder within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, against any and all loss, liability, claim, damage and
expense whatsoever described in the indemnity contained in Section 4(a) hereof,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment or supplement thereto) or any Prospectus (or any
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<PAGE>
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Issuers by or on behalf of such selling Holder with
respect to such Holder expressly for use in the Registration Statement (or any
supplement thereto), or any such Prospectus (or any amendment thereto);
PROVIDED, HOWEVER, that, in the case of the Shelf Registration Statement, no
such Holder shall be liable for any claims hereunder in excess of the amount of
net proceeds received by such Holder from the sale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement.
(c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Section 4(a) above, one counsel to all the
indemnified parties shall be selected by Bear, Stearns, and, in the case of
parties indemnified pursuant to Section 4(b) above, counsel to all the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; PROVIDED,
HOWEVER, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party.
Notwithstanding the foregoing, if it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel (in addition to any local counsel) chosen by it and approved
by the indemnified parties defendant in such action (which approval shall not be
unreasonably withheld), unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
which are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution is
sought under this Section 4, unless such settlement, compromise or consent (i)
includes a full and unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
the offer and sale of any Securities and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel pursuant to Section 4(a)(iii) above, then such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 4(a)(ii) effected without its written consent if (i)
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<PAGE>
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement. Notwithstanding the immediately preceding sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for reasonable fees and expenses of counsel
pursuant to 4(a)(iii) above, an indemnifying party shall not be liable for a
settlement of the nature contemplated by Section 4(a)(ii) effected without its
consent if such indemnifying party, prior to the date of such settlement (i)
reimburses such indemnified party in accordance with such request to the extent
it believes such request is, in good faith, reasonable and (ii) provides written
notice to the indemnified party that the indemnifying party disputes in good
faith the reasonableness of the unpaid balance of such fees and expenses and
substantiates the unreasonableness of such fees and expenses.
(e) In order to provide for just and equitable contribution in
circumstances under which any of the indemnity provisions set forth in this
Section 4 is for any reason held to be unavailable to the indemnified parties
although applicable in accordance with its terms, the Issuers, the Initial
Purchasers and the Holders, as applicable, shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity agreement incurred by the Issuers, the Initial Purchasers and the
Holders; PROVIDED, HOWEVER, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person that was not guilty of such
fraudulent misrepresentation. As between the Issuers and the Initial Purchasers
and the Holders, such parties shall contribute to such aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect the
relative fault of the Issuers, on the one hand, and of the Holder of Transfer
Restricted Securities, the Participating Broker-Dealer or Initial Purchasers, as
the case may be, on the other hand, in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative fault of the Issuers, on the one hand, and the Holder
of Transfer Restricted Securities, the Participating Broker-Dealer or the
Initial Purchasers, as the case may be, on the other hand, shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Issuers, or by the Holder
of Transfer Restricted Securities, the Participating Broker-Dealer or the
Initial Purchasers, as the case may be, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Issuers and the Holders of the Transfer Restricted Securities
and the Initial Purchasers agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 4.
21
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For purposes of this Section 4, each affiliate of any Person, if
any, who controls a Holder of Transfer Restricted Securities, an Initial
Purchaser or a Participating Broker-Dealer within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act shall have the same rights
to contribution as such other Person, and each director of each of the Issuers,
each affiliate of each of the Issuers, each executive officer of each of the
Issuers who signed the Registration Statement, and each Person, if any, who
controls any of the Issuers within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as each of the Issuers.
5. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may
participate in any underwritten registration hereunder unless such Holder (a)
agrees to sell such Holder's Transfer Restricted Securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and (b) completes and executes all
reasonable questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements. The Issuers shall be under no obligation to
compensate any Holder for lost income, interest or other opportunity foregone,
or other liability incurred, as a result of the Issuers' decision to exclude
such Holder from any underwritten registration if such Holder has not complied
with the provisions of this Section 5 in all material respects following 15
Business Days' written notice of non-compliance and the Issuers' decision to
exclude such Holder.
6. SELECTION OF UNDERWRITERS. The Holders of Transfer Restricted
Securities covered by the Shelf Registration Statement who desire to do so may
sell the securities covered by such Shelf Registration in an underwritten
offering. In any such underwritten offering, the underwriter or underwriters and
manager or managers that will administer the offering will be selected by the
Holders of a majority in aggregate principal amount of the Transfer Restricted
Securities covered by the Shelf Registration Statement; PROVIDED, HOWEVER, that
such underwriters and managers must be reasonably satisfactory to the Issuers.
7. MISCELLANEOUS.
(a) REPORTING REQUIREMENT. So long as any of the Transfer Restricted
Securities are outstanding, the Issuers will comply with the provisions of
Section 10.10 of the Indenture.
(b) NO INCONSISTENT AGREEMENTS. The rights granted to the Holders
hereunder do not, and will not for the term of this Agreement in any way
conflict with and are not, and will not during the term of this Agreement be
inconsistent with the rights granted to the holders of the Issuers' other issued
and outstanding securities under any other agreements entered into by the
Issuers.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, otherwise than with the prior written consent of the Issuers
and the Majority Holders; PROVIDED, HOWEVER, that no amendment, modification, or
supplement or waiver or consent to the departure with respect to the provisions
22
<PAGE>
of Section 4 hereof shall be effective as against any Holder of Transfer
Restricted Securities or any of the Issuers unless consented to in writing by
such Holder of Transfer Restricted Securities or the Issuers, as the case may
be.
(d) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, facsimile, or any courier guaranteeing overnight delivery (i)
if to a Holder, at the most current address given by such Holder to the Issuers
by means of a notice given in accordance with the provisions of this Section
7(d), which address initially is, with respect to the Initial Purchasers, the
address set forth in the Purchase Agreement; and (ii) if to the Issuers,
initially at the Company's address set forth in the Purchase Agreement and
thereafter at such other address, notice of which is given in accordance with
the provisions of this Section 7(d).
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; three
Business Days after being deposited in the mail, postage prepaid, if mailed;
when receipt is confirmed, if sent by facsimile; and on the next Business Day,
if timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall
be concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of the
Initial Purchasers, including, without limitation and without the need for an
express assignment, subsequent Holders; PROVIDED, HOWEVER, that nothing herein
shall be deemed to permit any assignment, transfer or other disposition of
Transfer Restricted Securities in violation of the terms of the Purchase
Agreement or the Indenture. If any transferee of any Holder shall acquire
Transfer Restricted Securities, in any manner, whether by operation of law or
otherwise, such Transfer Restricted Securities shall be held subject to all of
the terms of this Agreement, and by taking and holding such Transfer Restricted
Securities, such Person shall be conclusively deemed to have agreed to be bound
by and to perform all of the terms and provisions of this Agreement and such
Person shall be entitled to receive the benefits hereof.
(f) THIRD PARTY BENEFICIARY. Each of the Initial Purchasers and each
Holder shall be a third party beneficiary of the agreements made hereunder
between the Issuers, on the one hand, and the Initial Purchasers, on the other
hand, and shall have the right to enforce such agreements directly to the extent
it deems such enforcement necessary or advisable to protect its rights or the
rights of Holders hereunder.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
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<PAGE>
(h) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. All specified times of day refer
to New York City time.
(j) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(k) SECURITIES HELD BY ANY OF THE ISSUERS OR ANY OF THEIR RESPECTIVE
AFFILIATES. Whenever the consent or approval of Holders of a specified
percentage of Transfer Restricted Securities is required hereunder, Transfer
Restricted Securities held by the Issuers or any of their respective affiliates
(as such term is defined in Rule 405 under the Securities Act) shall not be
counted in determining whether such consent or approval was given by the Holders
of such required percentage.
(l) SUBSIDIARY GUARANTOR A PARTY. Immediately upon the designation
of any subsidiary of the Company as a Guarantor under the Indenture, the Company
shall cause such subsidiary to become a party hereto as a Subsidiary Guarantor
by executing and delivering to the Initial Purchasers a counterpart hereof.
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
PENTACON, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Senior Vice President
GUARANTORS:
ALATEC PRODUCTS, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
AXS SOLUTIONS, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ASI AEROSPACE GROUP, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
CAPITOL BOLT & SUPPLY, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
S-1
<PAGE>
MAUMEE INDUSTRIES, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
PACE PRODUCTS, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
SALES SYSTEMS, LIMITED
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
TEXAS INTERNATIONAL AVIATION, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
WEST COAST AERO PRODUCTS HOLDING
CORPORATION, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
POLLARD ACQUISITION CORP.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
S-2
<PAGE>
ALATEC RACE, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
TRACE ALATEC SUPPLY COMPANY, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC CABLE HARNESS & ASSEMBLY
DIVISION, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC FASTENER AND COMPONENT GROUP,
INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ALATEC INTERNATIONAL SALES, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
PENTACON AEROSPACE GROUP, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
S-3
<PAGE>
PENTACON INDUSTRIAL GROUP, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
TIA INTERNATIONAL, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
S-4
<PAGE>
Confirmed and accepted as of the date first above written:
BEAR, STEARNS & CO. INC.
By:/S/ JAMES C. DAIO
Name: James C. Daio
Title: Senior Managing Director
NATIONSBANC MONTGOMERY
SECURITIES LLC
By:/S/ J. G. WEINMANN, JR.
Name: J. G. Weinmann
Title: Managing Director
SANDERS MORRIS MUNDY INC.
By:/S/ BEN T. MORRIS
Name: Ben T. Morris
Title: President
S-5
<PAGE>
EXHIBIT A
FORM OF OPINION OF COUNSEL
1. Each of the Exchange Offer Registration Statement and the Prospectus
(other than the financial statements, notes or schedules thereto and other
financial and statistical information and supplemental schedules included or
referred to therein or omitted therefrom and the Form T-1, as to which such
counsel need express no opinion), complies as to form in all material respects
with the applicable requirements of the Securities Act and the applicable rules
and regulations promulgated under the Securities Act.
2. We have participated in conferences with officers and other
representatives of the Issuers, your representatives and representatives of the
independent accountants for the Issuers at which conferences the contents of the
Exchange Offer Registration Statement and related matters were discussed.
Although such counsel has not verified and does not pass upon or assume any
responsibility for the accuracy, completeness or fairness of the statements
contained therein, on the basis of the foregoing participation (relying as to
materiality to a large extent upon representations and opinions of officers and
other representatives of the Issuers), no facts have come to such counsel's
attention that lead such counsel to believe that the Exchange Offer Registration
Statement (other than the financial statements, notes and schedules thereto
contained or referred to therein and the Form T-1, as to which such counsel need
express no belief), at the time the Exchange Offer Registration Statement became
effective and at the time of the consummation of the Exchange Offer, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading, or that the Prospectus (other than the financial
statements, notes and schedules thereto contained or referred to therein, as to
which such counsel need express no belief) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained therein, in the light of the circumstances under which they were made,
not misleading.
<PAGE>
SCHEDULE A
GUARANTORS
Alatec Products, Inc.
Alatec Cable Harness & Assembly Division, Inc.
Alatec Fastener and Component Group, Inc.
Alatec International Sales, Inc.
Alatec Race, Inc.
Trace Alatec Supply Company, Inc.
Pentacon Aerospace Group, Inc.
Pentacon Industrial Group, Inc.
AXS Solutions, Inc.
Capitol Bolt & Supply, Inc.
Maumee Industries, Inc.
Sales Systems, Limited
Texas International Aviation, Inc.
TIA International, Inc.
Pace Products, Inc.
West Coast Aero Products Holding Corporation, Inc.
ASI Aerospace Group, Inc.
Pollard Acquisition Corp.
EXHIBIT 5.1
[Andrews & Kurth L.L.P. Letterhead]
April 27, 1999
Board of Directors
Pentacon, Inc.
10375 Richmond Avenue
Suite 700
Houston, Texas 77042
Ladies and Gentlemen:
We have acted as counsel to Pentacon, Inc., a Delaware corporation
(the "Company") and are delivering this opinion in connection with the Company's
Registration Statement on Form S-4 (the "Registration Statement") relating to
the registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the offer by the Company to exchange up to $100,000,000 aggregate
principal amount of its 123% Senior Subordinated Notes due 2009, Series B (the
"Exchange Notes") for its existing 123% Senior Subordinated Notes due 2009,
Series A (the "Existing Notes"). The Exchange Notes are proposed to be issued in
accordance with the provisions of the indenture (the "Indenture"), dated as of
March 30, 1999, between the Company, the guarantors named therein (the
"Guarantors") and State Street Bank and Trust Company, as Trustee.
In arriving at the opinions expressed below, we have examined the
Registration Statement, the Prospectus contained therein, the Indenture which is
filed as an exhibit to the Registration Statement, and the originals or copies
certified or otherwise identified to our satisfaction of such other instruments
and other certificates of public officials and officers and representatives of
the Company. In such examination, we have assumed and have not verified (i) that
the signatures on all documents that we have examined are genuine, (ii) the
authenticity of all documents submitted to us as originals, (iii) the conformity
with the authentic originals of all documents submitted to us as certified,
photostatic or faxed copies, (iv) the corporate power and authority and due
authorization and approval of the Exchange
<PAGE>
Board of Directors
Pentacon, Inc.
April 27, 1999
Notes and Guarantees by the parties thereto other than the Company and its
subsidiaries formed under the corporate laws of the States of Texas or Delaware
and (v) that all documents in respect of which forms were filed with the
Securities and Exchange Commission as exhibits to the Registration Statement
will conform in all material respects to the forms thereof that we have
examined. In addition, as the basis for the opinion hereinafter expressed, we
have examined such statutes, regulations, corporate records and documents,
certificates of corporate and public officials and other instruments as we have
deemed necessary or advisable for the purposes of this opinion.
Based upon the foregoing, having due regard for such legal
considerations as we deem relevant, we are of the opinion that the Exchange
Notes and the guarantee of each of the Guarantors (the AGuarantees@) (a) when
the Notes have been exchanged in the manner described in the Registration
Statement, (b) when the Exchange Notes have been duly executed, authenticated,
issued and delivered in accordance with the terms of the Indenture, (c) when the
Indenture has been duly qualified under the Trust Indenture Act of 1939, as
amended, and (d) when applicable provisions of Ablue sky@ laws have been
complied with, will constitute valid and binding obligations of the Company and
the Guarantors, as applicable, enforceable against the Company and the
Guarantors, as applicable, in accordance with their terms, under the laws of the
State of New York which are expressed to govern the same, except as the
enforcement thereof may be limited by (a) bankruptcy, insolvency, reorganization
or moratorium (including, without limitation, all laws relating to fraudulent
transfers), (b) other similar laws relating to or affecting enforcement of
creditors= rights generally, (c) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law) and (d)
limitations on the waiver of rights under usury laws.
This opinion is limited in all respects to the laws of the State of
Texas, the State of New York and the Delaware General Corporation Law. We
express no opinion as to, and for the purposes of the opinions set forth herein,
we have conducted no investigation of, and do not purport to be experts on, any
other laws. We hereby consent to the use of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
EXHIBIT 10.18
THIRD 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
MARCH 9, 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 ARTICLE IX ...................................... 4
Section 2.04 AMENDMENTS TO ANNEXES, SCHEDULES AND EXHIBITS ................. 4
ARTICLE III. CONDITIONS
Section 3.01 LOAN DOCUMENTS ................................................ 4
Section 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIES ......................... 5
Section 3.03 REPRESENTATIONS AND WARRANTIES ................................ 5
Section 3.04 NO DEFAULT .................................................... 5
Section 3.05 NO CHANGE ..................................................... 5
Section 3.06 SECURITY INSTRUMENTS .......................................... 6
Section 3.07 FEES .......................................................... 6
Section 3.08 OTHER INSTRUMENTS OR DOCUMENTS ................................ 6
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT AGREEMENT ... 6
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY ...................... 6
Section 4.03 SUCCESSORS AND ASSIGNS ........................................ 6
Section 4.04 COUNTERPARTS .................................................. 6
Section 4.05 NUMBER AND GENDER ............................................. 7
Section 4.06 ENTIRE AGREEMENT .............................................. 7
Section 4.07 INVALIDITY .................................................... 7
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS .................. 7
Section 4.09 GOVERNING LAW ................................................. 7
<PAGE>
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Percentage Shares, Maximum Revolving Credit Amounts, and
Revolver Term Loans
<PAGE>
THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "THIRD
AMENDMENT") executed effective as of the 9th day of March, 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 and the Second Amendment to Credit Agreement dated as of
February 12, 1999 (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 Third Amendment, each of
the terms "ADMINISTRATIVE AGENT", "BORROWER", "CREDIT AGREEMENT", "EFFECTIVE
DATE", "THIRD 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 Third Amendment shall refer to this
Third Amendment as a whole and not to any particular Article, Section,
subsection or provision of this Third Amendment.
(b) Section, subsection and Exhibit references herein are to such
Sections, subsections and Exhibits to this Third 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, the Second Amendment, and the
Third 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 April 15, 1999, "Applicable Margin" shall mean,
from and after April 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 day after
the occurrence of a Capital Market Event and each 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:
APPLICABLE MARGIN FOR APPLICABLE MARGIN FOR
LEVERAGE RATIO EURODOLLAR LOANS BASE RATE LOANS
- --------------------------------------------------------------------------------
Less than 3.00 1.750% 0.25%
- --------------------------------------------------------------------------------
Less than 3.50, but greater
than or equal to 3.00 2.000% 0.50%
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Less than 4.00, but greater
than or equal to 3.50 2.375% 0.75%
- --------------------------------------------------------------------------------
Less than 4.50, but greater
than or equal to 4.00 2.625% 1.00%
- --------------------------------------------------------------------------------
Less than 5.0, but greater
than or equal to 4.50 2.875% 1.25%
- --------------------------------------------------------------------------------
Greater than or equal to 5.0 3.250% 1.50%
- --------------------------------------------------------------------------------
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 definitions where alphabetically
appropriate, which reads in their entirety as follows:
"THIRD AMENDMENT" shall mean that certain Third Amendment to Amended and
Restated Credit Agreement dated as of March 9, 1999, by and among the Borrower,
the Administrative Agent and the Lenders.
"THIRD AMENDMENT FEE LETTERS" shall mean the fee letters between the
Borrower and each of the Lenders, executed in connection with the Third
Amendment.
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:
<PAGE>
"(d) If a Subordinated Debt Event occurs on or before April 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 April 15, 1999
the Aggregate Maximum Revolving Credit Amounts shall automatically be
reduced to $90,000,000."
SECTION 2.03 AMENDMENTS TO ARTICLE IX. Section 9.15 of the Credit
Agreement is hereby amended by replacing the first sentence thereof with the
following:
"The Borrower will not permit its Fixed Charge Coverage Ratio as of
the end of any fiscal quarter of the Borrower (calculated quarterly at the
end of each fiscal quarter) to be less than 2.00 to 1.00 until, but
excluding, September 30, 1999, and on and after September 30, 1999 to be
less than 1.40 to 1.00; PROVIDED, HOWEVER, after the occurrence of a
Subordinated Debt Event, the Borrower will not permit its Fixed Charge
Coverage Ratio as of the end of any fiscal quarter of the Borrower
(calculated quarterly at the end of each fiscal quarter) to be less than
1.2 to 1.00 until, but excluding June 30, 2000, and on and after June 30,
2000 to be less than 1.40 to 1.00."
SECTION 2.04 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 Third Amendment.
ARTICLE III. CONDITIONS
The enforceability of this Third 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:
(a) multiple original counterparts, as requested by the
Administrative Agent, of this Third Amendment executed and delivered by a
duly authorized officer of the Borrower, the Administrative Agent, each
Guarantor, and each Lender; and
(b) multiple original counterparts, as requested by each Lender, of
the Third Amendment Fee Letters executed and delivered by a duly
authorized officer of the Borrower and the respective Lenders.
SECTION 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIESSECTION 3.02 CORPORATE
PROCEEDINGS OF LOAN PARTIES. The Administrative Agent shall have received
multiple copies, as requested by the Administrative Agent, of the resolutions,
<PAGE>
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 Third Amendment and any other Loan
Documents to which they are respectively a party, executed in connection with
this Third 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 Third Amendment
and any other Loan Document executed pursuant hereto.
SECTION 3.03 REPRESENTATIONS AND WARRANTIES. Except as affected by the
transactions contemplated in the Credit Agreement and this Third 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 Third
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 Third Amendment.
SECTION 3.04 NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
SECTION 3.05 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 3.06 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 3.07 FEES. On or before the Effective Date, the Borrower shall
have paid to each Lender all fees required by the Third Amendment Fee Letters.
<PAGE>
SECTION 3.08 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 Third 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 Third 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 Third 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 Third Amendment containing a set of
counterpart execution pages reflecting the execution of each party hereto shall
be sufficient to reflect the execution of this Third Amendment by each necessary
party hereto and shall constitute one instrument.
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.
<PAGE>
SECTION 4.06 ENTIRE AGREEMENT. This Third 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 Third Amendment.
SECTION 4.07 INVALIDITY. In the event that any one or more of the
provisions contained in this Third 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 Third Amendment.
SECTION 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles or
headings to Articles, Sections, subsections or other divisions of this Third
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 Third 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 THIRD 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]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be duly executed and delivered by their proper and duly authorized officers as
of the Effective Date.
BORROWER: PENTACON, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Senior Vice President
LENDER AND AGENT: NATIONSBANK, N.A.
By: /S/ WILLIAM GRIFFIN
Name: William Griffin
Title: Vice President
LENDERS: PARIBAS
By: /S/ LARRY ROBINSON
Name: Larry Robinson
Title: Vice President
By: /S/ ROSINE K. MATTHEWS
Name: Rosine K. Matthews
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /S/ MYRA JUETTEN
Name: Myra Juetten
Title: Vice President
<PAGE>
GUARANTORS: ALATEC PRODUCTS, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
AXS SOLUTIONS, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
CAPITOL BOLT & SUPPLY, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
MAUMEE INDUSTRIES, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
SALES SYSTEMS, LIMITED
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
PACE PRODUCTS, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
WEST COAST AERO PRODUCTS HOLDING
CORPORATION, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
ASI AEROSPACE GROUP, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
POLLARD AVIATION, INC.
By: /S/ BRUCE M. TATEN
Name: Bruce M. Taten
Title: Vice President
<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
April 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 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 April 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 California, N.A. 30.7692% $20,000,000 -0-
- --------------------------------------------------------------------------------
TOTAL 100% $65,000,000 -0-
- --------------------------------------------------------------------------------
ANNEX I-1
EXHIBIT 10.19
FOURTH 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
MARCH 29, 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 ...................................... 3
Section 2.03 AMENDMENTS TO ARTICLE IX ...................................... 3
Section 2.04 AMENDMENTS TO ANNEXES, SCHEDULES AND EXHIBITS ................. 4
ARTICLE III. CONDITIONS
Section 3.01 LOAN DOCUMENTS ................................................ 4
Section 3.02 CORPORATE PROCEEDINGS OF LOAN PARTIES ......................... 4
Section 3.03 REPRESENTATIONS AND WARRANTIES ................................ 5
Section 3.04 NO DEFAULT .................................................... 5
Section 3.05 NO CHANGE ..................................................... 5
Section 3.06 SECURITY INSTRUMENTS .......................................... 5
Section 3.07 FEES .......................................................... 5
Section 3.08 OTHER INSTRUMENTS OR DOCUMENTS ................................ 6
ARTICLE IV. MISCELLANEOUS
Section 4.01 ADOPTION, RATIFICATION AND CONFIRMATION OF CREDIT AGREEMENT ... 6
Section 4.02 RATIFICATION AND AFFIRMATION OF GUARANTY ...................... 6
Section 4.03 SUCCESSORS AND ASSIGNS ........................................ 6
Section 4.04 COUNTERPARTS .................................................. 6
Section 4.05 NUMBER AND GENDER ............................................. 6
Section 4.06 ENTIRE AGREEMENT .............................................. 7
Section 4.07 INVALIDITY .................................................... 7
Section 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS .................. 7
Section 4.09 GOVERNING LAW ................................................. 7
<PAGE>
ANNEXES, EXHIBITS AND SCHEDULES
Annex I - List of Percentage Shares, Maximum Revolving Credit Amounts, and
Revolver Term Loans
<PAGE>
FOURTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"FOURTH AMENDMENT") executed effective as of the 29th day of March, 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 Amended and Restated
Credit Agreement dated as of December 31, 1998, the Second Amendment to Amended
and Restated Credit Agreement dated as of February 12, 1999, and the Third
Amendment to Amended and Restated Credit Agreement dated as of March 9, 1999
(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 Fourth Amendment, each
of the terms "ADMINISTRATIVE AGENT", "BORROWER", "CREDIT AGREEMENT", "EFFECTIVE
DATE", "FOURTH AMENDMENT", "LENDERS" and "NATIONSBANK" shall have the meaning
assigned to such term hereinabove.
<PAGE>
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 Fourth Amendment shall refer to this
Fourth Amendment as a whole and not to any particular Article, Section,
subsection or provision of this Fourth Amendment.
(b) Section, subsection and Exhibit references herein are to such
Sections, subsections and Exhibits to this Fourth 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, the Second Amendment, the Third
Amendment, and the Fourth Amendment, as the same may from time to time be
further amended or supplemented.
"BORROWING BASE" shall mean at any time the sum of (i) 85% of Eligible
Accounts Receivable plus (ii) 50% of Eligible Inventory, but not to exceed 60%
of the Borrowing Base; PROVIDED, HOWEVER, prior to the occurrence of a Capital
Market Event, the Borrowing Base shall be equal to the Aggregate Maximum
Revolving Credit Amounts.
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Fee Letters,
the Third Amendment Fee Letters, the Fourth Amendment Fee Letters, the
Engagement Letter, the Security Instruments, and any and all other agreements or
instruments now or hereafter executed and delivered by the Borrower or any other
Person in connection with this Agreement (other than participation or similar
agreements between any Lender and any other lender or creditor with respect to
any Indebtedness pursuant to this Agreement).
<PAGE>
"SUBORDINATED DEBT EVENT" shall mean the consummation of the issuance of
Subordinated Debt resulting in gross cash proceeds to the Borrower of at least
$97,000,000, 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 reads in their entirety as follows:
"ENGAGEMENT LETTER" shall mean that certain letter agreement dated March
24, 1999 among NationsBank, N.A., NationsBanc Montgomery Securities LLC, and
Pentacon, Inc. regarding, among other matters, syndication of the credit
facilities provided by this Agreement, as amended, supplemented or otherwise
modified from time to time.
"FOURTH AMENDMENT" shall mean that certain Fourth Amendment to Amended and
Restated Credit Agreement dated as of March 29, 1999, by and among the Borrower,
the Administrative Agent and the Lenders.
"FOURTH AMENDMENT FEE LETTERS" shall mean the fee letters, if any, between
the Borrower and each of the Lenders, executed in connection with the Fourth
Amendment.
SECTION 2.02 AMENDMENTS TO ARTICLE II. Section 2.03(c) of the Credit
Agreement is hereby amended by changing the reference to $65,000,000 in the last
sentence thereof to $85,000,000.
SECTION 2.03 AMENDMENTS TO ARTICLE IX. 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 until, but excluding 3/31/99 4.00 to 1.00
- ----------------------------------------------------------------------------
on and after 3/31/99 until, but excluding 6/30/99 3.50 to 1.00
- ----------------------------------------------------------------------------
on and after 6/30/99 until, but excluding 12/31/99 3.25 to 1.00
- ----------------------------------------------------------------------------
on 12/31/99 and thereafter 3.00 to 1.00
- ----------------------------------------------------------------------------
<PAGE>
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 the ratio corresponding to the
applicable period set forth below:
- --------------------------------------------------------------------------------
PERIOD RATIO
- --------------------------------------------------------------------------------
from the funding date of the 2.50 to 1.00
Capital Market Event until, but
excluding 3/31/2000
- --------------------------------------------------------------------------------
on 3/31/2000 and thereafter 2.25 to 1.00
- --------------------------------------------------------------------------------
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."
SECTION 2.04 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 Fourth Amendment.
ARTICLE III. CONDITIONS
The enforceability of this Fourth 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:
(a) multiple original counterparts, as requested by the
Administrative Agent, of this Fourth Amendment executed and delivered by a
duly authorized officer of the Borrower, the Administrative Agent, each
Guarantor, and each Lender; and
<PAGE>
(b) multiple original counterparts, as requested by each Lender, of
the Fourth Amendment Fee Letters executed and delivered by a duly
authorized officer of the Borrower and the respective Lenders.
SECTION 3.02 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 Fourth
Amendment and any other Loan Documents to which they are respectively a party,
executed in connection with this Fourth 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 Fourth Amendment and any other Loan Document executed pursuant
hereto.
SECTION 3.03 REPRESENTATIONS AND WARRANTIES. Except as affected by the
transactions contemplated in the Credit Agreement and this Fourth 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 Fourth 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
Fourth Amendment.
SECTION 3.04 NO DEFAULT. No Default or Event of Default shall have
occurred and be continuing as of the Effective Date.
SECTION 3.05 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 3.06 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.
<PAGE>
SECTION 3.07 FEES. On or before the Effective Date, the Borrower shall
have paid to each Lender all fees required by the Fourth Amendment Fee Letters
and any other Loan Documents (as such term is amended hereby).
SECTION 3.08 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 Fourth 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 Fourth 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 Fourth 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 Fourth Amendment containing a set of
counterpart execution pages reflecting the execution of each party hereto shall
be sufficient to reflect the execution of this Fourth Amendment by each
necessary party hereto and shall constitute one instrument.
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
<PAGE>
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 Fourth 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 Fourth Amendment.
SECTION 4.07 INVALIDITY. In the event that any one or more of the
provisions contained in this Fourth 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 Fourth Amendment.
SECTION 4.08 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles or
headings to Articles, Sections, subsections or other divisions of this Fourth
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 Fourth 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 FOURTH 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]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment
to be duly executed and delivered by their proper and duly authorized officers
as of the Effective Date.
BORROWER: PENTACON, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Senior Vice President
LENDER AND AGENT: NATIONSBANK, N.A.
By: /S/ WILLIAM T. GRIFFIN
Name: William T. Griffin
Title: Vice President
LENDERS: PARIBAS
By: /S/ LARRY ROBINSON
Name: Larry Robinson
Title: Vice President
By: /S/ GLENN E. MEALEY
Name: Glenn E. Mealey
Title: Managing Director
UNION BANK OF CALIFORNIA, N.A.
By: /S/ MYRA JUETTEN
Name: Myra Juetten
Title: Vice President
<PAGE>
GUARANTORS: ALATEC PRODUCTS, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
AXS SOLUTIONS, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
CAPITOL BOLT & SUPPLY, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
MAUMEE INDUSTRIES, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
SALES SYSTEMS, LIMITED
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
PACE PRODUCTS, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
WEST COAST AERO PRODUCTS HOLDING
CORPORATION, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
ASI AEROSPACE GROUP, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
POLLARD AVIATION, INC.
By: /S/ BRIAN FONTANA
Name: Brian Fontana
Title: Vice President
<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
April 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 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 April 15, 1999:
- --------------------------------------------------------------------------------
PERCENTAGE MAXIMUM REVOLVING REVOLVER
NAME OF LENDER SHARE CREDIT AMOUNT TERM LOANS
- --------------------------------------------------------------------------------
NationsBank, N.A. 69.9160% $59,428,590.00 -0-
- --------------------------------------------------------------------------------
Paribas 6.5546% $5,571,410 -0-
- --------------------------------------------------------------------------------
Union Bank of California, N.A. 23.5294% $20,000,000 -0-
- --------------------------------------------------------------------------------
TOTAL 100% $85,000,000 -0-
- --------------------------------------------------------------------------------
ANNEX I-1
EXHIBIT 12.1
PENTACON, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands of Dollars)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------------------------------------------------- -------------
FISCAL
NINE MONTHS FISCAL THREE MONTHS YEAR ENDED
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30, SEPTEMBER 30, ----------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1997 1998 1998
------- ------- ------- ------------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED:
Earnings:
Income before income
taxes ..................... $ 837 $ 2,419 $ 4,139 $ 4,529 $ 10,060 $ 248 $ 3,176
Fixed charges ................ 843 1,409 1,313 1,175 2,967 348 3,202
------- ------- ------- ------------- ------------- ------- -------
$ 1,680 $ 3,828 $ 5,452 $ 5,704 $ 13,027 $ 596 $ 6,378
======= ======= ======= ============= ============= ======= =======
Fixed Charges:
Interest expense ............. $ 686 $ 1,235 $ 1,118 $ 1,015 $ 2,448 $ 295 $ 2,953
Portion of rental cost
representing interest ..... 157 174 195 160 444 53 175
Net amortization of
debt issuance costs ....... -- -- -- -- 75 -- 74
------- ------- ------- ------------- ------------- ------- -------
$ 843 $ 1,409 $ 1,313 $ 1,175 $ 2,967 $ 348 $ 3,202
======= ======= ======= ============= ============= ======= =======
Ratio of earnings to
fixed charges ................. 2.0x 2.7x 4.2x 4.9x 4.4x 1.7x 2.0x
======= ======= ======= ============= ============= ======= =======
PRO FORMA:
Earnings:
Income before income
taxes ..................... $ 8,666 $ 1,264
Fixed charges ................ 4,361 5,114
------------- -------
$ 13,027 $ 6,378
============= =======
Fixed Charges:
Interest expense ............. $ 3,652 $ 4,777
Portion of rental
cost representing interest . 444 175
Net amortization of
debt issuance costs ....... 265 162
------------- -------
$ 4,361 $ 5,114
============= =======
Ratio of earnings to
fixed charges ................. 3.0x 1.2x
============= =======
PRO FORMA AS ADJUSTED:
Earnings:
Income before income
taxes ..................... $ 15,715
Fixed charges ................ 17,165
-------------
$ 32,880
=============
Fixed Charges:
Interest expense ............. $ 15,950
Portion of rental
cost representing interest 707
Net amortization of
debt issuance costs ....... 508
-------------
$ 17,165
=============
Ratio of earnings to
fixed charges ................. 1.9x
=============
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF PENTACON, INC.
Alatec Cable Harness & Assembly Division, Inc., a California corporation
Alatec Fastener and Component Group, Inc., a California corporation
Alatec International Sales, Inc., a U.S. Virgin Islands corporation
Alatec Products, Inc., a California corporation
Alatec Race, Inc., a California corporation
ASI Aerospace Group, Inc., a Delaware corporation
AXS Solutions, Inc., a Delaware corporation
Capitol Bolt & Supply, Inc., a Texas corporation
Maumee Industries, Inc., an Indiana corporation
Pace Products, Inc., a Texas corporation
Pentacon Aerospace Group, Inc., a Nevada corporation
Pentacon Industrial Group, Inc., a Nevada corporation
Pollard Acquisition Corp., a Delaware corporation
Sales Systems, Limited, a Pennsylvania corporation
Texas International Aviation, Inc., a Texas corporation
TIA International, Inc., a U.S. Virgin Islands corporation
Trace Alatec Supply Company, Inc., a California corporation
West Coast Aero Products Holding Corp., a Delaware corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated December 24, 1998 and October 16, 1997, with
respect to the financial statements of Pentacon, Inc., dated November 21, 1997
(except for Note 3, as to which the date is November 26, 1997) with respect to
the financial statements of Alatec Products, Inc., dated November 7, 1997 with
respect to the financial statements of AXS Solutions, Inc., dated October 15,
1997 with respect to the financial statements of Maumee Industries, Inc., and
dated October 20, 1997 with respect to the financial statements of Sales
Systems, Limited included in the Registration Statement (Form S-4) and related
prospectus of Pentacon, Inc.
/s/ ERNST & YOUNG LLP
Houston, Texas
April 27, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement and related
prospectus on Form S-4 of our report, dated November 21, 1997, relating to the
consolidated financial statements of Alatec Products, Inc. as of December 31,
1996 and for the year then ended, and our report dated February 20, 1998 (except
for Note 13, as to which the date is August 14, 1998), relating to the
consolidated financial statements of ASI Aerospace Group, Inc. as of December
31, 1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997. We
also consent to the reference to our Firm under the caption "Experts"
appearing in the prospectus.
/s/ McGLADREY & PULLEN, LLP
Pasadena, California
April 27, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 3, 1998, accompanying the
consolidated financial statements of Texas International Aviation, Inc.
contained in the Registration Statement on Form S-4 and Prospectus of Pentacon,
Inc. We consent to the use of the aforementioned report in this Registration
Statement on Form S-4 and Prospectus, and to the use of our name as it appears
under the caption "Experts".
/s/ GRANT THORNTON LLP
Dallas, Texas
April 27, 1999
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)
STATE STREET BANK AND TRUST COMPANY
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-1867445
(JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION IF NOT A U.S. NATIONAL BANK) IDENTIFICATION NO.)
225 Franklin Street, Boston, Massachusetts 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel
225 Franklin Street, Boston, Massachusetts 02110
(617) 654-3253
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
PENTACON, INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVE., SUITE 700
HOUSTON, TX 77042
(Address of principal executive offices) (Zip Code)
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH
IT IS SUBJECT.
Department of Banking and Insurance of The Commonwealth of
Massachusetts, 100 Cambridge Street, Boston, Massachusetts.
Board of Governors of the Federal Reserve System, Washington, D.C.,
Federal Deposit Insurance Corporation, Washington, D.C.
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its parent,
State Street Corporation.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT.
A copy of the Articles of Association of the trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A copy of a Statement from the Commissioner of Banks of
Massachusetts that no certificate of authority for the trustee to
commence business was necessary or issued is on file with the
Securities and Exchange Commission as Exhibit 2 to Amendment No. 1
to the Statement of Eligibility and Qualification of Trustee (Form
T-1) filed with the Registration Statement of Morse Shoe, Inc. (File
No. 22-17940) and is incorporated herein by reference thereto.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST
POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED
IN PARAGRAPH (1) OR (2), ABOVE.
A copy of the authorization of the trustee to exercise corporate
trust powers is on file with the Securities and Exchange Commission
as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and
Qualification of Trustee (Form T-1) filed with the Registration
Statement of Morse Shoe, Inc. (File No. 22-17940) and is
incorporated herein by reference thereto.
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on file
with the Securities and Exchange Commission as Exhibit 4 to the
Statement of Eligibility and Qualification of Trustee (Form T-1)
filed with the Registration Statement of Eastern Edison Company
(File No. 33-37823) and is incorporated herein by reference thereto.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN
DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(B) OF THE ACT.
The consent of the trustee required by Section 321(b) of the Act is
annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company, a corporation
organized and existing under the laws of The Commonwealth of Massachusetts, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Boston and The
Commonwealth of Massachusetts, on the 15TH DAY OF APRIL, 1999.
STATE STREET BANK AND TRUST COMPANY
By: /s/ SUSAN C. MERKER
Susan C. Merker
Vice President
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act
of 1939, as amended, in connection with the proposed issuance by PENTACON, INC.
of its 12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
STATE STREET BANK AND TRUST COMPANY
By: /s/ SUSAN C. MERKER
Susan C. Merker
Vice President
DATED: APRIL 15, 1999
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of State Street Bank and Trust Company,
Massachusetts and foreign and domestic subsidiaries, a state banking institution
organized and operating under the banking laws of this commonwealth and a member
of the Federal Reserve System, at the close of business DECEMBER 31, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act and in accordance
with a call made by the Commissioner of Banks under General Laws, Chapter 172,
Section 22(a).
Thousands of
ASSETS Dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........ 1,209,293
Interest-bearing balances................................. 12,007,895
Securities...................................................... 9,705,731
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary....................... 9,734,476
Loans and lease financing receivables:
Loans and leases, net of unearned income....... 6,973,125
Allowance for loan and lease losses....... 84,308
Allocated transfer risk reserve................ 0
Loans and leases, net of unearned income and allowances... 6,888,817
Assets held in trading accounts................................. 1,574,999
Premises and fixed assets....................................... 523,514
Other real estate owned......................................... 0
Investments in unconsolidated subsidiaries...................... 612
Customers' liability to this bank on acceptances outstanding.... 47,334
Intangible assets............................................... 212,743
Other assets.................................................... 1,279,224
------------
Total assets.................................................... 43,184,638
============
LIABILITIES
Deposits:
In domestic offices....................................... 10,852,862
Noninterest-bearing...................... 8,331,830
Interest-bearing......................... 2,521,032
In foreign offices and Edge subsidiary.................... 16,761,573
Noninterest-bearing...................... 83,010
Interest-bearing......................... 16,678,563
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary....................... 10,041,324
Demand notes issued to the U.S. Treasury........................ 108,420
Trading liabilities....................................... 1,240,938
Other borrowed money............................................ 322,331
Subordinated notes and debentures............................... 0
Bank's liability on acceptances executed and outstanding........ 47,334
Other liabilities............................................... 1,126,058
Total liabilities............................................... 40,500,840
------------
EQUITY CAPITAL
Perpetual preferred stock and related surplus................... 0
Common stock.................................................... 29,931
Surplus......................................................... 468,511
Undivided profits and capital reserves/Net unrealized holding
gains (losses) .............................................. 2,164,055
Net unrealized holding gains (losses) on
available-for-sale securities......................... 21,638
Cumulative foreign currency translation adjustments............. (337)
Total equity capital............................................ 2,683,798
------------
Total liabilities and equity capital............................ 43,184,638
------------
4
<PAGE>
I, Rex S. Schuette, Senior Vice President and Comptroller of the above named
bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Rex S. Schuette
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
David A. Spina
Marshall N. Carter
Truman S. Casner
EXHIBIT 99.3
PENTACON, INC.
LETTER OF TRANSMITTAL
FOR TENDER OF ALL OUTSTANDING
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A
IN EXCHANGE FOR
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED ___________________________, 1999
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON _____________________________ , 1999 UNLESS THE
EXCHANGE OFFER IS EXTENDED.
TO: STATE STREET BANK AND TRUST COMPANY (THE "EXCHANGE AGENT")
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL:
BY HAND OR OVERNIGHT DELIVERY: State Street Bank and Trust Company
State Street Bank and Trust Company Two International Place
Two International Place, 4th Floor P.O. Box 778
Boston, Massachusetts 02110 Boston, Massachusetts 02110
Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
BY FACSIMILE TRANSMISSION:
(for Eligible Institutions only)
State Street Bank and Trust Company
(617) 664-5290
Attention: Kellie Mullen
FOR INFORMATION OR CONFIRMATION BY TELEPHONE:
(617) 664-5587
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION TO A FACSIMILE
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE
METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES, IS AT THE RISK OF
THE HOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, IS RECOMMENDED. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned acknowledges that he or she has received the Prospectus,
dated ___________________________, 1999 (the "Prospectus") of Pentacon, Inc.,
a Delaware Corporation (the "Company") and this Letter of Transmittal and the
instructions hereto (the "Letter of Transmittal"), which together constitute
the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount
of its 12 1/4% Senior Subordinated Notes due 2009, Series B (the "Exchange
Notes") that have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which the
Prospectus is a part, for each $1,000 principal amount of its outstanding
12 1/4% Senior Subordinated Notes due 2009, Series A (the "Old Notes"), of
which $100,000,000 aggregate principal amount is outstanding, upon the terms and
subject to the conditions set forth in the Prospectus. The term "Expiration
Date" shall mean 5:00 p.m., New York City time, on ___________________________,
1999, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the term shall mean the latest date and time to which the Exchange
Offer is extended by the Company.
This Letter of Transmittal is to be used either if (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders, (ii) tender of Old Notes is to be made by book-entry
transfer to an account maintained by the Exchange Agent at The Depository Trust
Company ("DTC"), pursuant to the procedures set forth in "The Exchange
Offer -- Procedures for Tendering" in the Prospectus by any financial
institution that is a participant in DTC and whose name appears on a security
position listing as the owner of Old Notes or (iii) tender of
<PAGE>
Old Notes is to be made according to the guaranteed delivery procedures set
forth in the Prospectus under "The Exchange Offer -- Guaranteed Delivery
Procedures." Delivery of this Letter of Transmittal and any other required
documents must be made to the Exchange Agent. DELIVERY OF DOCUMENTS TO DTC DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The term "Holder" as used herein means any person in whose name Old Notes
are registered on the books of the Company or any other person who has obtained
a properly completed bond power from the registered holder.
All Holders of Old Notes who wish to tender their Old Notes must, prior to
the Expiration Date: (1) complete, sign, and deliver this Letter of Transmittal,
or a facsimile thereof, to the Exchange Agent, in person or to the address set
forth above; and (2) tender (and not withdraw) his or her Old Notes or, if a
tender of Old Notes is to be made by book-entry transfer to the account
maintained by the Exchange Agent at DTC, confirm such book-entry transfer (a
"Book-Entry Confirmation"), in each case in accordance with the procedures for
tendering described in the instructions to this Letter of Transmittal. Holders
of Old Notes whose certificates are not immediately available, or who are unable
to deliver their certificates or Book-Entry Confirmation and all other documents
required by this Letter of Transmittal to be delivered to the Exchange Agent on
or prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures" in the Prospectus. (See Instruction
2.)
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of the Old Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made promptly following the
Expiration Date. For the purposes of the Exchange Offer, the Company shall be
deemed to have accepted for exchange validly tendered Old Notes when, as and if
the Company has given written notice thereof to the Exchange Agent.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW. THE INSTRUCTIONS INCLUDED IN THIS LETTER OF
TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR
ADDITIONAL COPIES OF THE PROSPECTUS, THIS LETTER OF TRANSMITTAL AND THE NOTICE
OF GUARANTEED DELIVERY MAY BE DIRECTED TO THE EXCHANGE AGENT. SEE INSTRUCTION 12
HEREIN.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY AND COMPLY WITH ALL OF
ITS TERMS.
- 2 -
<PAGE>
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule, attached hereto. The
minimum permitted tender is $1,000 in principal amount of 12 1/4% Senior
Subordinated Notes due 2009, Series A. All other tenders must be in integral
multiples of $1,000.
DESCRIPTION OF 12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A
BOX I
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)*
(PLEASE FILL IN, IF BLANK)
<S> <C> <C>
(A) (B)
Aggregate
Principal
Certificate Amount Tendered
Number(s)* (if less than all)**
---------------- --------------------
---------------- --------------------
---------------- --------------------
---------------- --------------------
---------------- --------------------
Total Principal
Amount of Old
Notes Tendered:
---------------- --------------------
</TABLE>
- ------------
* Need not be completed by book-entry holders.
** Need not be completed by Holders who wish to tender with respect to all Old
Notes listed.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
BOX II
- ------------------------------------------------------------
SPECIAL REGISTRATION INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5, 6 AND 7)
To be completed ONLY if certificates for Old Notes in
a principal amount not tendered, or Exchange Notes
issued in exchange for Old Notes accepted for
exchange, are to be issued in the name of someone
other than the undersigned.
Issue certificate(s) to:
Name..................................................
(PLEASE PRINT)
......................................................
Address...............................................
(PLEASE PRINT)
......................................................
(INCLUDING ZIP CODE)
......................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
- ------------------------------------------------------------
BOX III
- ------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5, 6 AND 7)
To be completed ONLY if certificates for Old Notes in
a principal amount not tendered, or Exchange Notes
issued in exchange for Old Notes accepted for
exchange, are to be delivered to someone other than
the undersigned.
Deliver certificate(s) to:
Name..................................................
(PLEASE PRINT)
......................................................
Address...............................................
(PLEASE PRINT)
......................................................
(INCLUDING ZIP CODE)
......................................................
(TAX IDENTIFICATION OR SOCIAL SECURITY NUMBER)
- ------------------------------------------------------------
- 3 -
<PAGE>
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
THE CERTIFICATE(S) FOR OLD NOTES OR A CONFIRMATION OF BOOK-ENTRY TRANSFER OF
SUCH OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS) OR, IF GUARANTEED DELIVERY
PROCEDURES ARE TO BE COMPLIED WITH, A NOTICE OF GUARANTEED DELIVERY, MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
[ ] CHECK HERE IF OLD NOTES ARE BEING DELIVERED BY DTC TO AN ACCOUNT
MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _____ [ ] The Depository Trust Company
Account Number __________________________________________________________
Transaction Code Number _________________________________________________
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date may tender their Old Notes according to the
guaranteed delivery procedures set forth in the Prospectus under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures." (See Instruction 2.)
[ ] CHECK HERE IF OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of tendering Holder(s) ________________________________________
Date of Execution of Notice of Guaranteed Delivery _____________________
Name of Institution which Guaranteed Delivery __________________________
Transaction Code Number ________________________________________________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: _________________________________________________________________
Address: _______________________________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of
Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
- 4 -
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to Pentacon, Inc. (the "Company") the principal amount of Old
Notes indicated above.
Subject to and effective upon the acceptance for exchange of the principal
amount of Old Notes tendered hereby in accordance with this Letter of
Transmittal, the undersigned sells, assigns and transfers to, or upon the order
of, the Company all right, title and interest in and to the Old Notes tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as its agent and attorney-in-fact (with full knowledge that the Exchange
Agent also acts as the agent of the Company and as Trustee and Registrar under
the Indenture for the Old Notes and the Exchange Notes) with respect to the
tendered Old Notes with full power of substitution (such power of attorney being
deemed an irrevocable power coupled with an interest), subject only to the right
of withdrawal described in the Prospectus, to (i) deliver certificates for such
Old Notes to the Company or transfer ownership of such Old Notes on the account
books maintained by DTC, together, in either such case, with all accompanying
evidences of transfer and authenticity to, or upon the order of, the Company and
(ii) present such Old Notes for transfer on the books of the Company and receive
all benefits and otherwise exercise all rights of beneficial ownership of such
Old Notes, all in accordance with the terms of the Exchange Offer.
The undersigned acknowledges that the Exchange Offer is being made in
reliance upon interpretative advice given by the staff of the Securities and
Exchange Commission to third parties in connection with transactions similar to
the Exchange Offer, so that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than a broker-dealer who
purchased such Old Notes directly from the Company for resale pursuant to Rule
144A or any other available exemption under the Securities Act or a person that
is an "affiliate" of the Company or any Guarantor within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement with any person to participate in the
distribution of such Exchange Notes.
The undersigned agrees that acceptance of any tendered Old Notes by the
Company and the issuance of Exchange Notes in exchange therefor shall constitute
performance in full by the Company of its obligations under the registration
rights agreement, (as referred to in the Prospectus) and that, upon the issuance
of the Exchange Notes, the Company will have no further obligations or
liabilities thereunder (except in certain limited circumstances).
The undersigned represents and warrants that (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the person receiving Exchange Notes (which shall be the
undersigned unless otherwise indicated in the box entitled "Special Delivery
Instructions" above) (the "Recipient"), (ii) neither the undersigned nor the
Recipient (if different) is engaged in, intends to engage in or has any
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes, and (iii) neither the undersigned nor the Recipient (if
different) is an "affiliate" of the Company or any Guarantor as defined in
Rule 405 under the Securities Act. If the undersigned is not a broker-dealer,
the undersigned further represents that it is not engaged in, and does not
intend to engage in, a distribution of the Exchange Notes. If the undersigned is
a broker-dealer, the undersigned further (x) represents that it acquired Old
Notes for the undersigned's own account as a result of market-making activities
or other trading activities, (y) represents that it has not entered into any
arrangement or understanding with the Company or any "affiliate" of the
Company (within the meaning of Rule 405 under the Securities Act) to distribute
the Exchange Notes to be received in the Exchange Offer and (z) acknowledges
that it will deliver a prospectus meeting the requirements of the Securities Act
(for which purposes delivery of the Prospectus, as the same may be hereafter
supplemented or amended, shall be sufficient) in connection with any resale of
Exchange Notes received in the Exchange Offer. Such a broker-dealer will not be
deemed, solely by reason of such acknowledgment and prospectus delivery, to
admit that it is an "underwriter" within the meaning of the Securities Act.
The undersigned understands and agrees that the Company reserves the right
not to accept tendered Old Notes from any tendering holder if the Company
determines, in its sole and absolute discretion, that such acceptance could
result in a violation of applicable securities laws.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the Old Notes
tendered hereby and to acquire Exchange Notes issuable upon the exchange of such
tendered Old Notes, and that, when the same are accepted for exchange, the
Company will acquire good and unencumbered title thereto, free and clear of all
liens, restrictions, charges and encumbrances and not subject to any adverse
claim. The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed to be necessary or desirable by the
Exchange Agent or the Company in order to complete the
- 5 -
<PAGE>
exchange, assignment and transfer of tendered Old Notes or transfer of ownership
of such Old Notes on the account books maintained by a book-entry transfer
facility.
The undersigned understands and acknowledges that the Company reserves the
right in its sole discretion to purchase or make offers for any Old Notes that
remain outstanding subsequent to the Expiration Date or, as set forth in the
Prospectus under the caption "The Exchange Offer -- Procedures for Tendering,"
to terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
The undersigned understands that the Company may accept the undersigned's
tender by delivering written notice of acceptance to the Exchange Agent, at
which time the undersigned's right to withdraw such tender will terminate. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
validly tendered Old Notes when, as and if the Company has given oral (which
shall be confirmed in writing) or written notice thereof to the Exchange Agent.
The undersigned understands that the first interest payment following the
Expiration Date will include unpaid interest on the Old Notes accrued through
the date of issuance of the Exchange Notes.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer.
The undersigned acknowledges that the Exchange Offer is subject to the more
detailed terms set forth in the Prospectus and, in case of any conflict between
the terms of the Prospectus and this Letter of Transmittal, the Prospectus shall
prevail.
If any tendered Old Notes are not accepted for exchange pursuant to the
Exchange Offer for any reason, certificates for any such unaccepted Old Notes
will be returned (except as noted below with respect to tenders through DTC), at
the Company's cost and expense, to the undersigned at the address shown below or
at a different address as may be indicated herein under "Special Delivery
Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns. This tender may be withdrawn only in
accordance with the procedures set forth in this Letter of Transmittal.
By acceptance of the Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby acknowledges and agrees
that upon the receipt of notice by the Company of the happening of any event
which makes any statement in the Prospectus untrue in any material respect or
which requires the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such broker-dealer.
Unless otherwise indicated under "Special Registration Instructions,"
please issue the certificates representing the Exchange Notes issued in exchange
for the Old Notes accepted for exchange and return any certificates for Old
Notes not tendered or not exchanged, in the name(s) of the undersigned (or, in
either such event in the case of Old Notes tendered by DTC, by credit to the
account at DTC). Similarly, unless otherwise indicated under "Special Delivery
Instructions," please send the certificates representing the Exchange Notes
issued in exchange for the Old Notes accepted for exchange and any certificates
for Old Notes not tendered or not exchanged (and accompanying documents, as
appropriate) to the undersigned at the address shown below the undersigned's
signature(s), unless, in either event, tender is being made through DTC. In the
event that both "Special Registration Instructions" and "Special Delivery
Instructions" are completed, please issue the certificates representing the
Exchange Notes issued in exchange for the Old Notes accepted for exchange in the
name(s) of, and return any certificates for Old Notes not tendered or not
exchanged to, the person(s) so indicated. The undersigned understands that the
Company has no obligations pursuant to the "Special Registration Instructions"
or "Special Delivery Instructions" to transfer any Old Notes from the name of
the registered Holder(s) thereof if the Company does not accept for exchange any
of the Old Notes so tendered.
Holders who wish to tender the Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date, may tender their Old Notes according to the guaranteed
delivery procedures set
- 6 -
<PAGE>
forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures." See Instruction 1 regarding the completion of the Letter
of Transmittal.
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
AND WHETHER OR NOT TENDER IS TO BE MADE
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES
This Letter of Transmittal must be signed by the registered holder(s) as
their name(s) appear on the Old Notes or, if tendered by a participant in DTC,
exactly as such participant's name appears on a security listing as the owner of
Old Notes, or by person(s) authorized to become registered holder(s) by a
properly completed bond power from the registered holder(s), a copy of which
must be transmitted with this Letter of Transmittal. If Old Notes to which this
Letter of Transmittal relate are held of record by two or more joint holders,
then all such holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
then such person must (i) set forth his or her full title below and (ii) unless
waived by the Company, submit evidence satisfactory to the Company of such
person's authority so to act. (See Instruction 4.)
X_________________________________ ______________________________________
Date
X_________________________________ ______________________________________
Signature(s) of Holder(s) or Date
Authorized Signatory
Name(s): _________________________ Address:_______________________________
_________________________ _______________________________
(Please Print) (Including Zip Code)
Capacity:_________________________ Area Code and Telephone Number:_________
Social Security No.:______________________
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
- 7 -
<PAGE>
BOX IV
SIGNATURE GUARANTEE (SEE INSTRUCTION 1)
CERTAIN SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
______________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
______________________________________________________________________________
(Address (including zip code) and Telephone Number (including area code) of
Firm)
______________________________________________________________________________
(Authorized Signature)
______________________________________________________________________________
(Printed Name)
______________________________________________________________________________
(Title)
______________________________________________________________________________
Date: ______________________________
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Signatures on this Letter of Transmittal need
not be guaranteed if (a) this Letter of Transmittal is signed by the registered
holder(s) of the Old Notes tendered herewith and such holder(s) have not
completed the box set forth herein entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" or (b) such
Old Notes are tendered for the account of an Eligible Institution. (See
Instruction 6.) Otherwise, all signatures on this Letter of Transmittal or a
notice of withdrawal, as the case may be, must be guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States (an "Eligible Institution"). All
signatures on bond powers and endorsements on certificates must also be
guaranteed by an Eligible Institution.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES. Certificates for
all physically delivered Old Notes or confirmation of any book-entry transfer to
the Exchange Agent at DTC of Old Notes tendered by book-entry transfer, as well
as, in each case (including cases where tender is affected by book-entry
transfer), a properly completed and duly executed copy of this Letter of
Transmittal or facsimile hereof and any other documents required by this Letter
of Transmittal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date.
The method of delivery of the tendered Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder and the delivery will be deemed made only when
actually received by the Exchange Agent. If Old Notes are sent by mail,
registered mail with return receipt requested, properly insured, is recommended.
In all cases, sufficient time should be allowed to ensure timely delivery. No
Letter of Transmittal or Old Notes should be sent to the Company.
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Depositary for purposes of the Exchange Offer within two
business days after receipt of this Prospectus, and any financial institution
that is a participant in the Depositary may make book-entry delivery of Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account at the Depositary in accordance with the Depositary's procedures
for transfer. However, although delivery of Old Notes may be effected through
book-entry transfer at the Depositary, the Letter of Transmittal, with any
required signature guarantees or an Agent's Message (as defined below) in
connection with a book-entry transfer and any other required documents, must, in
any case, be transmitted to and received by the Exchange Agent at the address
specified on the cover page of the Letter of Transmittal on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
- 8 -
<PAGE>
A Holder may tender Old Notes that are held through the Depositary by
transmitting its acceptance through the Depositary's Automatic Tender Offer
Program, for which the transaction will be eligible, and the Depositary will
then edit and verify the acceptance and send an Agent's Message to the Exchange
Agent for its acceptance. The term "Agent's Message" means a message
transmitted by the Depositary to, and received by, the Exchange Agent and
forming part of the Book-Entry Confirmation, which states that the Depositary
has received an express acknowledgment from each participant in the Depositary
tendering the Old Notes and that such participant has received the Letter of
Transmittal and agrees to be bound by the terms of the Letter of Transmittal and
the Company may enforce such agreement against such participant.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, this Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date or comply with book-entry transfer procedures on a
timely basis must tender their Old Notes according to the guaranteed delivery
procedures set forth in the Prospectus. See "Exchange Offer -- Guaranteed
Delivery Procedures." Pursuant to such procedure: (i) such tender must be made
by or through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, overnight courier, mail or hand delivery) setting forth the name
and address of the Holder of the Old Notes, the certificate number or numbers of
such Old Notes and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration Date, this Letter of Transmittal (or
facsimile hereof) together with the certificate(s) representing the Old Notes
and any other required documents will be deposited by the Eligible Institution
with the Exchange Agent; and (iii) such properly completed and executed Letter
of Transmittal (or facsimile hereof), as well as all other documents required by
this Letter of Transmittal and the certificate(s) representing all tendered Old
Notes in proper form for transfer (or a confirmation of book-entry transfer of
such Old Notes into the Exchange Agent's account at DTC), must be received by
the Exchange Agent within three New York Stock Exchange trading days after the
Expiration Date, all in the manner provided in the Prospectus under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures." Any Holder who wishes
to tender his Old Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery prior to 5:00 p.m., New York City time, on the Expiration Date. Upon
request to the Exchange Agent, a Notice of Guaranteed Delivery will be sent to
Holders who wish to tender their Old Notes according to the guaranteed delivery
procedures set forth above.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. All tendering holders, by execution of this Letter of
Transmittal (or facsimile thereof), shall waive any right to receive notice of
the acceptance of the Old Notes for exchange. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the right to waive any irregularities or
conditions of tender as to particular Old Notes. The Company's interpretation of
the terms and conditions of the Exchange Offer (including the instructions in
this Letter of Transmittal) shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Old Notes,
nor shall any of them incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured to the Company's satisfaction or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering Holders pursuant to the
Company's determination, unless otherwise provided in this Letter of Transmittal
as soon as practicable following the Expiration Date. The Exchange Agent has no
fiduciary duties to the Holders with respect to the Exchange Offer and is acting
solely on the basis of directions of the Company.
3. INADEQUATE SPACE. If the space provided is inadequate, the certificate
numbers and/or the number of Old Notes should be listed on a separate signed
schedule attached hereto.
4. TENDER BY HOLDER. Only a Holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial owner of Old Notes who is not the
registered Holder and who wishes to tender should arrange with such registered
holder to execute and deliver this Letter of Transmittal on such beneficial
owner's behalf or must, prior to completing and executing this Letter of
Transmittal and delivering his Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such beneficial owner's name or obtain
a properly completed bond power from the registered holder or properly endorsed
certificates representing such Old Notes.
- 9 -
<PAGE>
5. PARTIAL TENDERS; WITHDRAWALS. Tenders of Old Notes will be accepted
only in integral multiples of $1,000. If less than the entire principal amount
of any Old Notes is tendered, the tendering Holder should fill in the principal
amount tendered in the third column of the box entitled "Description of 12 1/4%
Senior Subordinated Notes due 2009, Series A" above. The entire principal
amount of any Old Notes delivered to the Exchange Agent will be deemed to have
been tendered unless otherwise indicated. If the entire principal amount of all
Old Notes is not tendered, then Old Notes for the principal amount of Old Notes
not tendered and a certificate or certificates representing Exchange Notes
issued in exchange for any Old Notes accepted will be sent to the Holder at his
or her registered address, unless a different address is provided in the
"Special Delivery Instructions" box above on this Letter of Transmittal or
unless tender is made through DTC, promptly after the Old Notes are accepted for
exchange.
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile
transmission notice of withdrawal must be received by the Exchange Agent at its
address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, or, in the case of Old Notes
transferred by book-entry transfer the name and number of the account at DTC to
be credited), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Registrar with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no Exchange Notes
will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange by the Company will be returned to the Holder thereof
without cost to such Holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures described in the Prospectus
under "The Exchange Offer -- Procedures for Tendering" at any time prior to
the Expiration Date.
6. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS. If this Letter of Transmittal (or facsimile hereof) is signed by
the registered holder(s) of the Old Notes tendered hereby, the signature must
correspond with the name(s) as written on the face of the Old Note without
alteration, enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it
will be necessary to complete, sign and submit as many copies of this Letter of
Transmittal as there are different registrations of Old Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders (which term, for the Purposes described herein,
shall include a book-entry transfer facility whose name appears on a security
listing as the owner of the Old Notes) of Old Notes tendered and the certificate
or certificates for Exchange Notes issued in exchange therefor is to be issued
(or any untendered principal amount of Old Notes to be reissued) to the
registered Holder, then such Holder need not and should not endorse any tendered
Old Notes, nor provide a separate bond power. In any other case, such Holder
must either properly endorse the Old Notes tendered or transmit a properly
completed separate bond power with this Letter of Transmittal with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder or Holders of any Old Notes listed, such Old
Notes must be endorsed or accompanied by appropriate bond powers in each case
signed as the name of the registered Holder or Holders appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 6 must be guaranteed by an Eligible Institution.
7. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering Holders
should indicate, in the applicable box or boxes, the name and address to which
Exchange Notes or substitute Old Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
- 10 -
<PAGE>
8. BACKUP FEDERAL INCOME TAX WITHHOLDING AND SUBSTITUTE FORM W-9. Under
the federal income tax laws, payments that may be made by the Company on account
of Exchange Notes issued pursuant to the Exchange Offer may be subject to backup
withholding at the rate of 31%. In order to avoid such backup withholding, each
tendering holder should complete and sign the Substitute Form W-9 included in
this Letter of Transmittal and either (a) provide the correct taxpayer
identification number ("TIN") and certify, under penalties of perjury, that
the TIN provided is correct and that (i) the holder has not been notified by the
Internal Revenue Service (the "IRS") that the holder is subject to backup
withholding as a result of failure to report all interest or dividends or (ii)
the IRS has notified the holder that the holder is no longer subject to backup
withholding; or (b) provide an adequate basis for exemption. If the tendering
holder has not been issued a TIN and has applied for one, or intends to apply
for one in the near future, such holder should write "Applied For" in the
space provided for the TIN in Part I of the Substitute Form W-9, sign and date
the Substitute Form W-9 and sign the Certificate of Payee Awaiting Taxpayer
Identification Number. If "Applied For" is written in Part I, the Company (or
the Paying Agent under the indenture governing the Exchange Notes) shall retain
31% of payments made to the tendering holder during the sixty-day period
following the date of the Substitute Form W-9. If the Holder furnishes the
Exchange Agent or the Company with its TIN within sixty days after the date of
the Substitute Form W-9, the Company (or the Paying Agent) shall remit such
amounts retained during the sixty-day period to the Holder and no further
amounts shall be retained or withheld from payments made to the Holder
thereafter. If, however, the Holder has not provided the Exchange Agent or the
Company with its TIN within such sixty-day period, the Company (or the Paying
Agent) shall remit such previously retained amounts to the IRS as backup
withholding. In general, if a Holder is an individual, the TIN is the Social
Security number of such individual. If the Exchange Agent or the Company are not
provided with the correct TIN, the Holder may be subject to a $50 penalty
imposed by the IRS. Certain Holders (including, among others, certain
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. In order for a foreign individual to
qualify as an exempt recipient, such Holder must submit a statement (generally,
IRS Form W-8), signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Exchange Agent. For
further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if Old Notes are registered in more than one name), consult the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
Failure to complete the Substitute Form W-9 will not, by itself, cause Old
Notes to be deemed invalidly tendered, but may require the Company (or the
Paying Agent) to withhold 31% of the amount of any payments made on account of
the Exchange Notes. Backup withholding is not an additional federal income tax.
Rather, the federal income tax liability of a person subject to backup
withholding will be reduced by the amount of tax withheld. If backup withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
9. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing Exchange Notes or Old Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or are to
be registered in the name of, any person other than the registered holder of the
Old Notes tendered hereby, or if tendered Old Notes are registered in the name
of a person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or on any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder. See the Prospectus under "The Exchange Offer -- Solicitation of
Tenders; Fees and Expenses."
Except as provided in this Instruction 9, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
10. WAIVER OF CONDITIONS. The Company reserves the right, in their sole
discretion, to amend, waive or modify specified conditions in the Exchange Offer
in the case of any Old Notes tendered.
11. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instructions.
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
and requests for additional copies of the Prospectus or this Letter of
Transmittal may be directed to the Exchange Agent at the address specified in
the Prospectus. Holder may also contact their broker, dealer, commercial bank,
trust company or other nominee for assistance concerning the Exchange Offer.
- 11 -
<PAGE>
(DO NOT WRITE IN SPACE BELOW)
CERTIFICATE SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
_______________________ ____________________ _____________________
_______________________ ____________________ _____________________
Date Received__________ Accepted by_________ Checked by___________
Delivery Prepared by___ Checked by__________ Date__________________
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Old Notes are
accepted for payment is required to provide the Exchange Agent (as payer) with
such Holder's correct TIN on Substitute Form W-9 below or otherwise establish a
basis for exemption from backup withholding. If such Holder is an individual,
the TIN is his social security number. If the Exchange Agent is not provided
with the correct TIN, a $50 penalty may be imposed by the IRS, and payments made
pursuant to the Exchange Offer may be subject to backup withholding.
Certain Holders (including, among others, certain corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed IRS Form W-8, signed under penalties of
perjury, attesting to that Holder's exempt status. A Form W-8 can be obtained
from the Exchange Agent. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any payments made to the Holder or other payee. Backup withholding is not
an additional federal income tax. Rather, the federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the Exchange
Offer, the Holder is required to provide the Exchange Agent with either: (i) the
Holder's correct TIN by completing the Substitute Form W-9 below, certifying
that the TIN provided on Substitute Form W-9 is correct (or that such Holder is
awaiting a TIN) and that (A) the Holder has not been notified by the IRS that
the Holder is subject to backup withholding as a result of failure to report all
interest or dividends or (B) the IRS has notified the Holder that the Holder is
no longer subject to backup withholding or (ii) an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (E.G., social
security number or employer identification number) of the registered Holder of
the Old Notes. If the Old Notes are held in more than one name or are held not
in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
- 12 -
<PAGE>
CERTIFICATION OF PAYEE AWAITING TAXPAYER INDEMNIFICATION NUMBER
I certify, under penalties of perjury, that a Taxpayer Identification
Number has not been issued to me, and that I mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration Office (or I
intend to mail or deliver an application in the near future). I understand
that if I do not provide a Taxpayer Identification Number to the payer, 31% of
all payments made to me on account of the Exchange Notes shall be retained
until I provide a Taxpayer Identification Number to the payer and that, if I
do not provide my Taxpayer Identification Number within sixty days, such
retained amounts shall be remitted to the Internal Revenue Service as backup
withholding and 31% of all reportable payments made to me thereafter will be
withheld and remitted to the Internal Revenue Service until I provide a
Taxpayer Identification Number.
SIGNATURE ___________________________ DATE ___________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU ON ACCOUNT OF THE
EXCHANGE NOTES. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION
OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
Department of the Treasury
INTERNAL REVENUE SERVICE
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 8)
<TABLE>
<S> <C> <C>
PAYOR'S NAME: PENTACON, INC.
SUBSTITUTE PART I -- TAXPAYER IDENTIFICATION NUMBER SOCIAL SECURITY NUMBER
FORM W-9 (TIN) ______________________________
DEPARTMENT OF THE TREASURY ENTER YOUR TIN IN THE APPROPRIATE BOX. FOR OR
INTERNAL REVENUE SERVICE INDIVIDUALS, THIS IS YOUR SOCIAL SECURITY EMPLOYER IDENTIFICATION NUMBER
REQUEST FOR TAXPAYER NUMBER (SSN). FOR SOLE PROPRIETORS, SEE THE
IDENTIFICATION NUMBER INSTRUCTIONS IN THE ENCLOSED GUIDELINES. FOR _______________________________
AND CERTIFICATION OTHER ENTITIES, IT IS YOUR EMPLOYER
IDENTIFICATION NUMBER (EIN). IF YOU DO NOT
HAVE A NUMBER, SEE HOW TO GET A TIN IN THE
ENCLOSED GUIDELINES.
NOTE: IF THE ACCOUNT IS IN MORE THAN ONE
NAME, SEE THE CHART ON PAGE 2 OF THE
ENCLOSED GUIDELINES FOR INSTRUCTIONS ON
WHOSE NUMBER TO ENTER.
PART II -- FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING
(See Part II instructions in the enclosed Guidelines.)
PART III -- CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to
me) and
(2) I am not subject to backup withholding because (a) I am exempt from backup withholding or (b) I have not been notified
by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding.
Signature_________________________________________ Date_________________________________ , 1999
</TABLE>
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup withholding
because you have failed to report all interest or dividends on your tax return.
For real estate transactions, item 2 does not apply. For mortgage interest paid,
the acquisition or abandonment of secured property, cancellation of debt,
contributions to an individual retirement arrangement (IRA), and generally
payments other than interest and dividends, you are not required to sign the
Certification, but you must provide your correct TIN.
- 13 -
EXHIBIT 99.4
NOTICE OF GUARANTEED DELIVERY
FOR 12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A
OF PENTACON, INC.
As set forth in the Prospectus dated ________________, 1999 (the
"Prospectus") of Pentacon, Inc. (the "Company") and in the Letter of
Transmittal (the "Letter of Transmittal"), this form or a form substantially
equivalent to this form must be used to accept the Exchange Offer (as defined
below) if the certificates for the outstanding 12 1/4% Senior Subordinated Notes
due 2009, Series A (the "Old Notes") of the Company and all other documents
required by the Letter of Transmittal cannot be delivered to the Exchange Agent
by the expiration of the Exchange Offer or compliance with book-entry transfer
procedures cannot be effected on a timely basis. Such form may be delivered by
hand or transmitted by facsimile transmission, telex or mail to the Exchange
Agent no later than the Expiration Date, and must include a signature guarantee
by an Eligible Institution as set forth below.
TO:
State Street Bank and Trust Company (the "Exchange Agent")
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL:
BY MAIL OR HAND DELIVERY: State Street Bank and Trust Company
State Street Bank and Trust Company Two International Place
Two International Place, 4th Floor P.O. Box 778
Boston, Massachusetts 02110 Boston, Massachusetts 02110
Attention: Kellie Mullen Attention: Kellie Mullen
</TABLE>
BY FACSIMILE TRANSMISSION:
(for Eligible Institutions only)
State Street Bank and Trust Company
(617) 664-5290
Attention: Kellie Mullen
FOR INFORMATION OR CONFIRMATION BY TELEPHONE:
(617) 664-5587
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
DOES NOT CONSTITUTE A VALID DELIVERY. THE METHOD OF DELIVERY OF ALL DOCUMENTS,
INCLUDING CERTIFICATES, IS AT THE RISK OF THE HOLDER. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
THE INSTRUCTIONS ACCOMPANYING THE LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY
BEFORE THIS NOTICE OF GUARANTEED DELIVERY IS COMPLETED.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution under the instructions thereto, such
signatures must appear in the applicable space provided on the Letter of
Transmittal for Guarantee of Signature(s).
<PAGE>
Ladies and Gentlemen:
The undersigned acknowledges receipt of the Prospectus and the related
Letter of Transmittal which describes the Company's offer (the "Exchange
Offer") to exchange $1,000 in principal amount of a new series of 12 1/4%
Senior Subordinated Notes due 2009, Series B (the "Exchange Notes") for each
$1,000 in principal amount of the Old Notes.
The undersigned hereby tenders to the Company the aggregate principal
amount of Old Notes set forth below on the terms and conditions set forth in the
Prospectus and the related Letter of Transmittal pursuant to the guaranteed
delivery procedure set forth in the "The Exchange Offer -- Guaranteed Delivery
Procedures" section in the Prospectus and the accompanying Letter of
Transmittal.
The undersigned understands that no withdrawal of a tender of Old Notes may
be made on or after the expiration date of the Exchange Offer. The undersigned
understands that for a withdrawal of a tender of Old Notes to be effective, a
written notice of withdrawal that complies with the requirements of the Exchange
Offer must be timely received by the Exchange Agent at one of its addresses
specified on the cover of this Notice of Guaranteed Delivery prior to the
Expiration Date.
The undersigned understands that the exchange of Old Notes for Exchange
Notes pursuant to the Exchange Offer will be made only after timely receipt by
the Exchange Agent of (i) such Old Notes (or Book-Entry Confirmation of the
transfer of such Old Notes into the Exchange Agent's account at The Depository
Trust Company (the "Depositary" or "DTC")) and (ii) a Letter of Transmittal
(or facsimile thereof) with respect to such Old Notes, properly completed and
duly executed, with any required signature guarantees, this Notice of Guaranteed
Delivery and any other documents required by the Letter of Transmittal or a
properly transmitted Agent's Message. The term "Agent's Message" means a
message transmitted by the Depositary to, and received by, the Exchange Agent
and forming part of the confirmation of a book-entry transfer, which states that
the Depositary has received an express acknowledgment from each participant in
the Depositary tendering the Old Notes and that such participant has received
the Letter of Transmittal and agrees to be bound by the terms of the Letter of
Transmittal and the Company may enforce such agreement against such participant.
All authority conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall not be affected by, and shall survive, the death or
incapacity of the undersigned, and every obligation of the undersigned under
this Notice of Guaranteed Delivery shall be binding upon the heirs, executors,
administrators, trustees in bankruptcy, personal and legal representatives,
successors and assigns of the undersigned.
- 2 -
<PAGE>
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Owner(s) or Authorized
Signatory: ___________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Principal Amount of Old Notes Tendered:
________________________________________________________________________________
Certificate No(s) of Old Notes (if available):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Date: _________________________________________________________________________
Name(s) of Registered Holder(s)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Address: ______________________________________________________________________
________________________________________________________________________________
Area Code and Telephone No.: __________________________________________________
If Old Notes will be delivered by book-entry transfer at The Depository Trust
Company, insert
Depository Account No.: _______________________________________________________
This Notice of Guaranteed Delivery must be signed by the registered Holder(s) of
Old Notes exactly as its (their) name(s) appear on certificates for Old Notes or
on a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or other
person acting in a fiduciary or representative capacity, such person must
provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s): ______________________________________________________________________
Capacity: _____________________________________________________________________
Address(es): __________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
DO NOT SEND OLD NOTES WITH THIS FORM. OLD NOTES SHOULD BE SENT TO THE EXCHANGE
AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL.
- 3 -
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a commercial bank
or trust company having an office or a correspondent in the United States, or
otherwise an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby (a)
represents that each holder of Old Notes on whose behalf this tender is being
made "own(s)" the Old Notes covered hereby within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
(b) represents that such tender of Old Notes complies with Rule 14e-4 of the
Exchange Act and (c) guarantees that, within three New York Stock Exchange
trading days from the expiration date of the Exchange Offer, a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof),
together with certificates representing the Old Notes covered hereby in proper
form for transfer (or confirmation of the book-entry transfer of such Old Notes
into the Exchange Agent's account at The Depository Trust Company, pursuant to
the procedure for book-entry transfer set forth in the Prospectus) and required
documents will be deposited by the undersigned with the Exchange Agent.
The undersigned acknowledges that it must deliver the Letter of Transmittal
and Old Notes tendered hereby to the Exchange Agent within the time period set
forth above and that failure to do so could result in financial loss to the
<TABLE>
<S> <C>
undersigned.
Name of Firm:_____________________ _________________________________________
Authorized Signature
Address: _________________________ Name:____________________________________
__________________________________ Title:___________________________________
Area Code and Telephone No.:______ Date:____________________________________
</TABLE>
- 4 -
EXHIBIT 99.5
PENTACON, INC.
OFFER TO EXCHANGE
ITS
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B
FOR ANY AND ALL OF ITS
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A
To Our Clients:
Enclosed for your consideration are the Prospectus dated ________________,
1999 (the "Prospectus") and the related Letter of Transmittal (which together
with the Prospectus constitute the "Exchange Offer") in connection with the
offer by Pentacon, Inc., a Delaware corporation (the "Company"), to exchange
its outstanding 12 1/4% Senior Subordinated Notes due 2009, Series A (the
"Exchange Notes") for any and all of the outstanding 12 1/4% Senior
Subordinated Notes due 2009, Series B (the "Old Notes"), upon the terms and
subject to the conditions set forth in the Exchange Offer.
We are the Registered Holders of Old Notes held for your account. An
exchange of the Old Notes can be made only by us as the Registered Holders and
pursuant to your instructions. The Letter of Transmittal is furnished to you for
your information only and cannot be used by you to exchange the Old Notes held
by us for your account. The Exchange Offer provides a procedure for holders to
tender by means of guaranteed delivery.
We request information as to whether you wish us to exchange any or all of
the Old Notes held by us for your account upon the terms and subject to the
conditions of the Exchange Offer.
Your attention is directed to the following:
1. The Exchange Notes will be exchanged for the Old Notes at the rate
of $1,000 principal amount of Exchange Notes for each $1,000 principal
amount of Old Notes. Interest on the Notes will accrue at the rate of
12 1/4% per annum and will be payable semi-annually on each April 1 and
October 1 commencing October 1, 1999, to the holders of record of Notes at
the close of business on the March 15 and September 15, respectively,
immediately preceding such interest payment date. Interest on the Notes
will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the original date of issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Old Notes, except that (i)
the offering of the Exchange Notes has been registered under the Securities
Act of 1933, as amended (the "Securities Act"), (ii) the Exchange Notes
will not be subject to transfer restrictions and (iii) certain provisions
relating to an increase in the stated interest rate on the Old Notes
provided for under certain circumstances will be eliminated.
2. Based on an interpretation by the staff of the Securities and
Exchange Commission, Exchange Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or a "broker" or "dealer" registered under the
Securities Exchange Act of 1934, as amended) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of
such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution of such
Exchange
<PAGE>
Notes. See the discussion in the Prospectus under "The Exchange
Offer -- Purpose and Effect of the Exchange Offer."
3. The Exchange Offer is not conditioned on any minimum principal
amount of Old Notes being tendered.
4. Notwithstanding any other term of the Exchange Offer, the Company
will not be required to accept for exchange, or exchange Exchange Notes
for, any Old Notes not theretofore accepted for exchange, and may terminate
or amend the Exchange Offer as provided herein before the acceptance of
such Old Notes, if any of the conditions described in the Prospectus under
"The Exchange Offer -- Conditions to the Exchange Offer" exist.
5. Tendered Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on ___________________________, 1999.
6. Any transfer taxes applicable to the exchange of the Old Notes
pursuant to the Offer will be paid by the Company, except as otherwise
provided in the Prospectus under "The Exchange Offer -- Solicitation of
Tenders; Fees and Expenses" and in Instruction 9 of the Letter of
Transmittal.
If you wish to have us tender any or all of your Old Notes, please so
instruct us by completing, detaching and returning to us the instruction form
attached hereto. An envelope to return your instructions is enclosed. If you
authorize a tender of your Old Notes, the entire principal amount of Old Notes
held for your account will be tendered unless otherwise specified on the
instruction form. Your instructions should be forwarded to us in ample time to
permit us to submit a tender on your behalf by the Expiration Date.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of the Old Notes in any jurisdiction in which the
making of the Exchange Offer or acceptance thereof would not be in compliance
with the laws of such jurisdiction or would otherwise not be in compliance with
any provision of any applicable security law.
- 2 -
EXHIBIT 99.6
PENTACON, INC.
OFFER TO EXCHANGE
ITS
12% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B
FOR ANY AND ALL OF ITS
12% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A
To Brokers, Dealers, Commercial
Banks, Trust Companies and
Other Nominees:
We are enclosing herewith an offer by Pentacon, Inc., a Delaware
corporation (the "Company"), to exchange its 12 1/4% Senior Subordinated Notes
due 2009, Series B (the "Exchange Notes") for any and all of its outstanding
12 1/4% Senior Subordinated Notes due 2009, Series A (the "Old Notes"), upon
the terms and subject to the conditions set forth in the accompanying Prospectus
dated ________________, 1999 (the "Prospectus") and related Letter of
Transmittal (which together with the Prospectus constitutes the "Exchange
Offer").
The Exchange Offer provides a procedure for holders to tender the Old Notes
by means of guaranteed delivery.
The Exchange Offer will expire at 5:00 p.m., New York City time, on
________________, 1999, unless extended (the "Expiration Date"). Tendered Old
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date.
Based on an interpretation by the staff of the Securities and Exchange
Commission, Exchange Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by holders
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or a "broker" or
"dealer" registered under the Securities Exchange Act of 1934, as amended)
without compliance with the registration and prospectus delivery provisions of
the Securities Act provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such Exchange Notes. See
the discussion in the Prospectus under "The Exchange Offer -- Purpose and
Effect of the Exchange Offer."
The Exchange Offer is not conditioned on any minimum principal amount of
Old Notes being tendered.
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Notes, if
any of the conditions described in the Prospectus under "The Exchange
Offer -- Conditions to the Exchange Offer" exist.
The Company reserves the right not to accept tendered Old Notes from any
tendering holder if the Company determines, in its sole and absolute discretion,
that such acceptance could result in a violation of applicable securities laws.
For your information and for forwarding to your clients for whom you hold
Old Notes registered in your name or in the name of your nominee, we are
enclosing the following documents:
1. A Prospectus dated ________________, 1999.
<PAGE>
2. A Letter of Transmittal for your use and for the information of
your clients.
3. A printed form of letter which may be sent to your clients for
whose accounts you hold Old Notes registered in your name or in the name of
your nominee, with space provided for obtaining such clients' instructions
with regard to the Exchange Offer.
4. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 of the Internal Revenue Service (included in Letter of
Transmittal).
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE.
Any inquiries you may have with respect to the Exchange Offer may be
addressed to, and additional copies of the enclosed materials may be obtained
from, the Exchange Agent at the following telephone number: (617) 664-5587.
Very truly yours,
PENTACON, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU AS
THE AGENT OF THE COMPANY, THE EXCHANGE AGENT OR ANY OTHER PERSON OR AUTHORIZE
YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF
ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE DOCUMENTS
ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.
- 2 -
EXHIBIT 99.7
PENTACON, INC.
OFFER TO EXCHANGE
ITS
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES B
FOR ANY AND ALL OF ITS
12 1/4% SENIOR SUBORDINATED NOTES DUE 2009, SERIES A
INSTRUCTION TO REGISTERED HOLDER FROM BENEFICIAL OWNER
The undersigned acknowledge(s) receipt of your letter and the enclosed
Prospectus and the related Letter of Transmittal, in connection with the offer
by Pentacon, Inc. (the "Company") to exchange the 12 1/4% Senior Subordinated
Notes due 2009, Series A (the "Old Notes").
This will instruct you to tender the principal amount of Old Notes
indicated below held by you for the account of the undersigned, upon the terms
and subject to the conditions set forth in the Prospectus and the related Letter
of Transmittal.
The undersigned represents that (i) the 12 1/4%Senior Subordinated Notes
due 2009, Series B (the "Exchange Notes") to be acquired pursuant to the
Exchange Offer in exchange for the Old Notes designated below are being obtained
in the ordinary course of business of the person receiving such Exchange Notes,
(ii) neither the undersigned nor any other person receiving such Exchange Notes
is participating, intends to participate, or has any arrangement or
understanding with any person to participate, in the distribution of such
Exchange Notes, and (iii) it is not an "affiliate," as defined under Rule 405
of the Securities Act of 1933 (the "Securities Act"), of the Company or, if it
is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
If the undersigned is a "broker" or "dealer" registered under the
Securities Exchange Act of 1934 that acquired Old Notes for its own account
pursuant to its market-making or other trading activities (other than Old Notes
acquired directly from the Company), the undersigned understands and
acknowledges that it may be deemed to be an "underwriter" within the meaning
of the Securities Act and, therefore, must deliver a prospectus relating to the
Exchange Notes in connection with any resales by it of Exchange Notes acquired
for its own account in the Exchange Offer. Notwithstanding the foregoing, the
undersigned does not thereby admit that it is an "underwriter" within the
meaning of the Securities Act.
YOU ARE HEREBY INSTRUCTED TO TENDER ALL OLD NOTES HELD FOR THE ACCOUNT OF THE
UNDERSIGNED UNLESS OTHERWISE INDICATED BELOW.
[ ] DO NOT TENDER ANY OLD NOTES
[ ] TENDER OLD NOTES IN THE AGGREGATE PRINCIPAL AMOUNT OF
$________________________
SIGNATURE:
________________________________________________________________________________
NAME OF BENEFICIAL OWNER (PLEASE PRINT)
By _____________________________________________________________________________
SIGNATURE
________________________________________________________________________________
ADDRESS
________________________________________________________________________________
AREA CODE AND TELEPHONE NUMBER
DATED: , 1999
