FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
COMMISSION FILE NUMBER: 001-13931
-------------------------------------------------------
PENTACON, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE, SUITE 700 HOUSTON, TEXAS 77042
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-860-1000
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT, PAR VALUE $.01 PER SHARE,
OUTSTANDING AT JULY 30, 1999 WAS 16,668,129.
<PAGE>
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Historical Consolidated Balance Sheets -
Pentacon, Inc. as of June 30, 1999
and December 31, 1998................................3
Consolidated Statements of Operations -
Pentacon, Inc. Historical for the
Three Months and Six Months ended
June 30, 1999 and 1998 and Pro Forma
for the Three Months and Six Months
ended June 30, 1999 and 1998.........................4
Historical Consolidated Statements of
Cash Flows - Pentacon, Inc. for
the Six Months ended June 30, 1999 and 1998..........8
Notes to Consolidated Financial Statements.................9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.......13
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders....20
Item 6 - Exhibits and Reports on Form 8-K.......................21
Signature.......................................................21
2
<PAGE>
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 401 $ 744
Accounts receivable ........................................ 42,943 34,610
Inventories ................................................ 122,243 116,390
Deferred income taxes ...................................... 5,459 4,216
Other current assets ....................................... 540 897
-------- --------
Total current assets ................... 171,586 156,857
Property and equipment, net of accumulated depreciation..... 9,352 7,404
Goodwill, net of accumulated amortization .................. 134,712 134,528
Deferred income taxes ...................................... 672 672
Other assets ............................................... 4,625 1,892
-------- --------
Total assets ........................... $320,947 $301,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ........................................... $ 28,978 $ 33,895
Accrued expenses ........................................... 15,118 8,875
Income taxes payable ....................................... 1,383 3,384
Current maturities of long-term debt ....................... 423 31,957
-------- --------
Total current liabilities .............. 45,902 78,111
Long-term debt, net of current maturities .................. 157,146 106,632
-------- --------
Total liabilities ...................... 203,048 184,743
Commitments and contingencies
Preferred stock, $.01 par value, 10,000,000 shares
authorized , no shares issued and outstanding............. -- --
Common stock, $.01 par value, 51,000,000 shares
authorized, 16,668,129 shares issued and outstanding...... 167 167
Additional paid in capital ................................. 100,631 100,501
Retained earnings .......................................... 17,101 15,942
-------- --------
Total stockholders' equity ............... 117,899 116,610
-------- --------
Total liabilities and stockholders' equity $320,947 $301,353
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
JUNE 30,
--------------------------
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ............................. $ 71,197 $ 30,380
Cost of sales ........................ 48,561 46,428
-------- --------
Gross profit ............... 22,636 16,048
Operating expenses ................... 15,422 10,931
Goodwill amortization ................ 865 390
-------- --------
Operating income ........... 6,349 4,727
Other (income) expense, net .......... (32) (49)
Interest expense ..................... 4,266 369
-------- --------
Income before taxes ....... 2,115 4,407
Income taxes ......................... 1,215 2,286
-------- --------
Net income ................. $ 900 $ 2,121
======== ========
Net income per share:
Basic ...................... $ 0.05 $ 0.13
Diluted .................... $ 0.05 $ 0.13
The accompanying notes are an integral part of these statements.
4
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
---------------------------
JUNE 30,
---------------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ............................... $ 137,747 $ 66,284
Cost of sales .......................... 93,209 42,767
--------- ---------
Gross profit ................. 44,538 23,517
Operating expenses ..................... 30,434 18,150
Goodwill amortization .................. 1,723 469
--------- ---------
Operating income ............. 12,381 4,898
Write-off of debt issuance costs ....... 2,308 --
Other (income) expense, net ............ (50) (54)
Interest expense ....................... 7,458 681
--------- ---------
Income before taxes .......... 2,665 4,271
Income taxes ........................... 1,506 2,241
--------- ---------
Net income ................... $ 1,159 $ 2,030
========= =========
Net income per share:
Basic ........................ $ 0.07 $ 0.19
Diluted ...................... $ 0.07 $ 0.18
The accompanying notes are an integral part of these statements.
5
<PAGE>
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ................................. $ 71,197 $ 46,428
Cost of sales ............................ 48,561 30,380
-------- --------
Gross profit ................... 22,636 16,048
Operating expenses ....................... 15,422 10,931
Goodwill amortization .................... 865 390
-------- --------
Operating income ............... 6,349 4,727
Other (income) expense, net .............. (32) (49)
Interest expense ......................... 4,266 369
-------- --------
Income before taxes ............ 2,115 4,407
Income taxes ............................. 1,215 1,960
-------- --------
Net income ..................... $ 900 $ 2,447
======== ========
Net income per share:
Basic .......................... $ 0.05 $ 0.15
Diluted ........................ $ 0.05 $ 0.15
The accompanying notes are an integral part of these statements.
6
<PAGE>
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ................................. $ 137,747 $ 87,725
Cost of sales ............................ 93,209 57,549
--------- ---------
Gross profit ................... 44,538 30,176
Operating expenses ....................... 30,434 20,721
Goodwill amortization .................... 1,723 764
--------- ---------
Operating income ............... 12,381 8,691
Write-off of debt issuance costs ......... 2,308 --
Other (income) expense, net .............. (50) (79)
Interest expense ......................... 7,458 629
--------- ---------
Income before taxes ............ 2,665 8,141
Income taxes ............................. 1,506 3,644
--------- ---------
Net income ..................... $ 1,159 $ 4,497
========= =========
Net income per share:
Basic .......................... $ 0.07 $ 0.29
Diluted ........................ $ 0.07 $ 0.29
The accompanying notes are an integral part of these statements.
7
<PAGE>
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 30,
----------------------
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income ............................................. $ 1,159 $ 2,030
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization .......................... 2,836 849
Deferred income taxes .................................. 43 212
Compensation expense related to issuance of
management shares .................................... -- 1,800
Write-off of debt issuance costs ....................... 2,308 --
Changes in operating assets and liabilities:
Accounts receivable .............................. (8,395) 336
Inventories ...................................... (6,720) (6,204)
Other current assets ............................. 64 140
Accounts payable and accrued expenses ............ (1,216) (4,273)
Income taxes payable ............................. (2,001) (4,204)
Other assets and liabilities, net ................ (908) 1,495
--------- --------
Net cash used in operating activities ................ (12,830) (7,819)
Cash Flows From Investing Activities:
Capital expenditures ................................... (2,826) (2,010)
Cash paid for acquisitions, net of cash acquired ....... -- (3,917)
Cash paid for Founding Companies, net of cash acquired . -- (21,948)
Other .................................................. -- 19
--------- --------
Net cash used in investing activities ................ (2,826) (27,856)
Cash Flows From Financing Activities:
Principal payments on debt ............................. (171,916) (49,361)
Borrowings of debt ..................................... 190,856 35,600
Proceeds from issuance of common stock, net of
offering costs ....................................... -- 50,815
Debt issuance costs .................................... (3,627) (299)
--------- --------
Net cash provided by financing activities ............ 15,313 36,755
(Decrease)Increase in cash and cash equivalents ............ (343) 1,080
Cash and cash equivalents, beginning of period ............. 744 --
--------- --------
Cash and cash equivalents, end of period ................... $ 401 $ 1,080
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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, the Founding
Companies and acquisitions subsequent to the Offering ("Subsequent
Acquisitions").
In October 1998, the Company changed its year end from September 30 to
December 31. A Transition Report on Form 10-Q was filed for the three-month
transition period ended December 31, 1998. The accompanying unaudited interim
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 and the
Transition Report on Form 10-Q filed for the three-month transition period ended
December 31, 1998.
The pro forma financial information for the three and six months ended
June 30, 1998 includes the results of Pentacon combined with the Founding
Companies as if the Initial Acquisitions had occurred at the beginning of the
three- and six-month periods. 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 Bank 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. 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.
9
<PAGE>
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 for the Subsequent
Acquisitions 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 Founding Companies' assets acquired and liabilities assumed was
assigned and recorded based on fair market values. The allocation of purchase
price to the Subsequent Acquisitions' assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of fair
market value and may be revised as additional information concerning the
valuation of such assets and liabilities becomes available.
If all completed acquisitions, 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:
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ........................ $137,747 $145,133
Gross margin .................... 44,538 48,842
Operating income ................ 12,381 17,857
Write-off of debt issuance
costs ......................... 2,308 --
Interest expense ................ 7,458 5,248
Net income ...................... 1,159 6,784
Net income per share:
Basic ......................... $ 0.07 $ 0.41
Diluted ....................... $ 0.07 $ 0.40
10
<PAGE>
4. LONG-TERM DEBT
In March 1999, the Company sold $100 million of Senior Subordinated Notes
(the "Notes") due April 1, 2009. The net proceeds of $94.2 million, after the
original issue discount and paying underwriter's commissions, from the offering
of the Notes were used to repay indebtedness under the Company's credit
agreement (the "Bank Credit Facility"). The Notes accrue interest at 12 1/4%
which is payable on April 1 and October 1 of each year. The Notes are
publicly-registered and subordinated to all existing and future senior
subordinated obligations and will rank senior to all subordinated indebtedness.
The indenture governing the Notes contains covenants that limit the Company's
ability to incur additional indebtedness, pay dividends, make investments and
sell assets. At June 30, 1999, the Company was in compliance with the covenants.
Each of the Company's subsidiaries which are wholly-owned, fully,
unconditionally and jointly and severally guarantees the Notes on a senior
subordinated basis.
In connection with the issuance of the Notes in March 1999, the Company
amended its Bank Credit Facility to provide a revolving line of credit of up to
$85 million (subject to a borrowing base limitation) to be used for general
corporate purposes, future acquisitions, capital expenditures and working
capital. The Bank Credit Facility is secured by Company stock and assets.
Advances under the Bank Credit Facility bear interest at the banks' designated
variable rate plus a margin of 25 to 150 basis points. At the Company's option,
the loans may bear interest based on a designated London interbank offered rate
plus a margin of 175 to 325 basis points. Commitment fees of 25 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Bank Credit Facility contains a provision for standby letters of credit up to
$5.0 million. The Bank Credit Facility prohibits the payment of dividends by the
Company, restricts the Company's incurring or assuming other indebtedness and
requires the Company to comply with certain financial covenants including a
minimum net worth, senior debt leverage ratio, total debt leverage ratio, and
minimum fixed charge ratio. At June 30, 1999, the Company was in compliance with
the covenants. The Bank Credit Facility will terminate and all amounts
outstanding thereunder, if any, will be due and payable December 31, 2001. At
June 30, 1999, the Company has approximately $21.5 million available under the
Bank Credit Facility. In connection with the amendment of and reduction in the
Bank Credit Facility, the Company recorded a $2.3 million ($.07 impact on
earnings per share) noncash charge for the write-off of debt issuance costs.
5. EARNINGS PER SHARE
Pro forma and historical net income per share for the period ended June
30, 1998 is computed based on the weighted average shares of common stock
outstanding. The pro forma calculation assumes 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- and six-month periods ended
June 30, 1999 is based on the weighted average shares of common stock
outstanding.
11
<PAGE>
Basic and diluted historical net income per share is computed based on the
following information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
BASIC:
<S> <C> <C> <C> <C>
Net income ........................... $ 900 $ 2,121 $ 1,159 $ 2,030
======= ======= ======= =======
Average common shares ................ 16,668 15,721 16,668 10,907
======= ======= ======= =======
DILUTED:
Net income ........................... $ 900 $ 2,121 $ 1,159 $ 2,030
======= ======= ======= =======
Average common shares ................ 16,668 15,721 16,668 10,907
Common share equivalents:
Warrants ......................... -- 25 -- 16
Options .......................... 1 188 -- 115
------- ------- ------- -------
Total common share equivalents 1 213 -- 131
------- ------- ------- -------
Average common shares and
common share equivalents ..... 16,669 15,934 16,668 11,038
======= ======= ======= =======
</TABLE>
Basic and diluted pro forma net income per share is computed based on the
following information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUNE 30, JUNE 30,
-------------------- ---------------------
1999 1998 1999 1998
------- ------- -------- -------
(IN THOUSANDS)
BASIC:
<S> <C> <C> <C> <C>
Net income ......................... $ 900 $ 2,447 $ 1,159 $ 4,497
======= ======= ======== =======
Average common shares .............. 16,668 15,721 16,668 15,626
======= ======= ======== =======
DILUTED:
Net income ......................... $ 900 $ 2,447 $ 1,159 $ 4,497
======= ======= ======== =======
Average common shares .............. 16,668 15,721 16,668 15,626
Common share equivalents:
Warrants ....................... -- 25 -- 16
Options ........................ 1 188 -- 114
------- ------- -------- -------
Total common share equivalents 1 213 -- 130
------- ------- -------- -------
Average common shares and
common share equivalents ..... 16,669 15,934 16,668 15,756
======= ======= ======== =======
</TABLE>
12
<PAGE>
6. INCOME TAXES
The provision for income taxes included in the Historical Consolidated
Statement of Operations for the three- and six-month periods ended June 30, 1999
assumes the application of statutory federal and state income tax rates and the
non-deductibility of goodwill amortization. The provision for income taxes
included in the Historical Consolidated Statement of Operations for the three-
and six-month periods ended June 30, 1998 reflects the activity of the
accounting acquiror prior to the Initial Acquisitions, 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
Pro Forma Consolidated Statements of Operations for the three- and six-month
periods ended June 30, 1999 and 1998 assumes the application of statutory
federal and state income tax rates and the non-deductibility of goodwill
amortization. Interim period income tax provisions are based upon estimates of
annual effective tax rates and events may occur which will cause such rates to
vary.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the financial
statements of the Company and related notes thereto and management's discussion
and analysis of financial condition and results of operations related thereto
which are included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 and the Transition Report on Form 10-Q filed for
the three-month transition period ended December 31, 1998. As noted in the
transition report, the Company's year end has been changed to December 31 from
September 30. This discussion contains forward-looking statements that are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Key factors that could cause actual results to differ materially
from expectations include, but are not limited to (i) estimates of costs or
projected or anticipated changes to cost estimates relating to entering new
markets or expanding in existing markets (ii) changes in economic and industry
conditions (iii) changes in regulatory requirements (iv) changes in interest
rates (v) levels of borrowings under the Company's Bank Credit Facility (vi)
accumulation of excess inventories by certain customers in the aerospace
industry and (vii) volume or price adjustments with respect to sales to major
customers. These and other risks and assumptions are described in the Company's
reports that are available from the United States Securities and Exchange
Commission.
RESULTS OF OPERATIONS
In October 1998, the Company changed its year end from September 30 to
December 31. A
13
<PAGE>
Transition Report on Form 10-Q has been filed for the three-month transition
period ended December 31, 1998.
The pro forma financial information for the three- and six- months ended
June 30, 1999 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- and six-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 Bank Credit Facility (see Note 4 to the Financial Statements)
including decreases in interest expense resulting from the repayment or
refinancing of the Founding Companies' debt and (viii) adjustments to the
provisions for federal and state income taxes. Subsequent Acquisitions are
included in the Pro Forma Consolidated Statements of Operations only for those
periods subsequent to the dates of acquisition. The pro forma financial
information may not be comparable to and may not be indicative of the Company's
post-acquisition results of operations because the Founding Companies were not
under common control or management.
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, assimilation costs, costs of opening new facilities,
gain or loss of a material customer and variation in product mix. Accordingly,
the operating results for any three-month period are not necessarily indicative
of the results that may be achieved for any subsequent three- or six-month
period or for a full year.
PRO FORMA THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
The following table sets forth certain selected pro forma financial data
and the related amounts as a percentage of pro forma revenues for the periods
indicated:
PRO FORMA
THREE MONTH PERIOD ENDED
JUNE 30,
--------------------------------------------
1999 1998
------------------- -------------------
(DOLLARS IN THOUSANDS)
Revenues ........................ $71,197 100.0% $46,428 100.0%
Cost of sales ................... 48,561 68.2 30,380 65.4
------- ----- ------- -----
Gross profit .......... 22,636 31.8 16,048 34.6
Operating expenses .............. 15,422 21.7 10,931 23.6
Goodwill amortization ........... 865 1.2 390 0.8
------- ----- ------- -----
Operating income ...... $ 6,349 8.9% $ 4,727 10.2%
======= ===== ======= =====
REVENUES
Pro forma revenues increased 53.4% to $71.2 million for the three months
ended June 30, 1999 from $46.4 million for the three months ended June 30, 1998.
The increase in pro forma revenues was attributable primarily to the Subsequent
Acquisitions and, to a lesser extent, internal revenue growth of 3.3%
experienced by the Founding Companies. The modest internal revenue growth
resulted from increased revenues in the industrial business offset by a decline
in our aerospace business and lower pricing to a major industrial customer.
14
<PAGE>
COST OF SALES
Pro forma cost of sales increased $18.2 million, or 59.9%, to $48.6
million for the three months ended June 30, 1999 from $30.4 million for the
three months ended June 30, 1998. As a percentage of pro forma revenues, pro
forma cost of sales increased from 65.4% in the three months ended June 30, 1998
to 68.2% in the three months ended June 30, 1999. The increase in pro forma cost
of sales as a percentage of pro forma revenues was a result of lower margins
historically attained by the Subsequent Acquisitions and lower margins on new
business with an existing customer in our industrial business.
OPERATING EXPENSES
Pro forma operating expenses increased $4.5 million, or 41.3%, to $15.4
million for the three months ended June 30, 1999 from $10.9 million for the
three months ended June 30, 1998. As a percentage of pro forma revenues, pro
forma operating expenses decreased to 21.7% for the three months ended June 30,
1999 from 23.6% for the three months ended June 30, 1998. The decrease was
primarily attributable to lower operating expenses as a percentage of revenues
historically attained by the Subsequent Acquisitions partially offset by
additional costs associated with additional sales to an existing customer in our
industrial business.
OPERATING INCOME
Due to the factors discussed above, pro forma operating income increased
$1.6 million to $6.3 million for the three months ended June 30, 1999 from $4.7
million for the three months ended June 30, 1998. As a percentage of pro forma
revenues, pro forma operating income decreased to 8.9% for the three months
ended June 30, 1999 from 10.2% for the three months ended June 30, 1998.
NON-OPERATING COSTS AND EXPENSES
Interest expense for the three months ended June 30, 1999 totaled $4.3
million compared to $0.4 million for the three months ended June 30, 1998. The
increase in interest expense primarily results from additional debt incurred for
the Subsequent Acquisitions and the higher rate of interest on the Senior
Subordinated Notes issued in March 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended June 30, 1999
was $1.2 million (an effective rate of 57.4%) compared with $2.0 million (an
effective rate of 44.5%) for the three months ended June 30, 1998. The higher
effective tax rate for the quarter ended June 30, 1999 primarily related to the
increase in non-deductible goodwill amortization that resulted from the
Subsequent Acquisitions.
15
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PRO FORMA SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
The following table sets forth certain selected pro forma financial data
and the related amounts as a percentage of pro forma revenues for the periods
indicated:
PRO FORMA
SIX MONTH PERIOD ENDED
JUNE 30,
---------------------------------------------
1999 1998
------------------- -------------------
(DOLLARS IN THOUSANDS)
Revenues ...................... $137,747 100.0% $ 87,725 100.0%
Cost of sales ................. 93,209 67.7 57,549 65.6
-------- ----- -------- -----
Gross profit ....... 44,538 32.3 30,176 34.4
Operating expenses ............ 30,434 22.0 20,721 23.6
Goodwill amortization ......... 1,723 1.3 764 0.9
-------- ----- -------- -----
Operating income $ 12,381 9.0% $ 8,691 9.9%
======== ===== ======== =====
REVENUES
Pro forma revenues increased 57.0% to $137.7 million for the six months
ended June 30, 1999 from $87.7 million for the six months ended June 30, 1998.
The increase in pro forma revenues was attributable primarily to the Subsequent
Acquisitions and, to a lesser extent, internal revenue growth of 3.6%
experienced by the Founding Companies. The modest internal revenue growth
resulted from increased revenues in the industrial business offset by a decline
in our aerospace business and lower pricing to a major industrial customer.
COST OF SALES
Pro forma cost of sales increased $35.7 million, or 62.1%, to $93.2
million for the six months ended June 30, 1999 from $57.5 million for the six
months ended June 30, 1998. As a percentage of pro forma revenues, pro forma
cost of sales increased from 65.6% in the six months ended June 30, 1998 to
67.7% in the six months ended June 30, 1999. The increase in pro forma cost of
sales as a percentage of pro forma revenues was a result of lower margins
historically attained by the Subsequent Acquisitions as compared to the Initial
Acquisitions and lower margins on new business with an existing customer in our
industrial business.
OPERATING EXPENSES
Pro forma operating expenses increased $9.7 million, or 46.9%, to $30.4
million for the six months ended June 30, 1999 from $20.7 million for the six
months ended June 30, 1998. As a percentage of pro forma revenues, pro forma
operating expenses decreased to 22.0% for the six months ended June 30, 1999
from 23.6% for the six months ended June 30, 1998. The decrease was primarily
attributable to lower operating expenses as a percentage of revenues
historically attained by the Subsequent Acquisitions partially offset by
additional costs associated with additional sales to an existing customer in our
industrial business.
OPERATING INCOME
Due to the factors discussed above, pro forma operating income increased
$3.7 million to $12.4 million for the six months ended June 30, 1999 from $8.7
million for the six months ended June
16
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30, 1998. As a percentage of pro forma revenues, pro forma operating income
decreased to 9.0% for the six months ended June 30, 1999 from 9.9% for the six
months ended June 30, 1998.
NON-OPERATING COSTS AND EXPENSES
The write-off of debt issuance costs during the six months ended June 30,
1999 resulted from the amendment of the Company's Bank Credit Facility in
connection with the Senior Subordinated Notes issued in March 1999. Interest
expense for the six months ended June 30, 1999 totaled $7.5 million compared to
$0.6 million for the six months ended June 30, 1998. The increase in interest
expense primarily results from additional debt incurred for the Subsequent
Acquisitions and the higher rate of interest on the Senior Subordinated Notes
issued in March 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended June 30, 1999 was
$1.5 million (an effective rate of 56.5%) compared with $3.6 million (an
effective rate of 44.8%) for the six months ended June 30, 1998. The higher
effective tax rate for the six months ended June 30, 1999 primarily related to
the increase in non-deductible goodwill amortization that resulted from the
Subsequent Acquisitions.
HISTORICAL THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
The historical financial information represents the results of Pentacon
subsequent to the Initial Acquisitions and the Offering on March 10, 1998. The
historical financial information for the three-month period ended June 30, 1999
is the same as the pro forma financial information discussed in the preceding
section. However, the provision for income taxes in the three-month period ended
June 30, 1998 differed as a result of non-deductible goodwill amortization and
the non-deductible $1.8 million compensation expense related to the sale of
common stock to management.
HISTORICAL SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
The historical financial information represents the information of Alatec
prior to the Initial Acquisitions and the Offering and the consolidated results
of Pentacon Subsequent to the Initial Acquisitions and the Offering on March 10,
1998. The following table sets forth certain selected historical financial data
and the related amounts as a percentage of historical revenues for the periods
indicated:
HISTORICAL
SIX MONTH PERIOD ENDED
JUNE 30,
----------------------------------------------
1999 1998
-------------------- --------------------
(DOLLARS IN THOUSANDS)
Revenues ................... $137,747 100.0% $ 66,284 100.0%
Cost of sales .............. 93,209 67.7 42,767 64.5
-------- ----- -------- -----
Gross profit ......... 44,538 32.3 23,517 35.5
Operating expenses ......... 30,434 22.0 18,150 27.4
Goodwill amortization ...... 1,723 1.3 469 0.7
-------- ----- -------- -----
Operating income ...... $ 12,381 9.0% $ 4,898 7.4%
======== ===== ======== =====
17
<PAGE>
REVENUES
Revenues increased $71.4 million, or 107.7%, from $66.3 million for the
six months ended June 30, 1998 to $137.7 million for the six months ended June
30, 1999. The increase in revenues primarily results from the Initial
Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
COST OF SALES
Cost of sales increased $50.4 million, or 117.8%, from $42.8 million for
the six months ended June 30, 1998 to $93.2 million for the six months ended
June 30, 1999. The increase in cost of sales primarily results from the Initial
Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
OPERATING EXPENSES
Operating expenses increased $12.2 million, or 67.0%, from $18.2 million
for the six months ended June 30, 1998 to $30.4 million for the six months ended
June 30, 1999. The increase in operating expenses primarily results from the
Initial Acquisitions and the Offering on March 10, 1998 and the Subsequent
Acquisitions.
OPERATING INCOME
Operating income increased $7.5 million, or 153.1%, from $4.9 million for
the six months ended June 30, 1998 to $12.4 million for the six months ended
June 30, 1999 due to the factors noted above.
NON OPERATING COSTS AND EXPENSES
The write-off of debt issuance costs during the six months ended June 30,
1999 resulted from the amendment of the Company's Bank Credit Facility in
connection with the Senior Subordinated Notes issued in March 1999. Interest
expense for the six months ended June 30, 1999 totaled $7.5 million compared to
$0.7 million for the six months ended June 30, 1998. The increase in interest
expense primarily results from additional debt incurred for the Subsequent
Acquisitions and the higher rate of interest on the Senior Subordinated Notes
issued in March 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended June 30, 1999 was
$1.5 million (an effective rate of 56.5%) compared with $2.2 million (an
effective rate of 52.3%) for the six months ended June 30, 1998. The higher
effective tax rate for the quarter ended June 30, 1999 primarily related to the
increase in non-deductible goodwill amortization that resulted from the
Subsequent Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $12.8 million of net cash in operating activities during
the six months ended June 30, 1999; resulting primarily from increases in
working capital. Net cash used in investing activities was $2.8 million for
capital expenditures. Net cash provided by financing activities was $15.3
million for the six months ended June 30, 1999 and primarily consisted of $171.9
million
18
<PAGE>
repayment of debt offset by $190.9 million of borrowings on debt. At
June 30, 1999, the Company had cash of $0.4 million, working capital of $125.7
million and total debt of $157.6 million.
In March 1999, the Company sold $100 million of Notes due April 1, 2009.
The net proceeds of $94.2 million, after the original issue discount and paying
underwriter's commissions, from the offering of the Notes were used to repay
indebtedness under the Company's Bank Credit Facility. The Notes accrue interest
at 12 1/4% which is payable on April 1 and October 1 of each year. The Notes are
publicly-registered and subordinated to all existing and future senior
subordinated obligations and will rank senior to all subordinated indebtedness.
The indenture governing the Notes contains covenants that limit the Company's
ability to incur additional indebtedness, pay dividends, make investments and
sell assets. At June 30, 1999, the Company was in compliance with the covenants.
Each of the Company's subsidaries which are wholly-owned, fully, unconditionally
and jointly and severally guarantees the Notes on a senior subordinated basis.
In connection with the issuance of the Notes in March 1999, the Company
amended its Bank Credit Facility to provide a revolving line of credit of up to
$85 million (subject to a borrowing base limitation) to be used for general
corporate purposes, future acquisitions, capital expenditures and working
capital. The Bank Credit Facility is secured by Company stock and assets.
Advances under the Bank Credit Facility bear interest at the banks' designated
variable rate plus a margin of 25 to 150 basis points. At the Company's option,
the loans may bear interest based on a designated London interbank offered rate
plus a margin of 175 to 325 basis points. Commitment fees of 25 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Bank Credit Facility contains a provision for standby letters of credit up to
$5.0 million. The Bank Credit Facility prohibits the payment of dividends by the
Company, restricts the Company's incurring or assuming other indebtedness and
requires the Company to comply with certain financial covenants including a
minimum net worth, senior debt leverage ratio, total debt leverage ratio and
minimum fixed charge ratio. At June 30, 1999, the Company was in compliance with
the covenants. The Bank Credit Facility will terminate and all amounts
outstanding thereunder, if any, will be due and payable December 31, 2001. At
June 30, 1999, the Company has approximately $21.5 million available under the
Bank Credit Facility. In connection with the amendment of and reduction in the
Bank Credit Facility, the Company recorded a $2.3 million ($.07 impact on
earnings per share) noncash charge for the write-off of debt issuance costs.
The Company currently operates in a decentralized information systems
environment and uses a variety of software, computer systems and related
technologies for accounting and reporting purposes and for revenue-generating
activities. The Pentacon companies which primarily serve the aerospace industry
are in the process of migrating to a common information system which will
facilitate product ordering, pricing and reporting among the companies. The
total expenditures for these information systems are expected to be
approximately $3.0 million (of which $2.3 million has been incurred at June 30,
1999), 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 has come from operating cash flows
and the Company's Bank Credit Facility.
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
19
<PAGE>
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 have been modified so as to be Year 2000 compliant.
The Company's only significant computerized information system which is not Year
2000 compliant is being replaced in the quarter ended September 30, 1999.
Remaining costs of addressing potential problems are not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows. However, if the Company, its customers or vendors are
unable to resolve such processing issues in a timely manner, it could have a
significant impact on the Company's ability to conduct its business and result
in a material financial risk.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and service
providers. The Company has sent, and will continue to send, letters,
questionnaires and surveys to its significant business partners inquiring about
their Year 2000 efforts. If a significant supplier or customer of the Company
fails to be Year 2000 compliant, the Company could suffer a material loss of
business or incur material expenses.
As of June 30, 1999, the Company has spent $0.4 million in costs that are
directly attributable to addressing Year 2000 issues. Management currently
estimates that the Company will not incur significant additional costs during
1999 relating to Year 2000 issues. The Company expects that it will spend
approximately $3.0 million (of which $2.3 million has been incurred at June 30,
1999) to purchase software and hardware and on implementation expenses
associated with the migration to a common information technology system in the
Pentacon companies which primarily serve the aerospace industry. The Company
believes that these costs are not, for the most part, directly related to Year
2000 issues, but are required for the implementation of its new system in the
Pentacon companies which primarily serve the aerospace industry.
The Company is developing and evaluating contingency plans in the event
that the Company has not completed all of its remediation plans in a timely
manner or if third parties who provide goods or services to the Company fail to
address their Year 2000 issues appropriately. These plans include identification
of alternative suppliers and service providers, depletion of safety stocks of
inventory and identification of important areas of record retention.
PART II -OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Registrant was held on May 12, 1999 in Houston,
Texas. At the meeting, three director-nominees were elected to three-year terms
as Class I Directors. With respect to such election, proxies were solicited
pursuant to Regulation 14 under the Exchange Act and there was no solicitation
in opposition to such nominees. Of the Company's 16,666,115 shares of common
stock of record on March 29, 1999, 15,533,017 shares were entitled to vote on
the election of Mr. Baldwin and Ms. McClure, and 1,133,098 shares were
restricted shares entitled to vote only on the election of Mr. Grossman. Of the
15,533,017 shares of common stock entitled to vote with respect to the election
of Mr. Baldwin and Ms. McClure, 12,922,021 were voted at the meeting in person
or by proxy. Of the Company's 1,133,098 shares of restricted common stock
entitled to vote with respect to the election of Mr. Grossman, 649,207 were
voted at the meeting in person or by proxy. The following number of
20
<PAGE>
votes were cast as to the Class I Director nominees: Mark E. Baldwin, 12,832,180
votes for and 89,841 votes withheld; Cary M. Grossman, 649,207 votes for and no
votes withheld; and Mary E. McClure, 12,916,621 votes for and 5,400 votes
withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.17 Director Indemnification Agreement with Nishan Teshoian
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated May 6, 1999 concerning its
results of operations for the quarter ended March 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENTACON, INC.
Dated: August 13, 1999 By: /s/ BRIAN FONTANA
BRIAN FONTANA
Senior Vice President
& Chief Financial Officer
EXHIBIT 10.17
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT is made as of July 20, 1999, and is
entered into by and between Pentacon, Inc., a Delaware corporation (the
"Company"), and Nishan Teshoian ("Indemnitee").
R E C I T A L S:
WHEREAS, the certificate of incorporation and bylaws of the Company
provide for the indemnification of the Company's directors and executive
officers to the maximum extent permitted from time to time under applicable law
and, along with the Delaware General Corporation Law, contemplate that the
Company may enter into agreements with respect to such indemnification; and
WHEREAS, the Board of Directors of the Company has concluded that it
is reasonable, prudent and in the best interests of the Company's stockholders
for the Company to contractually obligate itself to indemnify certain of its
Authorized Representatives (defined below) so that they will serve or continue
to serve with greater certainty that they will be adequately protected.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires, the following terms
shall have the following respective meanings:
"Authorized Representative" means (i) a director, officer, employee,
agent or fiduciary of the Company or any Subsidiary and (ii) a person serving at
the request of the Company or any Subsidiary as a director, officer, employee,
fiduciary or other representative of another Enterprise.
"Enterprise" means any corporation, partnership, limited liability
company, association, joint venture, trust, employee benefit plan or other
entity.
"Expenses" means all expenses, including (without limitation)
reasonable fees and expenses of counsel.
"Liabilities" means all liabilities, including (without limitation)
the amounts of any judgments, fines, penalties, excise taxes and amounts paid in
settlement.
"Proceeding" means any threatened, pending or completed claim, action
(including any action by or in the right of the Company), suit or proceeding
(whether formal or informal, or civil, criminal, administrative, legislative,
arbitrative or investigative) in respect of which
<PAGE>
Indemnitee is, was or at any time becomes, or is threatened to be made, a party,
witness, subject or target, by reason of the fact that Indemnitee is or was an
Authorized Representative or a prospective Authorized Representative.
"Subsidiary" means, at any time, (i) any corporation of which at
least a majority of the outstanding voting stock is owned by the Company at such
time, directly or indirectly through subsidiaries, and (ii) any other Enterprise
in which the Company, directly or indirectly, owns more than a 50% equity
interest at such time.
2. INTERPRETATION.
(a) In this Agreement, unless a clear contrary intention appears:
(i) the singular number includes the plural number and VICE
VERSA;
(ii) reference to any gender includes each other gender;
(iii) the words "HEREIN," "HEREOF" and "HEREUNDER" and other
words of similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision;
(iv) unless the context indicates otherwise, reference to any
Section means such Section hereof; and
(v) the words "INCLUDING" (and with correlative meaning
"INCLUDE") means including, without limiting the generality of any description
preceding such term.
(b) The Section headings herein are for convenience only and shall
not affect the construction hereof.
(c) No provision of this Agreement shall be interpreted or
construed against any party solely because that party or its legal
representative drafted such provision.
(d) In the event of any ambiguity, vagueness or other similar
matter involving the interpretation or meaning of this Agreement, this Agreement
shall be liberally construed so as to provide to Indemnitee the full benefits
contemplated hereby.
(e) If the indemnification to which Indemnitee is entitled as
respects any aspect of any claim varies between two or more provisions of this
Agreement, that provision providing the most comprehensive indemnification shall
apply.
3. LIMITATION ON PERSONAL LIABILITY. To the fullest extent permitted
by applicable law, Indemnitee shall not be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a director
of the Company, PROVIDED that the foregoing shall not eliminate or limit the
liability of Indemnitee (i) for any breach of Indemnitee's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve
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<PAGE>
intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law relating to unlawful
dividend payments and unlawful stock purchases or redemptions or (iv) for any
transaction from which Indemnitee derived an improper personal benefit.
3. INDEMNITY.
(a) Subject to the following provisions of this Agreement, the
Company shall hold harmless and indemnify Indemnitee to the fullest extent
permitted by applicable law existing (now/or hereafter adopted) against all
Expenses and Liabilities actually incurred by Indemnitee in connection with any
Proceeding; PROVIDED, HOWEVER, that no indemnity shall be paid by the Company
spursuant to this Agreement:
(i) for amounts actually paid to Indemnitee pursuant to one or more
policies of directors and officers liability insurance maintained by the Company
or pursuant to a trust fund, letter of credit or other security or funding
arrangement provided by the Company; PROVIDED, HOWEVER, that if it should
subsequently be determined that Indemnitee is not entitled to retain any such
amount, this clause (i) shall no longer apply to such amount;
(ii) in respect of remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that payment of such
remuneration was in violation of applicable law;
(iii) on account of Indemnitee's conduct which is finally adjudged to
constitute willful misconduct or to have been knowingly fraudulent, deliberately
dishonest or from which the Indemnitee derives an improper personal benefit; or
(iv) on account of any suit in which final judgment is rendered
against Indemnitee for an accounting of profits made from the sale or purchase
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended.
(b) If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for only a portion (but not, however, for the
total amount) of any Expenses or Liabilities actually incurred by Indemnitee in
connection with any Proceeding, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses and Liabilities to which Indemnitee
is entitled. If the indemnification provided for herein in respect of any
Expenses or Liabilities actually incurred by Indemnitee in connection with any
Proceeding is finally determined by a court of competent jurisdiction to be
prohibited by applicable law, then the Company, in lieu of indemnifying
Indemnitee, shall contribute to the amount paid or payable by Indemnitee as a
result of such Expenses and Liabilities in such proportion as is appropriate to
reflect (i) the relative benefits received by the Company on the one hand and
Indemnitee on the other hand from the events, circumstances, conditions,
happenings, actions or transactions from which such Proceeding arose, (ii) the
relative fault of the Company (including its other Authorized Representatives)
on the one hand and of Indemnitee on the other hand in connection with the
events, circumstances and happenings which resulted in such Expenses and
Liabilities, such relative fault to be determined by
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<PAGE>
reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the events,
circumstances and/or happenings resulting in such Expenses and Liabilities, and
(iii) any other relevant equitable considerations, it being agreed that it would
not be just and equitable if such contribution were determined by pro rata or
other method of allocation which does not take into account the foregoing
equitable considerations.
(c) The indemnification provided herein shall be applicable only to
Proceedings commenced after the date hereof, regardless, however, of whether
they arise from acts, omissions, facts or circumstances occurring before or
after the date hereof.
(d) The indemnification provided herein shall be applicable whether
or not negligence of Indemnitee is alleged or proved, and regardless of whether
such negligence be contributory or sole.
(e) Amounts paid by the Company to Indemnitee under this Section 4
are subject to refund by Indemnitee as provided in Section 8.
4. NOTIFICATION AND DEFENSE OF CLAIMS.
(a) Promptly after the receipt by Indemnitee of notice of the
commencement of any Proceeding, Indemnitee will, if a claim in respect thereof
is to be made against the Company under this Agreement, notify the Company of
the commencement of such Proceeding; PROVIDED, HOWEVER, that the omission to so
notify the Company will not relieve the Company (i) from any liability which it
may have to Indemnitee under this Agreement unless, and then only to the extent
that, such omission results in insufficient time being available to permit the
Company or its counsel to effectively defend against or make timely response to
any loss, claim, damage, liability or expense resulting from such Proceeding or
otherwise has a material adverse effect on the Company's ability to promptly
deal with such loss, claim, damage, liability or expense or (ii) from any
liability which it may have to Indemnitee otherwise than under this Agreement.
(b) The following provisions shall apply with respect to any such
Proceeding as to which Indemnitee notifies the Company of the commencement
thereof:
(i) The Company shall be entitled to participate therein at its own
expense.
(ii) Except as otherwise provided below, to the extent it may elect
to do so, the Company (jointly with any other indemnifying party similarly
notified) will be entitled to assume the defense thereof, with counsel of its
own selection reasonably satisfactory to Indemnitee. After notice from the
Company to Indemnitee of its election so to assume the defense thereof, the
Company will not be liable to Indemnitee under this Agreement for any Expenses
subsequently incurred by Indemnitee in connection with the defense of such
Proceeding other than reasonable costs of investigation or as otherwise provided
below. Indemnitee shall have the right to employ separate counsel in such
Proceeding but the fees and expenses of such counsel incurred after notice from
the Company of its assumption of the defense thereof shall be at the expense of
Indemnitee unless (1) the employment of separate counsel by Indemnitee has been
authorized by the Company; (2) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the
-4-
<PAGE>
Company and Indemnitee in the conduct of the defense of such Proceeding; or (3)
the Company shall not in fact have employed counsel to assume the defense of
such Proceeding, in each of which cases the reasonable fees and expenses of
Indemnitee's counsel shall be borne by the Company. The Company shall not be
entitled to assume the defense of any Proceeding brought by or on behalf of the
Company or as to which Indemnitee shall have made the conclusion provided for in
(2) above. Nothing in this subparagraph (ii) shall affect the obligation of the
Company to indemnify Indemnitee against Expenses and Liabilities paid in
settlement for which it is otherwise obligated hereunder.
(iii) The Company shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceedings or claims
effected without its prior written consent. The Company shall not settle any
Proceeding or claim in any manner which would impose any penalty or limitation
on Indemnitee without Indemnitee's prior written consent. Neither the Company
nor Indemnitee will unreasonably withhold or delay its consent to any proposed
settlement.
6. ADVANCEMENT OF EXPENSES, ETC. If requested to do so by Indemnitee with
respect to any Proceeding, the Company shall advance to or for the benefit of
Indemnitee, prior to the final disposition of such Proceeding, the Expenses
actually incurred by Indemnitee in investigating, defending or appealing such
Proceeding. Any judgments, fines or amounts to be paid in settlement of any
Proceeding shall also be advanced by the Company upon request by Indemnitee.
Advances made by the Company under this Section 6 are subject to refund by
Indemnitee as provided in Section 8.
7. RIGHT OF INDEMNITEE TO BRING SUIT.
(a) If a claim for indemnification or a claim for an advance under this
Agreement is not paid in full by the Company within 30 days after receipt by the
Company from Indemnitee of a written request or demand therefor, Indemnitee may
bring suit against the Company to recover the unpaid amount of the claim. If, in
any such action, Indemnitee makes a prima facie showing of entitlement to
indemnification under this Agreement, the Company shall have the burden of
proving that indemnification is not required under this Agreement. The only
defense to any such action shall be that indemnification is not required by this
Agreement.
(b) In the event that any action is instituted by Indemnitee to enforce
Indemnitee's rights or to collect monies due to Indemnitee under this Agreement
and if Indemnitee is successful in such action, the Company shall reimburse
Indemnitee for all Expenses incurred by Indemnitee with respect to such action.
8. REPAYMENT OBLIGATION OF INDEMNITEE. If the Company advances or pays
any amount to Indemnitee under Section 4, 6 or 7 and if it shall thereafter be
finally adjudicated that Indemnitee was not entitled to be indemnified hereunder
for all or any portion of such amount, Indemnitee shall promptly repay such
amount or such portion thereof, as the case may be, to the Company. If the
Company advances or pays any amount to Indemnitee under Section 4, 6 or 7 and if
Indemnitee shall thereafter receive all or a portion of such amount under one or
more policies of directors and officers liability insurance maintained by the
Company or pursuant to a trust fund,
-5-
<PAGE>
letter of credit or other security or funding arrangement provided by the
Company, Indemnitee shall promptly repay such amount or such portion thereof, as
the case may be, to the Company.
9. CHANGES IN LAW. If any change after the date of this Agreement in any
applicable law, statute or rule expands the power of the Company to indemnify
Authorized Representatives, such change shall be within the purview of
Indemnitee's rights and the Company's obligations under this Agreement. If any
change after the date of this Agreement in any applicable law, statute or rule
narrows the right of the Company to indemnify an Authorized Representative, such
change shall, to the fullest extent permitted by applicable law, leave this
Agreement and the parties' rights and obligations hereunder unaffected.
10. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Company hereunder shall continue during the period Indemnitee is an Authorized
Representative, and shall continue after Indemnitee has ceased to occupy such
position or have such relationship so long as Indemnitee shall be subject to any
possible Proceeding.
11. NONEXCLUSIVITY. The indemnification and other rights provided by any
provision of this Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may be entitled under (i) any statutory or common law, (ii) the
Company's certificate of incorporation, (iii) the Company's bylaws, (iv) any
other agreement or (v) any vote of stockholders or disinterested directors or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while occupying any of the positions or having any of the
relationships referred to in this Agreement. Nothing in this Agreement shall in
any manner affect, impair or compromise any indemnification Indemnitee has or
may have by virtue of any agreement previously entered into between Indemnitee
and the Company.
12. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid, illegal or unenforceable (i) the validity, legality or enforceability
of the remaining provisions of this Agreement shall not be in any way affected
or impaired thereby and (ii) to the fullest extent possible, the provisions of
this Agreement shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable. Each provision of this
Agreement is a separate and independent portion of this Agreement.
13. MODIFICATION AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties. No waiver of any of the provisions of this Agreement shall be binding
unless executed in writing by the person making the waiver nor shall such waiver
constitute a continuing waiver.
14. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed (i) if to the Company, at
its principal office address as shown on the signature page hereof or such other
address as it may have designated by written notice to Indemnitee for purposes
hereof, directed to the attention of the Secretary and (ii) if to Indemnitee, at
Indemnitee's address as shown on the signature page hereof or to such other
address as Indemnitee may have designated by written notice to the Company for
purposes hereof. Each such notice or other communication shall be deemed to have
been duly given if (a) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, (b)
-6-
<PAGE>
transmitted by facsimile transmission, at the time that receipt of such
transmission is confirmed, or (c) mailed by certified or registered mail with
postage prepaid,on the third business day after the date on which it is so
mailed.
15. GOVERNING LAW. This Agreement shall be deemed to be a contract made
under, and shall be governed by and construed and enforced in accordance with,
the internal laws of the State of Texas without regard to principles of
conflicts of law.
16. HEIRS, SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon, inure to the benefit of and be
enforceable by (i) Indemnitee and Indemnitee's personal or legal
representatives, executors, administrators, heirs, devisees and legatees and
(ii) the Company and its successors and assigns. This Agreement shall not inure
to the benefit of any other person or Enterprise.
(b) The Company agrees to require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used herein, the term "Company" shall include any successor
to its business and/or assets as aforesaid which executes and delivers the
assumption and agreement provided for in this Section 16 or which otherwise
becomes bound by all terms and provisions of this Agreement by operation of law.
ENTERED into on the day and year first above written.
THE COMPANY:
PENTACON, INC.
By: /s/ MARK E. BALDWIN
Name: MARK E. BALDWIN
Title: CHAIRMAN & CHIEF EXECUTIVE OFFICER
INDEMNITEE:
/s/ NISHAN TESHOIAN
Nishan Teshoian
Address: 7208 Seton House Lane
Charlotte, N.C. 28277
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 401
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<RECEIVABLES> 42,943
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0
0
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