-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E+lYit3gbmnCHX+ctU3AkH3xGYTb34lfuQp52ntZVCDX7hiUm57tdgOcDNFSvRIp p1lp/JFm5UpRG4p7OtbdyA== 0000890566-98-000024.txt : 19980113 0000890566-98-000024.hdr.sgml : 19980113 ACCESSION NUMBER: 0000890566-98-000024 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19980109 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTACON INC CENTRAL INDEX KEY: 0001050504 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE [5072] IRS NUMBER: 760531585 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-41383 FILM NUMBER: 98504320 BUSINESS ADDRESS: STREET 1: 9821 KATY FRWY STREET 2: STE 500 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7134647770 MAIL ADDRESS: STREET 1: 9821 KATY FRWY STREET 2: STE 500 CITY: HOUSTON STATE: TX ZIP: 77024 S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998. REGISTRATION NO. 333-41383 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PENTACON, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 5085 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) DELAWARE 76-0531585 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 9821 KATY FREEWAY, SUITE 500 HOUSTON, TEXAS 77024 (713) 464-7770 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ MARK E. BALDWIN CHAIRMAN AND CHIEF EXECUTIVE OFFICER 9821 KATY FREEWAY, SUITE 500 HOUSTON, TEXAS 77024 (713) 464-7770 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPY TO: CHRISTOPHER S. COLLINS CHARLES SZALKOWSKI MICHAEL C. BLANEY BAKER & BOTTS, L.L.P. ANDREWS & KURTH L.L.P. ONE SHELL PLAZA 4200 TEXAS COMMERCE TOWER 910 LOUISIANA STREET HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002 (713) 220-4200 (713) 229-1234 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ 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. ================================================================================ 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 JANUARY 9, 1998 PROSPECTUS , 1998 3,773,585 SHARES PENTACON, INC. (LOGO) COMMON STOCK All of the shares of common stock, par value $0.01 per share ("Common Stock"), of Pentacon, Inc. (the "Company") offered hereby are being offered by the Company. Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company will apply for listing the Common Stock on the New York Stock Exchange under the symbol "JIT." SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREOF FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share..... $ $ $ Total(3)...... $ $ $ - -------------------------------------------------------------------------------- (1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING." (2) BEFORE DEDUCTING EXPENSES ESTIMATED AT $ , WHICH WILL BE PAID BY THE COMPANY. (3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30 DAY OPTION TO PURCHASE UP TO 566,038 ADDITIONAL SHARES AT THE PRICE TO THE PUBLIC LESS UNDERWRITING DISCOUNT AND COMMISSIONS, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO THE COMPANY WILL BE $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITING." The shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of share certificates will be made in New York, New York, on or about , 1998. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEXL BROWN SCHRODER & CO. INC. [Map of the United States indicating the location of the Company's facilities.] [Photographs of bolts, screws and other small parts, automated picking equipment and parts bagging equipment.] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY CONCURRENTLY WITH AND AS A CONDITION TO THE CONSUMMATION OF THE OFFERING MADE HEREBY (THE "OFFERING"), PENTACON PLANS TO ACQUIRE, IN SEPARATE TRANSACTIONS (COLLECTIVELY, THE "ACQUISITIONS"), FOR CONSIDERATION INCLUDING CASH AND SHARES OF ITS COMMON STOCK, THE FOLLOWING FIVE ENTITIES ENGAGED IN THE FASTENER AND SMALL PARTS DISTRIBUTION BUSINESS: ALATEC PRODUCTS, INC. ("ALATEC"), AXS SOLUTIONS, INC. ("AXS"), CAPITOL BOLT & SUPPLY, INC. ("CAPITOL"), MAUMEE INDUSTRIES, INC. ("MAUMEE") AND SALES SYSTEMS, LIMITED ("SSL" AND, TOGETHER WITH ALATEC, AXS, CAPITOL AND MAUMEE, THE "FOUNDING COMPANIES"). UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO "PENTACON" MEAN PENTACON, INC., AND REFERENCES TO THE "COMPANY" MEAN PENTACON AND THE FOUNDING COMPANIES, COLLECTIVELY. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE FINANCIAL INFORMATION AND PER SHARE DATA IN THIS PROSPECTUS (I) HAVE BEEN ADJUSTED FOR (A) THE ACQUISITIONS, (B) THE EFFECTS OF CERTAIN PRO FORMA ADJUSTMENTS TO THE HISTORICAL FINANCIAL STATEMENTS AND (C) THE CONSUMMATION OF THE OFFERING, AND (II) ASSUME THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO COMMON STOCK INCLUDE BOTH COMMON STOCK, $0.01 PAR VALUE PER SHARE, AND RESTRICTED VOTING COMMON STOCK, $0.01 PAR VALUE PER SHARE (THE "RESTRICTED COMMON STOCK"), OF THE COMPANY. THE COMPANY The Company is a leading distributor of fasteners and other small parts and provider of related inventory procurement and management services to original equipment manufacturers ("OEMs") on a worldwide basis. Fasteners and small parts include screws, bolts, nuts, washers, pins, rings, fittings, springs, electrical connectors and similar parts. Pentacon was founded in March 1997 to aggressively pursue the consolidation of the highly-fragmented fastener distribution industry. According to an industry study by The Freedonia Group, Inc., sales by fastener manufacturers in 1996 were approximately $8.0 billion in the United States and $25.0 billion globally. The United States fastener market is estimated to have over 1,900 distributors. The Company believes that the OEM fastener and small part distribution industry is in the early stages of consolidation, and the Company plans to lead the consolidation of the industry. The Company believes that its broad selection of fasteners and small parts, high quality services, professional management team, and strong competitive position as a publicly-owned fastener distributor focused on the OEM market, will allow it to be the leading consolidator. Fasteners and other small parts constitute a majority of the total number of parts needed by an OEM to manufacture many products, but represent only a small fraction of the total materials cost. The cost for an OEM to internally manage its inventory of fasteners and small parts is relatively high due to (i) the large number of fasteners and other small parts in the inventory, (ii) the risk of interruptions for just-in-time ("JIT") manufacturing operations, and (iii) the need to perform quality assurance testing of the fasteners and small parts. The Company believes that OEMs are increasingly outsourcing their fastener and other small parts inventory procurement and management needs to distributors in order to focus on their core manufacturing businesses and to reduce costs. To further reduce costs, many manufacturers are seeking to consolidate the number of distributors they use and are selecting national distributors with extensive product lines who can also provide inventory-related services. To capitalize on these trends, the Company offers a broad array of fasteners and small parts and provides a variety of related procurement and inventory management services, including inventory management information systems ("MIS") and reports, JIT delivery, quality assurance, advisory engineering services, component kit production and delivery, small component assembly and electronic data interchange ("EDI"). Upon consummation of the Offering, Pentacon will acquire the five Founding Companies, which have been in business an average of 25 years and which had combined net sales of $120.0 million in 1996 and $112.8 million for the nine months ended September 30, 1997. While total U.S. sales of fasteners have increased at a compound annual rate of approximately 4.1% during the four years ended December 31, 3 1996, the combined net sales of the Founding Companies have increased at a compound annual rate of approximately 14.8% per year over the same period. The Company believes that it has generated superior growth primarily by expanding the breadth of its product offerings and value-added services, which has allowed the Founding Companies to increase market share at existing customers and attract new customers. The Company operates a national sales and distribution network with 24 facilities in 14 states. Through this network and international agents, the Company serves more than 2,600 customers in over 25 countries. These customers manufacture a wide variety of products including diesel engines, locomotives, power turbines, motorcycles, telecommunications equipment, refrigeration equipment and aerospace equipment. The Company's largest customers include Cummins Engine Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes Aircraft subsidiary of General Motors Corporation, The Trane Company, Lockheed Martin Corporation, and The Boeing Company. The Company anticipates that its ability to provide a comprehensive product line and offer related services over a broad geographic area will assist the Company in obtaining additional nationwide accounts with large national and international OEMs. BUSINESS STRATEGY The Company intends to become the leading fastener and small parts distributor on a worldwide basis. Key elements of the Company's strategy to achieve its objective are: PROVIDE VALUE-ADDED SERVICES. The Company seeks to continually develop and supply inventory-related services designed to reduce its customers' operating costs. Quality assurance, JIT delivery and component kit production are examples of such services currently provided by the Company to its customers. By supplying such services, the Company becomes more integrated into the customers' internal manufacturing processes and is better able to anticipate its customers' needs, which the Company believes results in improved profitability and customer retention. DELIVER SUPERIOR CUSTOMER SERVICE. OEMs and other fastener customers choose fastener suppliers based, in significant part, on the quality of the service supplied. The Company believes that its superior customer service depends on its well-trained, technically competent workforce and that its workforce provides an advantage over other fastener distributors. The Company intends to review the training and operating practices at each Founding Company to identify and adopt those "best practices" in providing customer service that can be successfully implemented throughout its operations. As part of its commitment to superior customer service, the Company intends to have each of its operating companies certified under or be in compliance with the International Standards Organization ("ISO") standards for distribution companies. Two of the Founding Companies are already ISO-9002 certified. The other Founding Companies have commenced application for ISO-9002 or similar certification, and the Company expects the substantial majority of its currently uncertified locations to be ISO compliant or certified in 1998. ACCELERATE INTERNAL SALES GROWTH. One of the primary goals of the Company is to accelerate internal growth by both expanding the range of products and services provided to existing customers and aggressively pursuing new customers domestically and abroad. The Company believes it will be able to expand sales to existing customers by capitalizing on (i) the diverse products and the marketing expertise of the Founding Companies, (ii) cross-selling opportunities across the Company's customer base, and (iii) the additional financial resources that are expected to be available after consummation of the Offering. The Company believes its broad geographic coverage will present opportunities to capture additional business from existing customers that operate on a national and international basis. The Company intends to implement a company-wide marketing program and to adopt the "best practices" used by the Founding Companies to identify, obtain and maintain new customers. EXPAND OPERATING MARGINS. The Company believes that the combination of the Founding Companies will provide significant opportunities to increase its profitability. The key components of this strategy are to increase operating efficiencies and centralize appropriate administrative functions. 4 The Company intends to use its increased purchasing power to improve contractual relationships and gain volume discounts from its suppliers. The Company also intends to improve productivity through enhanced inventory management procedures, increased utilization of the Company's laboratories and distribution facilities, and the consolidation of information systems and employee benefits. AGGRESSIVELY PURSUE ACQUISITIONS. The Company believes that the fastener distribution industry is highly fragmented and in the early stages of consolidation. The Company intends to pursue an aggressive acquisition program targeting fastener distributors that will help the Company increase its presence in markets it currently serves, sell to new markets, develop new customer relationships with major OEMs, increase its presence in the international markets and expand its range of products and services. The Company believes there is a significant number of acquisition candidates available and that it will be regarded as an attractive acquiror due to its position as an industry leader, its ability to offer cash and/or publicly-traded stock for acquisitions, and the potential for improved growth and profitability as part of the Company. The Company intends to file a registration statement covering 3,350,000 additional shares of Common Stock under the Securities Act for its use in connection with future acquisitions. THE OFFERING Common Stock offered by the Company............................ 3,773,585 shares Common Stock to be outstanding after the Offering(1).................... 13,323,585 shares Use of proceeds...................... The net proceeds from the Offering will be used to repay certain indebtedness, including the obligation to pay the cash portion of the purchase price for the Founding Companies. See "Use of Proceeds." Proposed NYSE trading symbol......... JIT - ------------ (1) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii) 2,380,000 shares issued to McFarland, Grossman Capital Ventures, II, L.C. ("MGCV"), including 467,000 shares of Restricted Common Stock, and (iv) 3,773,585 shares to be sold in the Offering. Excludes (i) outstanding options to purchase 370,000 shares at an exercise price equal to the initial public offering price, (ii) options to purchase 600,000 shares at the initial public offering price which are expected to be granted to employees of the Founding Companies upon consummation of the Offering and (iii) outstanding warrants to purchase 50,000 shares at an exercise price equal to the lesser of $8.00 per share or 60% of the initial public offering price granted to certain Company consultants. See "Management," "Certain Transactions," and "Description of Capital Stock -- Common Stock and Restricted Common Stock." RISK FACTORS Prospective investors should carefully consider all the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" for risks involved with an investment in the shares. 5 SUMMARY PRO FORMA COMBINED FINANCIAL DATA Pentacon will acquire the Founding Companies simultaneously with and as a condition to the consummation of the Offering. Pentacon has adopted a fiscal year-end of September 30. For financial statement presentation purposes, Alatec (one of the Founding Companies) has been identified as the "accounting acquiror." Effective January 1, 1997, Alatec changed its fiscal year-end to September 30 to conform with Pentacon's fiscal year-end. The following table presents summary unaudited pro forma combined financial data for the Company, as adjusted for (i) the effects of the Acquisitions, (ii) the effects of certain pro forma adjustments to the historical financial statements described below and (iii) the consummation of the Offering. See "Selected Financial Data," the Unaudited Pro Forma Combined Financial Statements and the Notes thereto and the historical Financial Statements of the Founding Companies and the Notes thereto included elsewhere in this Prospectus. NINE MONTHS ENDED SEPTEMBER 30, 1997 PRO FORMA COMBINED(1) --------------------- (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) INCOME STATEMENT DATA: Revenues........................ $112,802 Cost of goods sold.............. 74,330 --------------------- Gross profit............... 38,472 Selling, general and administrative expenses(2)..... 27,042 Goodwill amortization(3)........ 812 --------------------- Operating income........... 10,618 Interest and other income (expense), net(4).............. (724) --------------------- Income before income taxes.................... 9,894 Income taxes.................... 4,397 --------------------- Net income................. $ 5,497 ===================== Net income per share............ $ 0.41 Shares used in computing pro forma net income per share(5)....................... 13,342,816 SEPTEMBER 30, 1997 --------------------------------------- PRO FORMA COMBINED(6) AS ADJUSTED(7) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash............................ $ 3,635 $ 3,635 Working capital................. 28,703 36,411 Total assets.................... 117,102 116,834 Total debt (including capital lease obligations)(8)......... 55,322 11,931 Stockholders' equity............ 38,075 81,198 (FOOTNOTES ON FOLLOWING PAGE) 6 - ------------ (1) The pro forma combined income statement data assumes that the Acquisitions and Offering were closed on January 1, 1997 (except for Capitol, whose historical results for nine months from December 1, 1996 to August 31, 1997 were used for pro forma information), and are not necessarily indicative of the results the Company would have obtained had these events actually then occurred or of the Company's future results. During the periods presented above, the Founding Companies were not under common control or management and, therefore, the data presented may not be comparable to or indicative of post-combination results to be achieved by the Company. The pro forma combined income statement data are based on available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. Neither the potential cost savings from consolidating certain operational and administrative functions nor the costs of corporate overhead, other than salaries of executive officers, have been included in the pro forma combined financial information. (2) The pro forma combined income statement data reflects an aggregate of approximately $2,146,000 in pro forma reductions in salary and benefits of the owners of the Founding Companies to which they have agreed prospectively, and $450,000 in pro forma increases in salary and benefits to the corporate management and $119,000 of expense reductions for the effect of revisions of certain lease agreements between certain stockholders of the Founding Companies and those Founding Companies. See "Certain Transactions." (3) Reflects amortization of the goodwill for the nine month period to be recorded as a result of the Acquisitions over a 40-year period and computed on the basis described in the Notes to the Unaudited Pro Forma Combined Financial Statements. (4) Includes interest income (expense) and other income (expense); net pro forma interest expense reflects a reduction in interest of $1,073,915 related to repayment of indebtedness with the proceeds from the Offering. See "Use of Proceeds." (5) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii) 2,380,000 shares issued to MGCV, (iv) 3,773,585 shares to be sold in the Offering, (v) the dilutive effect of warrants to purchase 50,000 shares at an exercise price equal to the lesser of $8.00 or 60% of the initial public offering price per share using the treasury stock method and assuming an initial public offering price of $ per share. Subsequent to September 30, 1997 (i) options to purchase 370,000 shares at the initial public offering price were issued and are currently outstanding and (ii) options to purchase 600,000 shares at the initial public offering price are expected to be granted to the Company's employees upon consummation of the Offering. (6) The pro forma combined balance sheet data assume that the Acquisitions were closed on September 30, 1997. The pro forma combined balance sheet data is based upon available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. (7) Reflects the closing of the Offering at an assumed price of $ per share and the Company's application of the net proceeds therefrom to fund the cash portion of the purchase price of the Acquisitions and to repay indebtedness of the Founding Companies. See "Use of Proceeds" and "Certain Transactions." (8) Includes $28,662,387 for the obligation to pay the cash portion of the purchase price for the Founding Companies. 7 SUMMARY INDIVIDUAL FOUNDING COMPANY AND COMBINED FINANCIAL DATA The following table presents summary historical financial data for the Founding Companies and Pentacon and Summary Pro Forma Combined Financial Data for the stated periods. The historical income from operations has not been adjusted for the anticipated increased costs associated with the Company's new corporate management and with being a public company or take into account the increase in income attributable to the compensation differential, the rent differential, and potential cost savings from consolidating certain operational or administrative functions. The summary unaudited pro forma combined financial data for the Company in the table below is adjusted for (i) the effects of the Acquisitions, (ii) the effects of certain pro forma adjustments to the historical financial statements described below and (iii) the consummation of the Offering. The Company has adopted a fiscal year-end of September 30. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Introduction." YEAR ENDED DECEMBER 31, ---------------------- NINE MONTHS ENDED 1995 1996 SEPTEMBER 30, 1997 (IN THOUSANDS) ALATEC: Net sales................... $ 41,204 $ 44,726 $ 42,296 Gross profit................ 15,008 18,019 17,182 Operating income............ 3,723 5,201 5,518 AXS: Net sales................... $ 20,228 $ 23,177 $ 22,002 Gross profit................ 7,234 8,124 6,726 Operating income............ 2,524 2,477 1,747 CAPITOL(1): Net sales................... $ 9,769 $ 10,234 $ 9,043 Gross profit................ 2,882 3,135 2,717 Operating income............ 233 167 247 MAUMEE: Net sales................... $ 20,582 $ 26,235 $ 27,473 Gross profit................ 4,482 6,522 7,916 Operating income (loss)..... (144) 1,245 1,287 SSL: Net sales................... $ 12,274 $ 15,663 $ 11,988 Gross profit................ 4,238 5,168 3,931 Operating income............ 512 569 834 PENTACON: Net sales................... $ -- $ -- $ -- Gross profit................ -- -- -- Operating loss.............. -- -- (18) HISTORICAL COMBINED: Net sales................... $ 104,057 $ 120,035 $112,802 Gross profit................ 33,844 40,968 38,472 Operating income(2)......... 6,848 9,659 9,615 PRO FORMA COMBINED(3): Net sales........................................... $112,802 Gross profit........................................ 38,472 Operating income(4)................................. 10,618 (FOOTNOTES ON FOLLOWING PAGE) 8 - ------------ (1) The financial data presented on a historical basis for Capitol are based on the years ended October 31, 1995 and 1996 and the nine months ended August 31, 1997. (2) The combined results of operations for the periods do not purport to present those of the combined Founding Companies and Pentacon in accordance with generally accepted accounting principles, but represent merely a summation of the net sales, gross profit, and operating income of the individual Founding Companies and Pentacon on a historical basis and exclude the effects of pro forma adjustments. (3) The pro forma combined income statement data assumes that the Acquisitions and Offering were closed on January 1, 1997 (except for Capitol, whose historical results for nine months from December 1, 1996 to August 31, 1997 were used for pro forma information), and are not necessarily indicative of the results the Company would have obtained had these events actually then occurred or of the Company's future results. During the periods presented above, the Founding Companies were not under common control or management and, therefore, the data presented may not be comparable to or indicative of post-combination results to be achieved by the Company. The pro forma combined income statement data are based on available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. Neither the potential cost savings from consolidating certain operational and administrative functions nor the costs of corporate overhead, other than salaries of executive officers, have been included in the pro forma combined financial information. (4) Pro forma combined operating income reflects (i) $2,146,000 in pro forma reductions in salary and benefits to the owners of the Founding Companies; (ii) $450,000 increases in salary and benefits to corporate management; (iii) $119,000 of expense reductions for the effect of revisions of certain lease agreements between certain stockholders of the Founding Companies and those Founding Companies; and (iv) a charge of approximately $812,000 related to amortization of goodwill over a 40-year period for the nine months to be recorded as a result of the Acquisitions. 9 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. INFORMATION CONTAINED IN THIS PROSPECTUS IS BASED ON BELIEFS OF, AND INFORMATION CURRENTLY AVAILABLE TO, THE COMPANY'S MANAGEMENT AS WELL AS ESTIMATES AND ASSUMPTIONS MADE BY THE COMPANY'S MANAGEMENT, AND MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "REFORM ACT"). WHEN USED IN THIS PROSPECTUS, WORDS SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, AS THEY RELATE TO THE COMPANY OR THE COMPANY'S MANAGEMENT, IDENTIFY FORWARD-LOOKING STATEMENTS. THE FOLLOWING MATTERS AND CERTAIN OTHER FACTORS NOTED THROUGHOUT THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO ANY SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATING FOUNDING COMPANIES Pentacon was founded in 1997 but has conducted no operations other than in connection with the Offering and the Acquisitions. Pentacon has not generated any sales to date. The Founding Companies have been operating as separate independent entities, and there can be no assurance that the Company will be able to integrate the operations of these businesses successfully or to institute the necessary systems and procedures, including accounting and financial reporting systems, to manage the combined enterprise on a profitable basis. The Company's senior management group has only limited experience working together and there can be no assurance that the management group will be able to manage the combined entity or to implement effectively the Company's acquisition and internal growth operating strategies. The pro forma combined historical financial results of the Founding Companies cover periods when the Founding Companies and Pentacon were not under common control or management and may not be indicative of the Company's future financial or operating results. Among the issues to be considered in combining the Founding Companies are the different objectives of, and accounting methodologies used by, private as opposed to public companies, such as the level of scrutiny imposed by management on business deductions such as salaries and benefits. The inability of the Company to integrate the Founding Companies successfully would have a material adverse effect on the Company's business, financial condition and results of operations and would make it unlikely that the Company's acquisition program will be successful. See "Business -- Strategy" and "Management." RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY The Company's strategy for growth significantly relies on the acquisition of additional fastener distributors. The Company expects to face competition for acquisition candidates, which may limit the number of acquisition opportunities and may lead to higher acquisition prices. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or to integrate successfully any acquired businesses into the Company without substantial costs, delays or other operational or financial difficulties. Further, acquisitions (including the acquisition of the Founding Companies) involve a number of special risks, including failure of the acquired business to achieve expected results, diversion of management's attention, failure to retain key personnel and customers of the acquired business and risks associated with unanticipated conditions, events or liabilities, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the Founding Companies or other businesses acquired in the future will achieve anticipated net sales and earnings. See "Business -- Strategy." CAPITAL REQUIREMENTS The Company's acquisition strategy will require substantial capital. The Company currently intends to finance future acquisitions by using shares of its Common Stock for all or a portion of the consideration to be paid. If the Common Stock does not maintain a sufficient market value, or if potential acquisition 10 candidates are otherwise unwilling to accept Common Stock as part of the consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to initiate and maintain its acquisition program. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain additional capital through debt or equity financings. The Company intends to obtain a commitment for a bank line of credit of approximately $45 million for working capital and acquisitions contingent upon consummation of the Offering. However, there can be no assurance that the Company will be able to obtain any additional financing it may need for acquisitions on terms that the Company deems acceptable. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Combined Liquidity and Capital Resources." RISKS RELATED TO INTERNAL GROWTH AND OPERATING STRATEGIES Although the Company intends to seek to improve the profitability of the Founding Companies and any subsequently acquired businesses by various means, including realizing overhead and purchasing efficiencies and centralizing certain administrative functions, there can be no assurances that the Company will be able to do so. The Company's ability to increase the profitability of the Founding Companies and any subsequently acquired businesses will be affected by various factors, including demand for fasteners, the Company's ability to expand the range of products and services offered by each Founding Company and by any subsequently acquired businesses and the Company's ability to successfully enter new markets. Many of these factors are beyond the control of the Company, and there can be no assurance that the Company's strategies will be successful or that it will be able to generate cash flow adequate to support its operations and internal growth. A key component of the Company's strategy is to operate the Founding Companies and subsequently acquired businesses on a decentralized basis, with local management retaining responsibility for day-to-day operations, profitability and the growth of the business. If proper overall business controls are not implemented or if management of the Founding Companies and subsequently acquired businesses are not successful in adopting an integrated operating approach, this decentralized operating strategy could result in inconsistent operating and financial practices at the Founding Companies and subsequently acquired businesses and the Company's overall profitability could be adversely affected. See "Business -- Strategy." RELIANCE ON PRINCIPAL CUSTOMERS A significant portion of the Company's revenue has historically been generated by a limited number of customers, although not necessarily the same customers from year to year. For the nine months ended September 30, 1997, the Company's ten largest customers collectively accounted for approximately 45% of the Company's net sales. The loss of a significant customer for any reason, including reduced production by a customer or competitive factors, could result in a substantial loss of revenue and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Customers." INTEGRATION OF COMPUTER SYSTEMS AND RELIANCE ON COMPUTER SYSTEMS The Company's success will be dependent in part on the Company's ability to coordinate and integrate the management and information systems ("MIS systems") of the Founding Companies that are used for ordering products, recording and analyzing financial results, controlling inventory and performing other important functions. There can be no assurance that the Company will be able to coordinate and integrate the MIS systems economically and it may experience delays, disruptions and unanticipated expenses in doing so. Any such event could have a material adverse effect on the Company's business, financial condition and results of operations. The Company will not be able to fully achieve certain contemplated operating efficiencies and competitive advantages until it has fully coordinated and integrated the MIS systems. Until the Company establishes coordinated and integrated MIS systems, which may not occur for several years, it will rely primarily on the separate systems of the Founding Companies. After the MIS systems are integrated, the Company will rely heavily on them in its daily operations. Consequently, any interruption in the operation of the MIS systems may have a material adverse effect on the Company's business, financial condition and results of operations. 11 RELIANCE ON INDUSTRIES SUBJECT TO FLUCTUATING DEMAND Certain of the Company's products are sold to customers in industries that experience significant fluctuations in demand based on economic conditions, energy prices, consumer demand and other factors beyond the control of the Company. No assurance can be given that the Company will be able to increase or maintain its level of sales in periods of economic stagnation or downturn. RELIANCE ON KEY PERSONNEL The Company will be highly dependent on the continuing efforts of its executive officers and, due in part to the Company's decentralized operating strategy, the senior management of the Founding Companies. In addition, the Company is likely to depend on the senior management of any significant business it acquires in the future. The Company's business, financial condition and results of operations could be affected adversely if any of these persons do not continue in his or her management role until the Company is able to attract and retain qualified replacements. See "Management." FLUCTUATIONS IN OPERATING RESULTS The Company's results of operations may fluctuate significantly from quarter to quarter or year to year because of a number of factors, including the timing of future acquisitions, fluctuations in the demand for its distribution services and competitive factors. Accordingly, quarterly comparisons of the Company's revenues and operating results should not be relied on as an indication of future performance, and the results of any quarterly period may not be indicative of results to be expected for a full year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The Company is engaged in a highly fragmented and competitive industry. Competition is based primarily on service, quality and geographic proximity. The Company competes with a large number of fastener distributors on a regional and local basis, some of which may have greater financial resources than the Company and some of which are public companies or divisions of public companies. The Company may also face competition for acquisition candidates from these companies, some of whom have acquired fastener distribution businesses during the past decade. Other smaller fastener distributors may also seek acquisitions from time to time. See "Business -- Competition." DEPENDENCE ON SUPPLIERS Certain types of specialized fasteners are available from only a limited number of sources. If for any reason those sources became unavailable to the Company, the Company would not be able to continue to sell such fasteners unless an alternative supplier was located. The inability to supply certain types of fasteners may adversely impact the Company's sales and its relationship with the customers requiring such fasteners. RISKS ASSOCIATED WITH GOVERNMENT REGULATION The Company's operations are subject to a number of federal, state and local regulations relating to the protection of the environment and to workplace health and safety. In addition, the Fastener Quality Act may impose additional tracking, marking and testing requirements on the Company that could result in operating costs that could adversely affect the Company's business, financial condition and results of operations. See "Business -- Government Regulation." CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS Following the consummation of the Acquisitions and the Offering, the Company's executive officers and directors, former stockholders of the Founding Companies and entities affiliated with them will beneficially own approximately 71.7% of the outstanding shares of Common Stock (68.8% if the Underwriters' over-allotment option is exercised in full). These holders of Common Stock, if acting in concert, 12 will be able to exercise control over the Company's affairs, to elect the entire Board of Directors and to control the outcome of any matter submitted to a vote of stockholders. See "Principal Stockholders." SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES OF FOUNDING COMPANIES Of the net proceeds of the Offering, $28.7 million will be paid as the cash portion of the purchase price for the Founding Companies. Certain of the Founding Companies have incurred indebtedness which has been personally guaranteed by their stockholders or by entities controlled by their stockholders. Some of the recipients of these funds will become directors of the Company or holders of more than 5% of the Common Stock. See "Principal Stockholders." At September 30, 1997, the aggregate amount of indebtedness of these Founding Companies was $29.4 million of which $19.5 million was subject to personal guarantees. After September 30, 1997, the Founding Companies may borrow up to an aggregate of $1.5 million to fund distributions to shareholders of the Founding Companies that are S-corporations to enable certain shareholders to make S-corporation income tax payments for 1997 and through the date of the Acquisitions (the "S-Corporation Tax Payment Distributions"). No funds other than the borrowed funds will be used to make the S-Corporation Tax Payment Distributions. The Company intends to use the net proceeds from the Offering, together with borrowings available from the Company's revolving credit facility, to repay substantially all of the indebtedness of the Founding Companies. Additionally, MGCV has agreed to advance to Pentacon, until the consummation of the Acquisitions and the Offering, such funds as are necessary to effect the Acquisitions and the Offering and will be reimbursed from the proceeds of the Offering in respect of such expenses. As of September 30, 1997, MGCV had advanced the Company $0.3 million for such expenses. See "Use of Proceeds" and "Certain Transactions." NO PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE Prior to the Offering, there has been no public market for the Common Stock. Therefore, the initial public offering price for the Common Stock will be determined by negotiation between the Company and the Representatives of the Underwriters and may bear no relationship to the price at which the Common Stock will trade after the Offering. See "Underwriting" for the factors to be considered in determining the initial public offering price. The Company intends to apply for listing of the Common Stock on the New York Stock Exchange. However, there can be no assurance that an active trading market will develop subsequent to the Offering or, if developed, that it will be sustained. VOLATILITY OF MARKET PRICE After completion of the Offering, the market price of the Common Stock could be subject to significant fluctuations due to variations in responses to numerous factors, including the timing of any acquisitions by the Company, variations in the Company's annual or quarterly financial results or those of its competitors, changes by financial research analysts in their estimates of the future earnings of the Company, conditions in the economy in general or in the Company's industry in particular, unfavorable publicity or changes in applicable laws and regulations (or judicial or administrative interpretations thereof) affecting the Company or the fastener industry. In addition, the securities markets have experienced significant price and volume fluctuations from time to time in recent years. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance, and these broad fluctuations may adversely affect the market price of the Common Stock. POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK Upon consummation of the Acquisitions and the Offering, 13,323,585 shares of Common Stock will be outstanding. The 3,773,585 shares sold in the Offering (other than shares that may be purchased by affiliates of the Company) will be freely tradable. The remaining outstanding shares may be resold publicly only following their registration under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant to an available exemption from registration (such as provided by Rule 144 following a one year holding period for previously unregistered shares). The holders of these remaining shares have agreed with the Company that they will not sell, transfer or otherwise dispose of any of their shares, for one year following the consummation of the Offering. Sales, or the availability for sale, of substantial amounts of the 13 Common Stock in the public market could adversely affect prevailing market prices and the future ability of the Company to raise equity capital and complete any additional acquisitions for Common Stock. See "Shares Eligible for Future Sale." POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Pentacon's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") authorizes the Board of Directors to issue, without stockholder approval, one or more series of preferred stock having such preferences, powers and relative, participating, optional and other rights (including preferences over the Common Stock respecting dividends and distributions and voting rights) as the Board of Directors may determine. The issuance of this "blank-check" preferred stock could render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. In addition, the Certificate of Incorporation provides for a classified Board of Directors, which may also have the effect of inhibiting or delaying a change in control of the Company. Certain provisions of the Delaware General Corporation Law may also discourage takeover attempts that have not been approved by the Board of Directors. See "Description of Capital Stock." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the net tangible book value of their stock of $ per share, assuming an initial public offering price of $ , and may experience further dilution in that value from issuances of Common Stock in connection with future acquisitions. See "Dilution." 14 THE COMPANY Pentacon was founded in March 1997 to become the leading domestic and international value-added distributor of fasteners and other small parts to OEMs, to provide inventory procurement and management services and to aggressively pursue the consolidation of the highly-fragmented fastener distribution industry. Pentacon has entered into agreements to acquire the Founding Companies simultaneously with, and as a condition to, the consummation of the Offering. The Founding Companies, which have been in business an average of 25 years, had combined net sales of $120.0 million in 1996 and $112.8 million for the nine months ended September 30, 1997, and serve in excess of 2,600 customers. For a description of the transactions pursuant to which these businesses will be acquired, see "Certain Transactions -- Organization of the Company." The following is a brief description of the Founding Companies: ALATEC PRODUCTS, INC. -- Alatec Products, Inc. ("Alatec"), headquartered in Chatsworth, California, was founded in 1972 by Fred List. Alatec operates through eight distribution facilities and sales offices located throughout the United States. Alatec principally serves commercial aviation, defense electronics, and other high-technology industries. Alatec had 1996 net sales of $44.7 million, net sales of $42.3 million for the nine months ended September 30, 1997, and, as of September 30, 1997, employed 211 people. Donald B. List, the President of Alatec, has been employed by Alatec for 20 years, will sign a five-year employment agreement with Alatec to continue to serve as President of Alatec following consummation of the Offering and will become a director of the Company. AXS SOLUTIONS, INC. -- AXS Solutions, Inc. ("AXS") is headquartered in Erie, Pennsylvania. AXS was formed upon the merger of Hoyt Fastener, Corp. ("Hoyt"), an Illinois corporation, and Champion Bolt Corp. ("Champion"), a Pennsylvania corporation, in 1996. Hoyt was founded in 1964 and Champion was founded in 1968. AXS operates through two distribution facilities and sales offices located in Pennsylvania and Illinois. AXS' principal customers are in the power generation, locomotive, gas and steam turbine, and small motor industries. AXS had 1996 net sales of $23.2 million, net sales of $22.0 million for the nine months ended September 30, 1997, and, as of September 30, 1997, employed 70 people. The principal officers of AXS are Jack L. Fatica, the Chief Executive Officer of AXS, who has been employed by AXS for 32 years, Jeffrey P. Fatica, the President of the Champion division of AXS, who has been employed by AXS for 21 years, and Robert M. Hoyt, the President of the Hoyt division of AXS, who has been employed by AXS for 9 years. Each of these individuals will sign a five-year employment agreement with AXS to continue in his current position. Following the consummation of the Offering, Jack L. Fatica will also become the President and Chief Operating Officer and a director of the Company. CAPITOL BOLT & SUPPLY, INC. -- Capitol Bolt & Supply, Inc. ("Capitol"), headquartered in Austin, Texas, was founded in 1966 by Earl and Mary E. McClure. Capitol operates through eight distribution facilities and sales offices located in the Midwest and the South. Capitol principally serves the metals, refrigeration, electronics and construction industries. Capitol had 1996 net sales of $10.2 million, net sales of $9.0 million for the nine months ended August 31, 1997, and, as of September 30, 1997, employed 50 people directly and indirectly. Ms. McClure, the President of Capitol, has been employed by Capitol for 31 years, will sign a five-year employment agreement with Capitol to continue to serve as President of Capitol following consummation of the Offering and will become a director of the Company. MAUMEE INDUSTRIES, INC. -- Maumee Industries, Inc. ("Maumee"), headquartered in Fort Wayne, Indiana, was founded in 1979 by Michael Black. Maumee operates through four distribution facilities located primarily in the Midwest. Maumee principally serves the automotive, recreational vehicle, heavy duty truck and toy industries. Maumee had 1996 net sales of $26.2 million, net sales of $27.5 million for the nine months ended September 30, 1997, and, as of September 30, 1997, employed 141 people. The principal officers of Maumee are Mr. Black, the President of Maumee, who has been employed by Maumee for 18 years, and Michael W. Peters, the Chief Executive Officer of Maumee, who has been employed by Maumee for 11 years. Mr. Peters will sign a five-year employment agreement with Maumee to continue to serve in his current position. The Company anticipates Mr. Black will sign an Advisory Agreement with Pentacon to provide advisory services to Pentacon. Following the consummation of the Offering, Mr. Peters will become a director of the Company. 15 SALES SYSTEMS, LIMITED -- Sales Systems, Limited ("SSL"), headquartered in Allentown, Pennsylvania, was founded in 1979 and prior to consummation of the Offering, will be owned principally by Benjamin E. Spence, Jr. and Richard Knorr. SSL operates through two distribution facilities and sales offices in Pennsylvania and South Carolina. SSL principally serves the motor vehicles, furniture and equipment, general service machinery and transport equipment industries. SSL had 1996 net sales of $15.7 million, net sales of $12.0 million for the nine months ended September 30, 1997, and, as of September 30, 1997, employed 44 people directly and indirectly. The principal officers of SSL are Mr. Spence, the President of SSL, who has been employed by SSL for 18 years, and Richard Knorr, the Vice President of SSL, who has been employed by SSL for 16 years. Each of these individuals will sign a five-year employment agreement with SSL to continue to serve in their current positions. Following the consummation of the Offering, Mr. Spence will become a director of the Company. Pentacon's executive offices are located at 9821 Katy Freeway, Suite 500, Houston, Texas 77024, and its telephone number is (800) 315-6979. 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, are estimated to be approximately $43.1 million (approximately $50.0 million if the Underwriters exercise their over-allotment option in full). Of the net proceeds, the Company estimates that approximately $28.7 million will be used to pay the cash portion of the purchase price for the Founding Companies, all of which will be paid to the stockholders of the Founding Companies. The remainder of the purchase price for the Founding Companies will be paid by the issuance of 6,720,000 shares of Common Stock to their stockholders. In addition, approximately $14.4 million of the net proceeds will be used to repay outstanding indebtedness of the Founding Companies at the closing of the Offering. Of that $14.4 million, (i) approximately $5.5 million is owed by Maumee to a financial institution, bears interest at 1.5% over the bank's base rate or 10% at September 30, 1997 and matures May 31, 2000 and (ii) approximately $6.5 million of the $9.5 million currently outstanding under a line of credit provided to Alatec by a financial institution, bears interest at the prime rate or 8.5% at September 30, 1997 and matures in June 1999. The remaining indebtedness of $2.4 million to be repaid from the proceeds of the Offering consists of various notes payable which bear interest ranging from 6.2% to 9.3% and mature at various dates through January 2002. See "Certain Transactions." After the consummation of the Offering and the Acquisitions and after giving effect to the application of the proceeds as described above and to the anticipated draw down on the Company's credit facilities, described below, to pay off the Founding Companies' current indebtedness, the Company expects to have a total of $9.1 million in debt outstanding. The Company has reached an agreement in principle with a bank for a credit facility of $50 million. The bank has also agreed in principle 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. DIVIDEND POLICY The Company intends to retain all its earnings, if any, to finance the expansion of its business, and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Any future dividends will be at the discretion of the Board of Directors after taking into account various factors, including, among others, the Company's financial condition, results of operations, cash flows from operations, current and anticipated cash needs and expansion plans, the income tax laws then in effect and the requirements of Delaware law. In addition, the credit facility may restrict or prohibit the payment of dividends by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Combined -- Combined Liquidity and Capital Resources." 17 CAPITALIZATION The following table sets forth the capitalization at September 30, 1997 (i) of the Company on a pro forma combined basis to give effect to the Acquisitions and (ii) of the Company, as adjusted, to give effect to both the Acquisitions and the Offering and the application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. SEPTEMBER 30, 1997 ------------------------------ PRO FORMA(1) AS ADJUSTED -------------- ------------ (IN THOUSANDS) Cash................................. $ 3,635 $ 3,635 ============== ============ Current maturities of long-term obligations, notes payable, and capital lease obligations.......... $ 10,985 $ 3,277 Long-term obligations, less current maturities(2)...................... 44,338 8,655 Stockholders' equity: Preferred Stock: $0.01 par value, 10,000,000 shares authorized; no shares issued and outstanding -- -- Common Stock: $0.01 par value, 51,000,000 shares authorized; 9,550,000 shares issued and outstanding, pro forma; and 13,323,585 shares issued and outstanding, as adjusted(3)... 96 133 Additional paid-in capital........... 28,355 71,441 Retained earnings.................... 9,624 9,624 -------------- ------------ Total stockholders' equity...... 38,075 81,198 -------------- ------------ Total capitalization....... $ 93,398 $ 93,130 ============== ============ - ------------ (1) Combines the respective accounts of Pentacon and the Founding Companies as reflected in the pro forma combined balance sheet as of September 30, 1997 except for Capitol which is combined using the balance sheet as of August 31, 1997. (2) Includes $28,662,387 for the obligation to pay the cash portion of the purchase price for the Founding Companies. (3) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii) 2,380,000 shares issued to McFarland, Grossman Capital Ventures, II, L.C. ("MGCV"), including 467,000 shares of Restricted Common Stock, and (iv) 3,773,585 shares to be sold in the Offering. Excludes (i) outstanding options to purchase 370,000 shares at an exercise price equal to the initial public offering price, (ii) options to purchase 600,000 shares at the initial public offering price which are expected to be granted to employees of the Founding Companies upon consummation of the Offering and (iii) outstanding warrants to purchase 50,000 shares at an exercise price equal to the lesser of $8.00 per share or 60% of the initial public offering price granted to certain Company consultants. See "Management," "Certain Transactions," and "Description of Capital Stock -- Common Stock and Restricted Common Stock." 18 DILUTION The deficit in pro forma net tangible book value of the Company at September 30, 1997 was approximately $8.7 million or $0.92 per share after giving effect to the Acquisitions but before the Offering. Pro forma net tangible book value per share is the adjusted tangible net worth (total tangible assets less total liabilities) of the Company divided by the number of shares of Common Stock outstanding after giving effect to the Acquisitions. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the pro forma net tangible book value per share after the Offering. After giving effect to the sale of the shares of Common Stock offered hereby (at an assumed price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses), the pro forma net tangible book value of the Company at September 30, 1997 would have been $ million or per share, representing an immediate increase in net tangible book value of $3.50 per share to existing stockholders and an immediate dilution of $ per share to the investors purchasing the shares in the Offering ("New Investors"). The following table illustrates this dilution to New Investors: Assumed initial public offering price per share.......................... --------- Pro forma deficit in net tangible book value per share at September 30, 1997.......... $ (0.92) Increase in net tangible book value per share attributable to New Investors.................. 3.50 --------- Pro forma net tangible book value per share after the Offering........... 2.58 --------- Dilution per share to New Investors.......................... ========= The following table sets forth as of the date of this Prospectus the number of shares of Common Stock purchased from the Company, the total consideration to the Company and the average price per share paid by existing stockholders (after giving effect to the Acquisitions) and by the New Investors:
SHARES PURCHASED TOTAL CONSIDERATION(1) --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing stockholders (including owners of Founding Companies)...... 9,550,000 71.7% $(7,939,000) $ (0.83) New Investors........................ 3,773,585 28.3 ---------- ------- ----------- ------- ------------- Total........................... 13,323,585 100.0% $ 100.0% $ ========== ======= =========== ======= =============
- ------------ (1) Total consideration paid by existing stockholders represents the combined stockholders' equity of the Founding Companies and Pentacon before the Offering of approximately $20.8 million, adjusted to reflect the payment of approximately $28.7 million in cash to the stockholders of the Founding Companies as part of the consideration for the Acquisitions. See "Certain Transactions." 19 SELECTED FINANCIAL DATA Pentacon will acquire the Founding Companies simultaneously with and as a condition to the consummation of the Offering. Pentacon has adopted a fiscal year ended September 30. For financial statement presentation purposes, Alatec has been identified as the "accounting acquiror." Effective January 1, 1997, Alatec changed its fiscal year to September 30. The following selected historical financial data for Alatec as of and for the years ended December 31, 1995 and 1996 and the nine month period ended September 30, 1997 have been derived from audited financial statements of Alatec included elsewhere in this Prospectus. The selected historical financial data as of, and for the years ended December 31, 1993 and 1994, has been derived from unaudited financial statements of Alatec, which have been prepared on the same basis as the audited financial statements and, in the opinion of Alatec, reflect all adjustments consisting of normal recurring adjustments, necessary for a fair presentation of such data. The following summary unaudited pro forma combined financial data presents certain data for the Company, adjusted for (i) the Acquisitions, (ii) the effects of certain pro forma adjustments to the historical financial statements and (iii) the consummation of the Offering and the application of the net proceeds therefrom. See the Unaudited Pro Forma Combined Financial Statements and the notes thereto included elsewhere in this Prospectus.
THE COMPANY ------------- PRO FORMA ALATEC COMBINED ---------------------------------------------------------- ------------- NINE MONTHS NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ------------------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1993 1994 1995 1996 1997 1997(1) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales....................... $ 30,935 $ 33,700 $ 41,204 $ 44,726 $42,296 $112,802 Cost of goods sold.............. 20,004 21,926 26,196 26,707 25,114 74,330 --------- --------- --------- --------- ------------- ------------- Gross profit............... 10,931 11,774 15,008 18,019 17,182 38,472 Selling, general and administrative expenses(2).... 9,795 10,238 11,285 12,818 11,664 27,042 Goodwill amortization(3)........ -- -- -- -- -- 812 --------- --------- --------- --------- ------------- ------------- Operating income........... 1,136 1,536 3,723 5,201 5,518 10,618 Interest and other income (expense), net(4)............. (885) (699) (1,304) (1,062) (989) (724) --------- --------- --------- --------- ------------- ------------- Income before income taxes................... 251 837 2,419 4,139 4,529 9,894 Income taxes.................... 97 384 995 1,628 1,860 4,397 --------- --------- --------- --------- ------------- ------------- Net income................. $ 154 $ 453 $ 1,424 $ 2,511 $ 2,669 $ 5,497 ========= ========= ========= ========= ============= ============= Net income per share........................................................ $ 0.41 Shares used in computing pro forma net income per share(5).................. 13,342,816 ALATEC --------------------------------------------------------- THE COMPANY AS OF DECEMBER 31, AS OF ------------------------- ------------------------------------------ SEPTEMBER 30, PRO FORMA AS 1993 1994 1995 1996 1997 COMBINED(6) ADJUSTED(7) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash............................ $ 95 $ 237 $ 117 $ 256 $ 733 $ 3,635 $ 3,635 Working capital................. 3,611 3,835 13,308 17,130 20,155 28,703 36,411 Total assets.................... 15,255 19,902 23,226 28,519 34,911 117,102 116,834 Total debt (including capital lease obligations)............ 7,403 9,671 10,698 11,588 14,050 55,322(8) 11,931 Stockholders' equity............ 3,662 3,695 5,119 7,630 8,384 38,075 81,198
(FOOTNOTES ON FOLLOWING PAGE) 20 - ------------ (1) The pro forma combined income statement data assumes that the Acquisitions and Offering were closed on January 1, 1997, (except for Capitol, whose historical results for nine months from December 1, 1996 to August 31, 1997 were used for pro forma information), and are not necessarily indicative of the results the Company would have obtained had these events actually then occurred or of the Company's future results. During the periods presented above, the Founding Companies were not under common control or management and, therefore, the data presented may not be comparable to or indicative of post-combination results to be achieved by the Company. The pro forma combined income statement data are based on available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. Neither the potential cost savings from consolidating certain operational and administrative functions nor the costs of corporate overhead, other than salaries of executive officers, have been included in the pro forma combined financial information. (2) The pro forma combined income statement data reflects an aggregate of approximately $2,146,000 in pro forma reductions in salary and benefits of the owners of the Founding Companies to which they have agreed prospectively, and $450,000 in pro forma increases in salary and benefits to the corporate management and $119,000 of expense reductions for the effect of revisions of certain lease agreements between certain stockholders of the Founding Companies and those Founding Companies. See "Certain Transactions." (3) Reflects amortization of the goodwill for the nine month period to be recorded as a result of the Acquisitions over a 40-year period and computed on the basis described in the Notes to the Unaudited Pro Forma Combined Financial Statements. (4) Includes interest income (expense) and other income (expense); net pro forma interest expense reflects a reduction in interest of $1,073,915 related to repayment of indebtedness with the proceeds from the Offering. See "Use of Proceeds." (5) Consists of (i) 6,720,000 shares to be issued to the owners of the Founding Companies, (ii) 450,000 shares issued to the management of Pentacon, (iii) 2,380,000 shares issued to MGCV, (iv) 3,773,585 shares to be sold in the Offering, (v) the dilutive effects of warrants to purchase 50,000 shares at an exercise price equal to the lesser of $8.00 or 60% of the initial public offering price per share using the treasury stock method and assuming an initial public offering price of $ per share. Subsequent to September 30, 1997 (i) options to purchase 370,000 shares at the initial public offering price were issued and are currently outstanding and (ii) options to purchase 600,000 shares at the initial public offering price are expected to be granted to the Company's employees upon consummation of the Offering. (6) The pro forma combined balance sheet data assumes that the Acquisitions were closed on September 30, 1997. The pro forma combined balance sheet data is based upon available information and certain assumptions that management deems appropriate and should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. (7) Reflects the closing of the Offering at an assumed price of $ per share and the Company's application of the net proceeds therefrom to fund the cash portion of the purchase price of the Acquisitions and to repay indebtedness of the Founding Companies. See "Use of Proceeds" and "Certain Transactions." (8) Includes $28,662,387 for the obligation to pay the cash portion of the purchase price for the Founding Companies. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Founding Companies' Financial Statements and related notes thereto and "Selected Financial Data" appearing elsewhere in this Prospectus. INTRODUCTION The Company's revenues are derived from the sale of fasteners and other small parts with associated inventory management services. Net sales are recognized upon shipment of the product to the customer. Cost of goods and services consists primarily of materials, cost of products sold, costs for product processing and modification, freight and obsolescence. Selling, general and administrative expenses consist primarily of compensation and related benefits, advertising, facility rent and utilities, communications and professional fees. Certain owners and certain key employees of the Founding Companies have agreed to reductions totaling $2.1 million in their compensation and related benefits in connection with their acquisition by the Company on a pro forma basis for the nine months ended September 30, 1997. Such reductions in salaries, bonuses and benefits are in accordance with the terms of employment agreements. Certain facility leases have also been renegotiated and the lessors have agreed to reductions totaling approximately $119,000 on a pro forma basis for the nine months ended September 30, 1997. Both adjustments have been reflected as a pro forma adjustment in the Unaudited Pro Forma Combined Statement of Operations but have not been reflected in the Historical Combined Statement of Operations. The Company anticipates that following the Acquisitions it will realize savings from (i) greater volume discounts from suppliers, and (ii) consolidation of insurance programs and other general and administrative expenses. However, there will be costs related to the Company's new corporate management, costs associated with being a public company and integration costs. None of these savings or incremental costs are reflected in the Pro Forma or Historical Combined Statement of Operations. Subsequent to September 30, 1997 the Company recorded a non-recurring non-cash compensation charge of $4.7 million relating to certain shares of Common Stock sold to management, based on the difference between an estimated initial public offering price with a twenty percent marketability discount and the amount paid for the shares. In addition, upon completion of the Offering, a non-recurring non-cash charge of approximately $24.8 million based on an estimated initial offering price to the public with a twenty percent marketability discount will be recorded to reflect Offering expenses related to the 2,380,000 shares of Common Stock held by MGCV. These charges will be offset by increases in equal amounts in stockholders equity (par value common stock and paid-in capital). As a result of the acquisition of the Founding Companies other than Alatec, the excess of the fair value of the consideration paid over the fair value of the net assets to be acquired will be recorded as goodwill on the Company's balance sheet. Goodwill will be amortized as a non-cash charge to the income statement over a 40-year period. Based on an initial public offering price of $ per share, the initial amount of goodwill will be $43.3 million and the pro forma impact of this amortization expense, which is non-deductible for tax purposes, is expected to be approximately $1.1 million per year. Such amortization expense is reflected in the Pro Forma Combined Results of Operations but not the Historical Combined Results of Operations. The following sections present the results of the four largest Founding Companies on an individual basis and on a combined basis for all Founding Companies. The results of Capitol have not been presented separately as they do not represent a significant portion of the combined Company's net sales. The combined results do not include certain pro forma adjustments that the Company expects to incur following the Acquisitions, including the reduction of salaries among key employees of the Founding Companies and an increase in corporate expenses. Pentacon has adopted a fiscal year ended September 30, and the accounting acquiror, Alatec, has changed its fiscal year to September 30 to conform to Pentacon's fiscal year end. The nine month period ended September 30, 1997, is therefore used for comparison purposes to the year ended December 31, 1996. Pentacon was founded in March 1997 and does not have financial statements for the nine month period ended September 30, 1996. For the remaining Founding Companies, 22 the nine month period ended September 30, 1997 is compared to the year ended December 31, 1996. The comparison below between the nine months ended September 30, 1997 and prior period is made as follows: (i) for net sales, the comparison is made versus the unaudited nine months ended September 30, 1996, and (ii) for cost of goods sold, gross profit, selling, general and administrative expenses and operating income, the comparison is made on a percentage of sales basis between the nine months ended September 30, 1997 and the twelve months ended December 31, 1996. RESULTS OF OPERATIONS -- COMBINED The Combined Founding Companies Statements of Operations for the years ended December 31, 1995 and 1996 and for the fiscal period comprised of the nine months ended September 30, 1997 do not purport to present results of operations of the combined Founding Companies in accordance with generally accepted accounting principles, but are only a summation of the revenues, gross profit and operating costs and expenses of the individual Founding Companies on a historical basis and exclude the effects of pro forma adjustments. This data may not be comparable to and may not be indicative of the Company's post combination results of operations because (i) the Founding Companies were not under common control or management during the periods presented; (ii) the Founding Companies used different tax structures (S corporations and C corporations) during the periods presented; (iii) the Company will incur incremental costs related to its new corporate management and the costs of being a public company; (iv) the Company will use the purchase method to record the Acquisitions, resulting in the recording of goodwill that will be amortized over 40 years; and (v) the combined data does not reflect the compensation differential and potential benefits and costs savings the Company expects to realize when operating as a combined entity. The following table sets forth the combined results of operations of the Founding Companies on a historical basis and such results as a percentage of net sales.
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED ------------------------------------------ 1995 1996 SEPTEMBER 30, 1997 -------------------- -------------------- -------------------- (DOLLARS IN MILLIONS) Net sales............................ $ 104.1 100.0% $ 120.0 100.0% $ 112.8 100.0% Cost of sales........................ 70.3 67.5 79.0 65.8 74.3 65.9 --------- --------- --------- --------- --------- --------- Gross profit......................... 33.8 32.5 41.0 34.2 38.5 34.1 Selling, general and administrative expenses........................... 27.0 26.0 31.3 26.1 28.9 25.6 --------- --------- --------- --------- --------- --------- Operating income..................... $ 6.8 6.5% $ 9.7 8.1% $ 9.6 8.5% ========= ========= ========= ========= ========= =========
COMBINED NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1996 NET SALES. Combined net sales increased $26.3 million, or 30.4%, from $86.5 million for the nine months ended September 30, 1996 to $112.8 million for the nine months ended September 30, 1997. The increase in combined net sales was attributable to several factors, including net sales to new customers and an increase in net sales to existing customers primarily at Alatec, AXS and Maumee and an acquisition in the third quarter of 1996 by AXS. Net sales for Alatec increased $9.0 million from the nine months ended September 30, 1996 to the nine months ended September 30, 1997 due to an increase in net sales to new and existing customers. Net sales for AXS increased $7.4 million from the nine months ended September 30, 1996 to the nine months ended September 30, 1997 due primarily to an acquisition during 1996 which accounted for $5.0 million of the increase, three new customers which accounted for $0.8 million of the increase and $1.0 million attributable to increased sales to new and existing customers due to the customers' implementation of new inventory management systems. Net sales for Maumee increased $8.3 million from the nine months ended September 30, 1996 to the nine months ended September 30, 1997 due to approximately a $4.5 million increase in sales to new customers and approximately a $5.5 million increase with existing customers, offset by a $1.2 million reduction in net sales to one existing customer. Net sales for the twelve months ended December 31, 1996 were $120.0 million compared to net sales for the nine months ended September 30, 1997 of $112.8 million. 23 COST OF SALES. As a percentage of net sales, combined cost of sales remained consistent at 65.8% in the twelve months ended December 31, 1996 and 65.9% in the nine months ended September 30, 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales, selling, general and administrative expenses decreased from 26.1% in the twelve months ended December 31, 1996 to 25.6% in the nine months ended September 30, 1997. As a percentage of net sales, selling, general and administrative expenses for Alatec decreased from 28.6% in the twelve months ended December 31, 1996 to 27.7% in the nine months ended September 30, 1997 due to an increase in net sales without a commensurate increase in administrative costs. As a percentage of net sales, selling, general and administrative expenses for AXS decreased from 24.1% in the twelve months ended December 31, 1996 to 22.7% in the nine months ended September 30, 1997. The decrease was primarily due to reduced compensation expense related to personnel reductions related to the elimination of duplicative positions resulting from the 1996 acquisition by AXS. As a percentage of net sales, selling, general and administrative expenses for Maumee increased from 20.2% in the twelve months ended December 31, 1996 to 24.0% in the nine months ended September 30, 1997. The increase was primarily attributable to $1.2 million, or 4.4%, as a percentage of net sales, in costs associated with the issuance of stock to a key employee. OPERATING INCOME. As a percentage of net sales, combined operating income increased from 8.1% in the twelve months ended December 31, 1996 to 8.5% in the nine months ended September 30, 1997 due to the factors discussed above. COMBINED YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995 NET SALES. Combined net sales increased $15.9 million, or 15.3%, from $104.1 million in 1995 to $120.0 million in 1996. Net sales for Alatec increased $3.5 million from 1995 to 1996 due to an increase in net sales to existing customers. Net sales for AXS increased $3.0 million from 1995 to 1996 due to an acquisition in 1996 which accounted for $2.7 million of the increase. Net sales for Maumee increased $5.6 million from 1995 to 1996 due to an increase in net sales to new and existing customers. Net sales for SSL increased $3.5 million primarily due to an increase of approximately $2.2 million in net sales to an existing customer. COST OF SALES. Combined cost of sales increased $8.7 million, or 12.4%, from $70.3 million in 1995 to $79.0 million in 1996. The increase in combined cost of sales was primarily a result of the increase in net sales for 1996 and increased costs related to AXS' 1996 acquisition. As a percentage of net sales, combined cost of sales decreased from 67.5% in 1995 to 65.8% in 1996 primarily due to an increase in sales of products with higher margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Combined selling, general and administrative expenses increased $4.3 million, or 15.9%, from $27.0 million in 1995 to $31.3 million in 1996. The increase in combined selling, general and administrative expenses was primarily due to several factors including an increase in personnel to support a higher volume of business and increased costs related to AXS' 1996 acquisition. As a percentage of net sales, combined selling, general and administrative expenses increased from 26.0% in 1995 to 26.1% in 1996. OPERATING INCOME. Due to the factors discussed above, combined operating income increased $2.9 million, or 42.6%, from $6.8 million in 1995 to $9.7 million in 1996. As a percentage of net sales, operating income increased from 6.5% in 1995 to 8.1% in 1996. COMBINED LIQUIDITY AND CAPITAL RESOURCES On a combined basis the Founding Companies generated $2.1 million of net cash from operating activities for the nine months ended September 30, 1997, which was used primarily for working capital requirements. Net cash used in investing activities was $0.6 million on a combined basis for the nine months ended September 30, 1997, primarily for capital expenditures. Net cash used in financing activities was $1.9 million for the nine months ended September 30, 1997 and primarily consisted of distributions to stockholders of $1.2 million and reductions in borrowings under lines of credit of $1.6 million. At 24 September 30, 1997, the combined Founding Companies had cash of $3.6 million, working capital of $26.0 million and total debt of $29.4 million (including $7.0 million of debt to related parties). On a combined basis, the Founding Companies generated $2.2 million of net cash from operating activities during 1996 primarily for working capital requirements. Net cash used in investing activities was $0.3 million on a combined basis for 1996 and was used primarily for capital expenditures. Net cash used in financing activities was $0.4 million on a combined basis and primarily consisted of advances under lines of credit of $1.8 million offset by distributions to stockholders of $1.2 million. At December 31, 1996, the combined Founding Companies had cash of $3.9 million, working capital of $23.9 million and total debt of $25.3 million, including $2.5 million of debt to related parties. The Company intends to obtain a credit facility which would be available upon the closing of the Offering. This credit facility would provide for a revolving line of credit up to $45 million, which would be used for general corporate purposes, including post-offering acquisitions, capital expenditures, and working capital. The ability of the Company to secure the credit facility is subject to satisfactory negotiations with prospective lenders as well as the execution of loan documentation. Upon the completion of the Offering, the Company intends to borrow approximately $5.1 million to repay certain assumed indebtedness of the Founding Companies. The Company intends to actively pursue acquisition opportunities. The Company expects to fund acquisitions through the issuance of additional Common Stock, borrowings (including use of amounts available under its credit facility), and cash flow from operations. The Company has agreed to repay substantially all of the Founding Companies' outstanding bank loans. Such payments will include $150,000 in prepayment penalties. Capital expenditures for equipment and expansion of facilities are expected to be funded from cash flow from operations and supplemented as necessary by borrowings from the credit facility or other sources of financing. The Company anticipates that its cash flow from operations will be sufficient to meet the Company's normal working capital and debt service requirements for at least the next several years. The Company anticipates spending approximately $2.5 million on updating and combining the Founding Companies' computer systems. Such costs include the estimated cost of any software updates required to allow the systems to process data attributable to the year 2000 and thereafter. The funds to pay such costs will be obtained from cash flow, the Company's credit facilities, or both. RESULTS OF OPERATIONS -- ALATEC Alatec, headquartered in Chatsworth, California, was founded in 1972 and operates through eight distribution facilities and sales offices located throughout the United States. Alatec principally serves the commercial aviation, defense electronics and other high-technology industries. The following table sets forth certain historic data and such data as a percentage of net sales for the periods indicated:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------------------------------ SEPTEMBER 30, 1997 1995 1996 -------------------- -------------------- -------------------- (DOLLARS IN MILLIONS) Net sales............................ $ 41.2 100.0% $ 44.7 100.0% $ 42.3 100.0% Cost of sales........................ 26.2 63.6 26.7 59.7 25.1 59.3 --------- --------- --------- --------- --------- --------- Gross profit......................... 15.0 36.4 18.0 40.3 17.2 40.7 Selling, general and administrative expenses........................... 11.3 27.4 12.8 28.6 11.7 27.7 --------- --------- --------- --------- --------- --------- Operating income..................... $ 3.7 9.0% $ 5.2 11.7% $ 5.5 13.0% ========= ========= ========= ========= ========= =========
ALATEC NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1996 NET SALES. Net sales increased $9.0 million, or 27.0%, from $33.3 million for the nine months ended September 30, 1996 to $42.3 million for the nine months ended September 30, 1997. Approximately $1.0 25 million of this increase was attributable to new customers and approximately $8.0 million was due to an increase in net sales to existing customers. Net sales for the twelve months ended December 31, 1996 were $44.7 million compared to net sales for the nine months ended September 30, 1997 of $42.3 million. COST OF SALES. As a percentage of net sales, cost of sales remained relatively constant at 59.3% in the nine months ended September 30, 1997 compared to 59.7% the twelve months ended December 31, 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales, selling, general and administrative expenses decreased from 28.6% in the twelve months ended December 31, 1996 to 27.7% in the nine months ended September 30, 1997. This percentage decrease was a result of the increase in net sales without a commensurate increase in administrative costs. OPERATING INCOME. As a percentage of net sales, operating income increased from 11.7% in the twelve months ended December 31, 1996 to 13.0% in the nine months ended September 30, 1997 as a result of the factors discussed above. ALATEC YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995 NET SALES. Net sales increased $3.5 million, or 8.5%, from $41.2 million in 1995 to $44.7 million in 1996. Approximately $1.0 million of this increase was attributable to new customers and approximately $2.5 million was due to an increase in net sales to existing customers. COST OF SALES. Cost of sales increased $0.5 million, or 1.9%, from $26.2 million in 1995 to $26.7 million in 1996. As a percentage of net sales, cost of sales decreased from 63.6% in 1995 to 59.7% in 1996. The decrease was primarily due to an increase in sales of products with higher margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $1.5 million, or 13.3%, from $11.3 million in 1995 to $12.8 million in 1996. Approximately $0.6 million of this increase was due to the hiring of additional personnel to support certain new just in time supply contracts and the majority of the remainder was related to wage increases and overtime expense. As a percentage of net sales, selling, general and administrative expenses increased from 27.4% in 1995 to 28.6% in 1996. OPERATING INCOME. Due to the factors discussed above, operating income increased $1.5 million, or 40.5%, from $3.7 million in 1995 to $5.2 million in 1996. As a percentage of net sales, operating income increased from 9.0% in 1995 to 11.7% in 1996. ALATEC LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, Alatec had working capital of $20.2 million, compared to working capital of $17.1 million at December 31, 1996. Alatec's principal capital requirements have been to fund inventory and accounts receivable and purchase and upgrade property and equipment. Historically, these requirements have been met by cash flows from operating activities and borrowings under bank lines of credit. Net cash provided by (used in) operating activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $(1.1) million, $(0.4) million and $0.1 million, respectively. Net cash used in investing activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $0.1 million, $0.3 million and $0.1 million, respectively. The net cash used for investing activities during these periods was primarily attributable to capital expenditures of which the individual components of these expenditures were not significant. Net cash provided by financing activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $1.0, $0.9 million and $0.5 million, respectively. As of September 30, 1997, Alatec had a $13.3 million bank credit facility secured by accounts receivable, inventories, equipment and the guarantee of the principal stockholder. The facility will expire in June 1999. At September 30, 1997, approximately $3.0 million was available for borrowings. The credit agreement contains certain restrictive financial covenants including, but not limited to, minimum working capital requirements and dividend restrictions. As of September 30, 1997, the Company was in compliance with the financial covenants. However, at September 30, 1997 Alatec was not in compliance with certain 26 nonfinancial covenants relating to providing information and notice of defined transactions and events to the bank. The bank has provided a written waiver for these covenant violations and management believes that the Company will be in compliance with these covenants in future periods. It is anticipated that the bank credit facility will be repaid upon consummation of the Offering. RESULTS OF OPERATIONS -- AXS AXS, headquartered in Erie, Pennsylvania, was founded in 1996 upon the merger of Hoyt (founded 1964) and Champion (founded 1968). AXS operates through two distribution facilities and sales offices located in Pennsylvania and Illinois. AXS principally serves the power generation, locomotive, gas and steam turbine and small motor industries. The following table sets forth certain historic data and such data as a percentage of net sales for the periods indicated:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------------------------------ SEPTEMBER 30, 1997 1995 1996 -------------------- -------------------- -------------------- (DOLLARS IN MILLIONS) Net sales............................ $ 20.2 100.0% $ 23.2 100.0% $ 22.0 100.0% Cost of sales........................ 13.0 64.4 15.1 65.1 15.3 69.6 --------- --------- --------- --------- --------- --------- Gross profit......................... 7.2 35.6 8.1 34.9 6.7 30.4 Selling, general and administrative expenses........................... 4.7 23.3 5.6 24.1 5.0 22.7 --------- --------- --------- --------- --------- --------- Operating income..................... $ 2.5 12.3% $ 2.5 10.8% $ 1.7 7.7% ========= ========= ========= ========= ========= =========
AXS NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 1996 NET SALES. Net sales increased $7.4 million, or 50.7% from $14.6 million for the nine months ended September 30, 1996 to $22.0 million for the nine months ended September 30, 1997. The increase was due to the acquisition of Hoyt during the third quarter of 1996, which accounted for $5.0 million of the increase, three new customers which accounted for $0.8 million of the increase and $1.0 million attributable to increased sales to new and existing customers due to the customers' implementation of inventory management systems. Net sales for the twelve months ended December 31, 1996 were $23.2 million compared to net sales for the nine months ended September 30, 1997 of $22.0 million. COST OF SALES. As a percentage of net sales, cost of sales increased from 65.1% in the twelve months ended December 31, 1996 to 69.6% in the nine months ended September 30, 1997. The increase was primarily due to the writedown of slow-moving inventory to market of approximately $700,000. The inventory written down to market was not concentrated in any particular class or classes of inventory and resulted from more inventory meeting the Company's slow-moving or obsolescence criteria in a variety of classes of inventory. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales, selling, general and administrative expenses decreased from 24.1% in the twelve months ended December 31, 1996 to 22.7% in the nine months ended September 30, 1997. The decrease was primarily due to reduced compensation expense related to the termination of an executive level position and other personnel reductions related to the elimination of duplicative positions resulting from the 1996 acquisition of Hoyt. OPERATING INCOME. As a percentage of net sales, operating income decreased from 10.8% in the twelve months ended December 31, 1996 to 7.7% in the nine months ended September 30, 1997. AXS YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995 NET SALES. Net sales increased $3.0 million, or 14.9%, from $20.2 million in 1995 to $23.2 million in 1996. The increase was primarily due to the acquisition of Hoyt during the third quarter of 1996, which accounted for $2.7 million of the increase. 27 COST OF SALES. Cost of sales increased $2.1 million, or 16.2%, from $13.0 million in 1995 to $15.1 million in 1996. The increase was primarily attributable to the increase in net sales in 1996 and costs associated with the 1996 acquisition of Hoyt. As a percentage of net sales, cost of sales increased from 64.4% in 1995 to 65.1% in 1996. The increase was primarily due to an increase in the sale of products with lower profit margins. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $0.9 million, or 19.1%, from $4.7 million in 1995 to $5.6 million in 1996. Substantially all of this increase was related to costs associated with the 1996 acquisition of Hoyt. As a percentage of net sales, selling, general and administrative expenses increased from 23.3% in 1995 to 24.1% in 1996. OPERATING INCOME. Due to the factors discussed above, operating income remained constant at $2.5 million for both periods. As a percentage of net sales, operating income decreased from 12.3% in 1995 to 10.8% in 1996. AXS LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, AXS' working capital was $4.3 million, compared to working capital of $6.4 million at December 31, 1996. AXS' principal capital requirements have been to fund inventory and purchase and upgrade property and equipment. Historically, these requirements have been met by cash flows from operating activities and borrowings under bank lines of credit. Net cash provided by operating activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $3.4 million, $2.5 million and $1.9 million, respectively. Net cash provided by (used in) investing activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $(0.2) million, $0.3 million and $(0.1) million, respectively. The net cash used in investing activities during these periods was primarily attributable to capital expenditures of which the individual components of these expenditures were not significant. Net cash used in financing activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $2.5 million, $0.9 million and $2.5 million, respectively. The Company continuously evaluates its inventory for slow-moving and obsolete inventory and makes appropriate non-cash charges to cost of sales to write any such inventory down to market. During the nine months ended September 30, 1997, the Company wrote down inventory by approximately $0.7 million as a result of an increase of items which met the Company's slow-moving or obsolete inventory criteria as compared to no write-down during the year ended December 31, 1996. The write-down was due to the accumulation of prior purchases in a variety of inventory classes for which sales have slowed down or ceased. The inventory that became slow-moving or obsolete in 1997 was not due to the loss of any significant customer, and management does not believe the write-down in 1997 was the result of a continuing trend. Management is monitoring its purchasing patterns to better reflect demand and does not expect this trend to continue. As of September 30, 1997, AXS had a $3.0 million bank credit facility secured by separate balances with the bank and the guarantee of the two principal stockholders, which was due on demand. At September 30, 1997 approximately $1.1 million was available for borrowings. It is anticipated that the bank credit facility will be repaid upon consummation of the Offering. RESULTS OF OPERATIONS -- MAUMEE Maumee, headquartered in Fort Wayne, Indiana, was founded in 1979 and operates through four facilities and sales offices in two states. Maumee principally serves the automotive, recreational vehicle, heavy duty truck and toy industries. 28 The following table sets forth certain historic data and such data as a percentage of net sales for the period indicated:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------------------------------ SEPTEMBER 30, 1997 1995 1996 -------------------- -------------------- -------------------- (DOLLARS IN MILLIONS) Net sales............................ $ 20.6 100.0% $ 26.2 100.0% $ 27.5 100.0% Cost of sales........................ 16.1 78.2 19.7 75.2 19.6 71.3 --------- --------- --------- --------- --------- --------- Gross profit......................... 4.5 21.8 6.5 24.8 7.9 28.7 Selling, general and administrative expense............................ 4.6 22.3 5.3 20.2 6.6 24.0 --------- --------- --------- --------- --------- --------- Operating income..................... $ (0.1) (0.5)% $ 1.2 4.6% $ 1.3 4.7% ========= ========= ========= ========= ========= =========
MAUMEE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1996 NET SALES. Net sales increased $8.3 million, or 43.2%, from $19.2 million for the nine months ended September 30, 1996 to $27.5 million for the nine months ended September 30, 1997. Approximately $4.0 million of this increase was attributable to new customers and approximately $5.5 million was due to an increase in net sales to existing customers offset by approximately a $1.2 million reduction in net sales to one existing customer. Net sales for the twelve months ended December 31, 1996 were $26.2 million compared to net sales for the nine months ended September 30, 1997 of $27.5 million. COST OF SALES. As a percentage of net sales, cost of sales decreased from 75.2% in the twelve months ended December 31, 1996 to 71.3% in the nine months ended September 30, 1997. The decrease was due to a higher margin product mix from new products and from the use of lower cost suppliers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales, selling, general, and administrative expenses increased from 20.2% in the twelve months ended December 31, 1996 to 24.0% in the nine months ended September 30,1997. The increase was primarily attributable to $1.2 million, or 4.4%, as a percentage of net sales, in costs associated with the issuance of stock to a key employee. OPERATING INCOME. As a percentage of net sales, operating income increased from 4.6% in the twelve months ended December 31, 1996 to 4.7% in the nine months ended September 30, 1997. MAUMEE YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995 NET SALES. Net sales increased $5.6 million, or 27.2%, from $20.6 million in 1995 to $26.2 million in 1996. Approximately $1.0 million of this increase was attributable to a new customer and the majority of the remainder was attributable to an increase in net sales to existing customers. COST OF SALES. Cost of sales increased $3.6 million, or 22.4%, from $16.1 million in 1995 to $19.7 million in 1996, primarily as a result of the increase in sales in 1996. As a percentage of net sales, cost of sales decreased from 78.2% in 1995 to 75.2% in 1996. The decrease was due to increased sales of higher margin products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $0.7 million, or 15.2%, from $4.6 million in 1995 to $5.3 million in 1996. This increase was primarily due to an increase in personnel needed to support increased sales volume. As a percentage of net sales, selling, general and administrative expenses decreased from 22.3% in 1995 to 20.2% in 1996. OPERATING INCOME. Operating income increased $1.3 million from $(0.1) million in 1995 to $1.2 million in 1996. As a percentage of net sales, operating income increased from a loss in 1995 to 4.6% in 1996. MAUMEE LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, Maumee had a working capital deficit of $1.9 million, compared to a working capital deficit of $3.0 million at December 31, 1996. Maumee's principal capital requirements have been to 29 fund inventory and accounts receivable and purchase and upgrade property and equipment to support the growth of the Company. Historically, these requirements have been met by cash flows from operating activities and borrowings under bank lines of credit. Net cash used in operating activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $0.6 million, $0.03 million and $0.6 million, respectively. The usage of cash from operations during these three periods is due to the working capital requirements to fund the growth and successful turnaround of the Company. During the three periods presented the Company has been focused on increasing sales volume and returning the Company to profitability. As noted above, sales have increased 27.2% from 1995 to 1996 and increased 43.2% for the nine months ended September 30, 1996 to the nine months ended September 30, 1997. The usage of cash from operations has primarily been to support the increase in inventory and accounts receivable offset by an increase in accounts payable related to the increase in sales volume. As sales volumes have increased, the Company's gross margins have increased as a result of the Company's ability to decrease its costs to purchase certain inventory and to focus on selling higher margin products. Management has decreased its working capital deficit by $0.9 million during the nine months ended September 30, 1997 and anticipates the Company's historical gross margin will remain stable and result in the Company's ability to generate cash flows from operations and generate working capital. Net cash used in investing activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $0.2 million, $0.1 million and $0.2 million, respectively. The net cash used for investing activities during these periods was primarily attributable to capital expenditures of which the individual components of these expenditures were not significant. Net cash provided by financing activities for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 was $0.8 million, $0.2 million and $0.7 million, respectively. As of September 30, 1997, Maumee had a $7.7 million bank credit facility secured by substantially all of Maumee's assets including accounts receivable, inventories, equipment and the guarantee of the principal stockholder. The facility will expire May 31, 2000. At September 30, 1997, approximately $2.2 million was available for borrowings. It is anticipated that the bank credit facility will be repaid upon consummation of the Offering. RESULTS OF OPERATIONS -- SSL SSL, headquartered in Allentown, Pennsylvania, was founded in 1979 and operates through two distribution facilities and sales offices in Pennsylvania and South Carolina. SSL principally serves the motor vehicles, furniture and equipment, general service machinery and transport equipment industries. The following table sets forth certain historic data and such data as a percentage of net sales for the periods indicated:
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------------------ SEPTEMBER 30, 1997 1995 1996 -------------------- -------------------- -------------------- (DOLLARS IN MILLIONS) Net sales............................ $ 12.2 100.0% $ 15.7 100.0% $ 12.0 100.0% Cost of sales........................ 8.0 65.6 10.5 66.9 8.1 67.5 --------- --------- --------- --------- --------- --------- Gross profit......................... 4.2 34.4 5.2 33.1 3.9 32.5 Selling, general and administrative expenses........................... 3.7 30.3 4.6 29.3 3.1 25.8 --------- --------- --------- --------- --------- --------- Operating income..................... $ 0.5 4.1% $ 0.6 3.8% $ 0.8 6.7% ========= ========= ========= ========= ========= =========
SSL NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER 31, 1996 NET SALES. Net sales increased $0.1 million, or 0.8%, from $11.9 million for the nine months ended September 30, 1996 to $12.0 million for the nine months ended September 30, 1997. Revenues remained 30 relatively constant for both periods primarily due to a reduction of approximately $2.0 million in net sales to one existing customer offset by an increase in net sales of approximately $2.0 million to other customers. Net sales for the twelve months ended December 31, 1996 were $15.7 million compared to net sales for the nine months ended September 30, 1997 of $12.0 million. COST OF SALES. As a percentage of net sales, cost of sales increased from 66.9% in the twelve months ended December 31, 1996 to 67.5% in the nine months ended September 30, 1997 due to increased supplier costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales, selling, general and administrative expenses decreased from 29.3% in the twelve months ended December 31, 1996 to 25.8% in the nine months ended September 30, 1997. The decrease was attributable to a reduction in personnel and related expenses. OPERATING INCOME. As a percentage of net sales, operating income increased from 3.8% in the twelve months ended December 31, 1996 to 6.7% in the nine months ended September 30, 1997, due to the factors discussed above. SSL YEAR ENDED 1996 COMPARED TO YEAR ENDED 1995 NET SALES. Net sales increased $3.5 million, or 28.7%, from $12.2 million in 1995 to $15.7 million in 1996. Approximately $2.2 million of this increase was attributable to one customer and the remainder of the increase was due to increased net sales to other customers. COST OF SALES. Cost of sales increased $2.5 million, or 31.3%, from $8.0 million in 1995 to $10.5 million in 1996, primarily as a result of the increase in sales in 1996. As a percentage of net sales, cost of sales increased from 65.6% in 1995 to 66.9% in 1996. The increase was due to competitive pricing and lower margins on the increased net sales related to the one customer mentioned above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $0.9 million, or 24.3%, from $3.7 million in 1995 to $4.6 million in 1996. The increase was due in part to the higher volume of business, but also reflects the addition of personnel to support the additional net sales related to the one existing customer mentioned above. As a percentage of net sales, however, selling, general and administrative expenses decreased from 30.3% in 1995 to 29.3% in 1996. OPERATING INCOME. Operating income increased $0.1 million, or 20.0%, from $0.5 million in 1995 to $0.6 million in 1996. As a percentage of net sales, operating income decreased from 4.1% in 1995 to 3.8% in 1996, due to the factors discussed above. SSL LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, SSL had working capital of $1.9 million, compared to working capital of $1.4 million at December 31, 1996. SSL's principal capital requirements have been to fund inventory and accounts receivable and purchase and upgrade property and equipment. Historically, these requirements have been met by cash flows from operating activities and borrowings under bank lines of credit. Net cash provided by (used in) operating activities for the fiscal year ended December 31, 1996 and the nine months ended September 30, 1997 was $(0.1) million and $1.2 million, respectively. Net cash used in investing activities for the fiscal year ended December 31, 1996 and the nine months ended September 30, 1997 was $0.2 million and $0.1 million, respectively. The net cash used for investing activities during these periods was primarily attributable to capital expenditures of which the individual components of these expenditures were not significant. Net cash provided by (used in) financing activities for the fiscal year ended December 31, 1996 and the nine months ended September 30, 1997 was $0.3 million and $(1.2) million, respectively. SSL paid distributions to shareholders of $0.2 million in 1996 and 1997. Borrowings in 1996 were primarily made to fund working capital requirements. During 1997 SSL repaid a portion of the borrowings under its revolving bank credit facility. Prior to the Acquisitions, SSL anticipates borrowing approximately $0.5 million to fund its portion of the S Corporation Tax Payment Distributions. 31 As of September 30, 1997, SSL had a $1.3 million bank credit facility secured by accounts receivable and inventories and the guarantee of the stockholders which will expire on June 1, 1998. At September 30, 1997, approximately $0.9 million was available for borrowings. It is anticipated that the bank credit facility will be repaid upon consummation of the Offering. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company experiences modest seasonal declines in the fourth calendar quarter due to declines in its customers' activities in that quarter. The Company's volume of business may be adversely affected by a decline in projects as a result of regional or national downturns in economic conditions. Quarterly results may also be materially affected by the timing of acquisitions and the timing and magnitude of acquisition assimilation costs. Accordingly, the operating results for any three-month period are not necessarily indicative of the results that may be achieved for any subsequent fiscal quarter or for a full fiscal year. INFLATION Inflation has not had a material impact on the Company's results of operations for the last three years. 32 BUSINESS GENERAL The Company is a leading distributor of fasteners and other small parts and provider of related inventory procurement and management services to original equipment manufacturers ("OEMs") on a worldwide basis. Fasteners and small parts include screws, bolts, nuts, washers, pins, rings, fittings, springs, electrical connectors and similar parts. Pentacon was founded in March 1997 to aggressively pursue the consolidation of the highly-fragmented fastener distribution industry. According to an industry study by The Freedonia Group, Inc., sales by fastener manufacturers in 1996 were approximately $8.0 billion in the United States and $25.0 billion globally. The United States fastener market is estimated to have over 1,900 distributors. The Company believes that the OEM fastener and small part distribution industry is in the early stages of consolidation, and the Company plans to lead the consolidation of the industry. The Company believes that its broad selection of fasteners and small parts, high quality services, professional management team, and strong competitive position as a publicly-owned fastener distributor focused on the OEM market, will allow it to be the leading consolidator. Fasteners and other small parts constitute a majority of the total number of parts needed by an OEM to manufacture many products, but represent only a small fraction of the total materials cost. The cost for an OEM to internally manage its inventory of fasteners and small parts is relatively high due to (i) the large number of fasteners and other small parts in the inventory, (ii) the risk of interruptions for just-in-time ("JIT") manufacturing operations, and (iii) the need to perform quality assurance testing of the fasteners and small parts. The Company believes that OEMs are increasingly outsourcing their fastener and other small parts inventory procurement and management needs to distributors in order to focus on their core manufacturing businesses and to reduce costs. To further reduce costs, many manufacturers are seeking to consolidate the number of distributors they use and are selecting national distributors with extensive product lines who can also provide inventory-related services. To capitalize on these trends, the Company offers a broad array of fasteners and small parts and provides a variety of related procurement and inventory management services, including inventory management information systems ("MIS") and reports, JIT delivery, quality assurance, advisory engineering services, component kit production and delivery, small component assembly and electronic data interchange ("EDI"). Upon consummation of the Offering, Pentacon will acquire the five Founding Companies, which have been in business an average of 25 years and which had combined net sales of $120.0 million in 1996 and $112.8 million for the nine months ended September 30, 1997. While total U.S. sales of fasteners have increased at a compound annual rate of approximately 4.1% during the four years ending December 31, 1996, the combined net sales of the Founding Companies have increased at a compound annual rate of approximately 14.8% per year over the same period. The Company believes that it has generated superior growth primarily by expanding the breadth of its product offerings and value-added services, which has allowed the Founding Companies to increase market share at existing customers and attract new customers. INDUSTRY OVERVIEW Companies operating in the fastener distribution business can generally be characterized by the end users they serve, which are comprised broadly of OEMs, maintenance and repair operations ("MROs") and construction companies. The traditional fastener distribution market is similar to most industrial distribution markets. Fasteners are purchased from both domestic and overseas manufacturers and sold to both domestic and overseas customers. The majority of these fasteners are sold to OEM and MRO clients on a purchase order basis. Some smaller distributors specialize along industry lines because of the uniqueness of manufacturer requirements. Other smaller distributors provide a wide range of fasteners used for general assembly. Larger distributors, such as the Company, generally provide a wide range of fasteners as well as meet certain specialized industry needs. The U.S. sales by fastener manufacturers was estimated to be approximately $8.0 billion in 1996, and the global market for fasteners is estimated to be $25.0 billion. The OEM market represents in excess of 80% of the total U.S. fastener market, the MRO market accounts for 13% with construction and other 33 markets accounting for the remaining 7%. There are in excess of 1,900 fastener distributors in the United States, none of which is responsible for more than 4% of the market sales. The Company believes that there is currently only one public company whose primary business is fastener distribution. The industry data provided herein were derived from several sources including Dun & Bradstreet and The Freedonia Group, Inc. The following table lists the approximate number of privately owned fastener companies in the U.S. by size: NUMBER OF PRIVATELY OWNED FASTENER DISTRIBUTION COMPANIES BY SALES VOLUME NUMBER OF PRIVATE SALES VOLUME COMPANIES - ------------------------------------- ----------------- (DOLLARS IN MILLIONS) $100+ 3 $50-$100 10 $25-$50 11 $10-$25 61 $5-$10 112 $2-$5 270 less than $2 1,523 Customer demand for inventory management services and electronic data exchange has required industry participants to make substantial investments in sophisticated computer systems in order to remain competitive. Automated inventory picking, component kit assembly and quality control laboratories also require significant capital investment in equipment. In addition, many customers are seeking to reduce their operating costs by decreasing the number of suppliers with whom they do business, often eliminating those suppliers offering limited ranges of products and services. The Company believes that these trends have placed a substantial number of small, owner-operated fastener distributors at a competitive disadvantage because of their limited product lines and inventory systems. In addition they have limited access to the capital resources necessary to modernize and expand their capabilities. The owners of these businesses traditionally have not had a viable exit strategy, leaving them with few attractive liquidity options. Due in part to these factors, the Company believes that the opportunity exists for a well capitalized professionally managed company to lead the consolidation of the industry. BUSINESS STRATEGY The Company intends to become the leading fastener and small parts distributor on a worldwide basis. Key elements of the Company's strategy to achieve its objective are: PROVIDE VALUE-ADDED SERVICES. The Company seeks to continually develop and supply inventory-related services designed to reduce its customers' operating costs. Quality assurance, JIT delivery and component kit production are examples of such services currently provided by the Company to its customers. By supplying such services, the Company becomes more integrated into the customers' internal manufacturing processes and is better able to anticipate its customers' needs which the Company believes results in improved profitability and customer retention. DELIVER SUPERIOR CUSTOMER SERVICE. OEMs and other fastener customers choose fastener suppliers based, in significant part, on the quality of the service supplied. The Company believes that its superior customer service depends on its well-trained, technically competent workforce and that its workforce provides an advantage over other fastener distributors. The Company intends to review the training and operating practices at each Founding Company to identify and adopt those "best practices" in providing customer service that can be successfully implemented throughout its operations. As part of its commitment to superior customer service, the Company intends to have each of its operating companies certified under the International Standards Organization ("ISO") standards for distribution companies. 34 ACCELERATE INTERNAL SALES GROWTH. One of the primary goals of the Company is to accelerate internal growth by both expanding the range of products and services provided to existing customers and aggressively pursuing new customers domestically and abroad. The Company believes it will be able to expand sales to existing customers by capitalizing on (i) the diverse products and the marketing expertise of the Founding Companies, (ii) cross-selling opportunities across the Company's customer base, and (iii) the additional financial resources that are expected to be available after consummation of the Offering. The Company believes its broad geographic coverage will present opportunities to capture additional business from existing customers that operate on a national and international basis. The Company intends to implement a company-wide marketing program and to adopt the "best practices" used by the Founding Companies to identify, obtain and maintain new customers. EXPAND OPERATING MARGINS. The Company believes that the combination of the Founding Companies will provide significant opportunities to increase its profitability. The key components of this strategy are to increase operating efficiencies and centralize appropriate administrative functions. The Company intends to use its increased purchasing power to improve contractual relationships and gain volume discounts from its suppliers. The Company also intends to improve productivity through enhanced inventory management procedures, increased utilization of the Company's laboratories and distribution facilities, and the consolidation of information systems and employee benefits. AGGRESSIVELY PURSUE ACQUISITIONS. The Company believes that the fastener distribution industry is highly fragmented and in the early stages of consolidation. The Company intends to pursue an aggressive acquisition program targeting fastener distributors that will help the Company increase its presence in markets it currently services, sell to new markets, develop new customer relationships with major OEMs, increase its presence in the international markets and expand its range of products and services. The Company believes there is a significant number of acquisition candidates available and that it will be regarded as an attractive acquiror due to its position as an industry leader, its ability to offer cash and/or publicly-traded stock for acquisitions, and the potential for improved growth and profitability as part of the Company. ACQUISITION STRATEGY The Company intends to pursue an aggressive acquisition program. The Company intends to acquire other fastener distributors in order to enter new industries and markets; increase sales in certain industries it currently serves; develop new customer relationships with major OEMs; expand the geographical reach of the Company; and expand its range of products and services. Potential acquisition candidates will be evaluated on the strength of management, quality of customer service, profitability and industry orientation. The Company believes it will be regarded by acquisition candidates as an attractive acquiror because of (i) the Company's strategy for creating an international, comprehensive and professionally managed value-added distributor of fasteners and other small parts to OEMs; (ii) the Company's ability to acquire businesses with a combination of cash and publicly traded stock; (iii) the Company's increased visibility and access to financial resources as a public company; and (iv) the potential for increased profitability of the acquired company due to purchasing economies, centralization of administrative functions, enhanced systems capabilities and access to increased marketing resources. The Company believes management of the Founding Companies will be instrumental in identifying and completing future acquisitions. Moreover, several of the principals of the Founding Companies have held leadership roles in industry trade associations, which have enabled these individuals to develop relationships with the owners of numerous acquisition targets across the country. The Company expects that the visibility of these individuals and the Company within the industry will increase the awareness of, and interest of acquisition candidates in, the Company and its acquisition program. Within the past several months, the Company has contacted the owners of a number of acquisition candidates, several of whom have expressed interest in discussing the sale of their businesses to the Company. The Company has engaged in preliminary discussions with a few potential acquisition candidates; however, the Company has not engaged in any material negotiations with such candidates, and the Company does not have any 35 agreements, understandings, arrangements or commitments with respect to any acquisitions other than the acquisitions of the Founding Companies. As consideration for future acquisitions, the Company intends to primarily use various combinations of its Common Stock and cash. The consideration for each future acquisition will vary on a case-by-case basis, with the major factors in establishing the purchase price being historical operating results, future prospects of the target and the ability of the target to provide entry to new OEM markets or customers. Within 90 days following the completion of the Offering, the Company intends to register 3,350,000 additional shares of Common Stock under the Securities Act for its use in connection with future acquisitions. The Company believes that it can structure certain acquisitions as tax-free reorganizations by using its Common Stock as consideration, which will be attractive to those targeted business owners with a low-tax basis in the stock of their businesses. See "Risk Factors -- Risks Related to the Company's Acquisition Strategy." PRODUCTS The Company distributes over 100,000 different fasteners and other small parts, generally denoted by a unique standard identifier known as a Stockkeeping Unit ("SKU"). The SKUs fall into two general categories: fasteners and other small parts. FASTENERS. Fasteners sold by the Company include screws, bolts, nuts, washers, rings, pins, rivets and staples. These items come in a variety of materials, sizes, platings, and shapes. The variety is driven by the end-use requirement or specification of the fastener, such as strength, resistance to corrosion, reusability, and many other factors. The Company's sales and purchasing departments have extensive knowledge of the available products offered by fastener manufacturers, and play an important role in assisting OEMs to select the appropriate fastener for a given application. Some of the more common variable characteristics of the fasteners sold by the Company include: o Materials -- The materials used in the manufacture of fasteners include steel, brass, aluminum, nylon, bronze, stainless steel, titanium, copper, polypropylene, alloys and other materials. Most of these materials come in different grades with each having a unique set of properties. o Sizes -- The sizes vary by length, outside diameter, depth of the threads, threads per inch or centimeter and pitch, or angle, of the threads. o Platings -- Platings may be applied to enhance the properties of a given metal, and include zinc, cadmium, chrome, nickel, organic and other materials. o Shapes -- The range of shapes is broad, including hex head, U-bolt, L-bolt, shouldered, eye bolt, external tooth, internal tooth and many others. OTHER SMALL PARTS. The Company also distributes other small parts used by OEMs to assemble their products. These items include standoffs, inserts, clamps, spacers, springs, brackets, electrical connectors, small molded parts, cable ties, plugs, hoses, fittings and other small parts. Like fasteners, these parts come in many shapes, sizes and materials depending upon the designated end-use. OEMs are increasingly requesting that the Company provide these parts because they are often used during the manufacturing or assembly process in conjunction with the fasteners supplied by the Company. SERVICES In connection with its sale of fasteners and other small parts, the Company also provides a wide range of value-added services to OEMs. The OEMs' demand for these services is driven by the reduction in costs achievable through the use of such services. These value-added services also benefit the Company by further integrating the Company into its customers' process. The Company's services include: INVENTORY PROCUREMENT AND MANAGEMENT SYSTEMS. Increasingly, manufacturers are outsourcing their inventory management needs to distributors. These services range from installing a simple inventory bin card system to developing a complete turn-key inventory management system with full-time staff. These inventory systems are designed to meet the specific needs of the Company's 36 customers. They range in sophistication from helping the OEM set appropriate order quantities and frequencies to delivering the correct fastener or small part to the assembly floor on a JIT basis. In some cases, the Company utilizes computer systems deployed at the OEM's sites to facilitate the management of the fastener and parts inventories. Inventory replenishment services and product consolidation services decrease the number of invoices and vendors, lower inventory carrying cost, and allow customers to focus on their core manufacturing business. COMPREHENSIVE PRODUCT AVAILABILITY. OEMs have reduced their operating costs by reducing the number of suppliers they use. The Company provides a wide array of fasteners and other small parts and will, upon a customer's request, stock additional parts. As a result, the Company's customers are able to reduce the number of distributors they use. KIT SERVICES. OEMs often request that the Company package several fasteners or parts into a package or "kit." A common use of this service is to supply fastener kits included with products the retail consumer is required to assemble such as lawn mowers, bicycles and furniture. The use of kits has also expanded into the manufacturing environment. Manufacturers frequently desire to have several related fasteners or components arrive at the assembly line in a single package; this ensures that all of the parts arrive at the same time and that no part will be missed in the installation process. This "kit" process aids the manufacturer by decreasing the number of distributors needed and improves productivity by having the fasteners delivered to the assembly line with the other related parts. Kit services improve the efficiency and effectiveness of the manufacturing line and decreases the number of stock outs and subsequent manufacturing line stoppages. QUALITY ASSURANCE SERVICES. These services involve the testing of fasteners to ensure they meet the specifications stated by the manufacturer. Although fasteners are not a significant part of the costs in a product, they are often critical components whose failure can cause the entire product to fail. As a result, many OEMs require strict quality control with respect to the fasteners. Certain of the Founding Companies have installed specialized equipment and laboratories and hired trained technicians to perform quality control tests on some of their fastener products. Quality assurance services lower the warranty costs of the OEMs. The Company operates four labs to test fasteners. The labs can test metallurgy, size consistency, corrosion and strength as well as other properties. Additionally, two of the Founding Companies are ISO-9002 certified and the remaining three are in the process of becoming certified under ISO-9002 or a comparable standard. The Company expects the substantial majority of its currently uncertified locations to be ISO compliant or certified in 1998. PRODUCT ENHANCEMENT SERVICES. In order to meet the exacting requirements of customers, the Company maintains relationships with vendors that provide plating, galvanizing and coating services. These services are used to enhance in-stock fasteners in order to meet the specific requirements of OEMs. The ability of the Company to manage the process and quickly respond to small orders enhances the relationship with the Company's customers. SUB-ASSEMBLY SERVICES. Customers may request that two or more parts in a kit be pre-assembled into a single unit prior to being placed in the kit. These services are closely related to the kit services offered by the Company and are offered at the request of customers. Similar to kits, the sub-assembly services improve the productivity of the OEM's manufacturing line. ENGINEERING SERVICES. Upon a customer's request, the Company will provide advice regarding the types of fasteners to use in a product. These services are often used by customers during early product development or re-engineering to decrease the production cost, improve the assembly process or enhance the product quality. The Company works with its customers' engineering departments to select the appropriate fasteners and components based upon the specifications of the customer. These services often lower the customer's cost by reducing the number of fasteners required to assemble the product, replacing expensive special fasteners with less expensive standards or identifying different coatings to improve quality. EDI SERVICES. The Company offers a wide range of options with respect to the type and level of EDI services available to its customers. In addition to offering invoice and payment options, the 37 Company can also offer its customers direct access to its current inventory, images of fasteners with specifications, and the ability to enter an order directly into the Company's system. CUSTOMERS The Company sells fasteners and other small parts to more than 2,600 customers in over 25 countries. The customers manufacture a wide variety of products including diesel engines, locomotives, power turbines, motorcycles, telecommunications equipment, refrigeration equipment and aerospace equipment. For the nine months ended September 30, 1997, the Company had net sales of $112.8 million. The Company's ten largest customers, including Cummins Engine Company, General Electric Corporation, Harley-Davidson, Inc., the Hughes Aircraft subsidiary of General Motors Corporation, The Trane Company, Lockheed Martin Corporation, and The Boeing Company, represented approximately 45% of the Company's net sales in the nine months ended September 30, 1997. The Company has been selling fasteners and small parts to these customers for an average of 12 years. Cummins Engine Company and its affiliates accounted for approximately 17% of the Company's net sales in the nine months ending September 30, 1997. No other customer represented more than 9% of the Company's net sales in the nine months ended September 30, 1997. All of the Company's contracts with its customers for the supply of fasteners and parts may be canceled by either party on no more than 60 days notice. The Company accepts returns of fasteners and other small parts and issues a credit in exchange for such returns. Historically, returns have not been of an amount to materially affect the Company's business. Approximately 8% of the Company's net sales during 1997 were to customers or customer locations outside of the U.S. Several of the Company's customers have international operations and some of them have requested that the Company provide products and services to them in their foreign locations. Historically, resource constraints have limited the Founding Companies' ability to expand internationally and therefore the Founding Companies have not been able to capitalize on these opportunities. However, the Company anticipates aggressively pursuing these international opportunities. The following table sets forth information with respect to the Founding Companies' estimated combined net sales by end-user industry base for the nine months ended September 30, 1997: SALES BY INDUSTRY (DOLLARS IN MILLIONS) NINE MONTHS ENDED SEPTEMBER 30, 1997 --------------------------------- PERCENTAGE INDUSTRY NET SALES OF SALES - ------------------------------------- ---------- ------------------- Industrial Machinery................. $ 39.8 35.3% Aerospace............................ 24.9 22.1 Electrical Machinery & Electronics... 16.5 14.6 Motor Vehicles....................... 6.3 5.6 Fabricated Metal Products............ 2.4 2.1 Other Industries..................... 22.9 20.3 ---------- ------ $112.8 100.0% ========== ====== BACKLOGS The Company does not have any significant backlog of orders; as noted above, all of the Company's contracts for the supply of fasteners and parts may be canceled by either party on no more than 60 days notice. SALES AND MARKETING The Company utilizes a sales force comprised of 65 sales people. The primary responsibilities of the sales force are to: o Identify potential customers; o Educate the customers about the Company's products, services and potential value; 38 o Manage the transition from existing vendors or systems to the Company's systems, products and services; o Conduct follow-up sessions to identify additional product and service possibilities; o Furnish product advice and options for specific customers requirements; and o Resolve customers' problems and concerns. The Company expects to focus on marketing its products and services primarily to mid- to large-size OEMs. The Company generally targets those OEMs that could achieve significant cost savings from the products and services offered by the Company; these would include OEMs that (i) maintain substantial inventories of fasteners and components; (ii) utilize multiple vendors but wish to decrease that number; (iii) experience a significant number of stockouts; (iv) desire to improve the quality and reliability of their products; or (v) desire to improve the efficiency and effectiveness of the manufacturing process. The Company believes that its commitment to consistent quality and service has enabled it to develop and maintain long-term relationships with existing customers, while expanding its market penetration through the use of its sales and marketing program. DELIVERY The Company utilizes several forms of transportation to deliver its products to its customers depending upon the urgency and frequency of delivery, the customer's preference and cost. The Company primarily utilizes several common carriers to deliver products to its customers. The cost of transportation is generally paid by the customer. The Company believes that by maintaining relationships with several carriers, it can effectively avoid the impact caused by any one carrier ceasing operations. The Company does not believe that it is materially dependent on any single transportation service or carrier and that it currently maintains good relationships with all of its common carriers. The Company operates 24 distribution and sales facilities across the U.S. SUPPLIERS The fasteners and small parts sold by the Company are manufactured by over 2,000 suppliers located in more than 16 countries. The Company purchases fasteners and small parts directly from manufacturers or, to a lesser degree, from authorized distributors. During the nine months ended September 30, 1997, the Company purchased no more than 5% of its fasteners and small parts from any single source. The Company's decision to purchase from a specific supplier is based on product specifications, quality, reliability of delivery, production lead times and price. The Company anticipates reviewing its supplier base after completion of the Acquisitions and believes that by reorganizing its supplier base, it will be able to purchase fasteners and other small parts in sufficient volumes to achieve improved service and pricing. The Company believes that it is not materially dependent on any single supplier and that it currently maintains good relationships with all of its suppliers. COMPETITION The Company is engaged in a highly fragmented and competitive industry. Competition is based primarily on service, quality, and geographic proximity. The Company competes with a large number of fastener distributors on a regional and local basis, some of which may have greater financial resources than the Company and some of which are public companies or divisions of public companies. The Company may also face competition for acquisition candidates from these companies, some of whom have acquired fastener distribution businesses during the past decade. Other smaller fastener distributors may also seek acquisitions from time to time. The Company believes that it will be able to compete effectively because of its significant number of locations, geographic diversity, knowledgeable and trained sales force, integrated computer systems, modern equipment, broad-based product line, long-term customer relationships, combined purchasing volume and operational economies of scale. The Company intends to seek to differentiate itself from its competition in terms of service and quality by investing in systems and equipment and by offering a broad 39 range of products and services as well as through its entrepreneurial culture and decentralized operating structure. MANAGEMENT INFORMATION SYSTEMS Each of the Founding Companies operates a management information system that is used to purchase, monitor and allocate inventory throughout its facilities. The Company believes that these systems enable it to manage inventory costs effectively and to achieve appropriate inventory turnover rates. All of these systems include computerized order entry, sales analysis, inventory status, invoicing and payment, and all but one includes bar-code tracking. These systems are designed to improve productivity for both the Company and its customers. All of the Founding Companies use EDI, through which they offer their customers a paperless electronic process for order entry, shipment tracking, customer billing, remittance processing and other routine matters. In connection with developing its internal Company-wide systems following the Offering, the Company expects to draw upon the best features of the existing systems that have been utilized by the Founding Companies. Once the systems of the Founding Companies are integrated, certain of the information systems will operate over a wide area network, and the real-time information system will allow each warehouse and sales center to share information and monitor daily progress relating to sales activities, credit approval, inventory levels, stock balancing, vendor returns, order fulfillment, and other measures of performance. GOVERNMENT REGULATION The Fastener Quality Act (the "Fastener Act") was signed into law by President Bush on November 16, 1990 and was subsequently amended in March 1996. Due to a lack of accredited testing facilities required under the Fastener Act, the implementation date has been delayed until May 26, 1998. The Fastener Act is intended to protect the public safety by deterring the introduction of non-conforming fasteners into commerce and by improving the traceability of fasteners. Generally, the Fastener Act covers fasteners including screws, nuts, bolts or studs with internal or external threads and load indicating washers with nominal diameters of greater than approximately one quarter inch, which contain metal or are held out as meeting a standard or specification that requires through-hardening. The Fastener Act also covers fasteners and washers that are marked with a grade identification required by a specification or standard. An estimated 25% to 55% of currently available fasteners meet this definition and are therefore subject to the Fastener Act's requirement. Fastener distributors such as the Company are subject to the Fastener Act. The Fastener Act places responsibility on fastener manufacturers and distributors to ensure that fasteners conform to the standards and specifications to which the manufacturer represents it has been manufactured by having them tested in a laboratory accredited under the Fastener Act. Persons who significantly alter fasteners must mark the fasteners so as to permit identification of the source of the alteration. Further, the Fastener Act prohibits manufacturers and distributors from commingling like fasteners from more than two different lots in the same container during packaging. The Company currently operates four quality control labs at its facilities and believes it will not be obligated to make any significant investment to comply with the Fastener Act. The Company is applying for accreditation of its laboratories under the Fastener Act. The Company anticipates that the majority of any additional costs resulting from compliance with the Fastener Act will be included in the prices to its customers. Some small distributors that are unable to invest in the quality control equipment or services required to comply with the Fastener Act may be forced to discontinue or reduce the parts of their business that become subject to the Fastener Act. The Company's operations are subject to various federal, state and local laws and regulations, including those relating to worker safety and protection of the environment. The Company is a distributor and does not generally engage in manufacturing. As a result, environmental laws generally have a minimal effect on its operations. The Company believes it is in substantial compliance with applicable regulatory requirements. 40 EMPLOYEES At September 30, 1997, the Company had approximately 516 employees. The Company is a party to one collective bargaining agreement covering approximately nine employees. The Company believes that its relationship with employees is good. PROPERTIES The Company operates 24 distribution and sales facilities throughout the United States. These facilities range in size from 500 square feet to 90,000 square feet, and generally consist of warehouse space with a small amount of associated office space. Four of the facilities include laboratory space for quality testing. All of the facilities are leased. The Company's leases expire between 1998 and 2012. The Company believes that suitable replacement space will be available as required. Additional detail regarding certain leases is contained herein under "Certain Transactions -- Transactions Involving Certain Officers, Directors and Stockholders -- Leases of Real Property by Founding Companies." The Company believes that its current facilities are adequate for its expected needs over the next several years. However, the Company may add new facilities as a result of acquisitions or due to a customer's request for an on-site or local facility. The Company's corporate headquarters are located in space subject to a short-term lease in Houston, Texas. The Company is in the process of obtaining office space in Houston, Texas under a longer term lease for its corporate headquarters. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to its business that management believes would not have a material adverse effect on its business, financial condition or results of operations. 41 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information concerning the Company's directors and executive officers, and those persons who will become directors and executive officers following the consummation of the Offering:
NAME AGE POSITION - ------------------------------------- --- --------------------------------------------- Mark E. Baldwin...................... 44 Chairman of the Board and Chief Executive Officer Jack L. Fatica....................... 53 President*, Chief Operating Officer* and Director* Brian Fontana........................ 40 Senior Vice President and Chief Financial Officer Bruce M. Taten....................... 42 Senior Vice President, Chief Administrative Officer and General Counsel James C. Jackson..................... 43 Vice President, Corporate Controller Cary M. Grossman..................... 43 President and Director Donald B. List....................... 42 Director* Mary E. McClure...................... 57 Director* Michael W. Peters.................... 38 Director* Benjamin E. Spence, Jr............... 44 Director* Jeffrey A. Pugh...................... 34 Director
- ------------ * Effective as of the consummation of the Offering. Mr. Grossman will resign as President of the Company and Mr. Pugh will resign as a director of the Company effective as of the consummation of the Offering. Mark E. Baldwin became Chief Executive Officer of the Company in September 1997 and became Chairman of the Board in November 1997. Mr. Baldwin has been involved in the organization of the Company, the acquisition of the Founding Companies and the Offering. From 1980 through August 1997, Mr. Baldwin was employed by Keystone International, Inc., a publicly traded manufacturer of industrial valves and controls, serving most recently as President of the Industrial Valves & Controls Group, a division with 17 manufacturing locations and multiple company-owned sales and distribution locations in 15 countries. Mr. Baldwin received a B.S. in Mechanical Engineering from Duke University and a M.B.A. from Tulane University. Jack L. Fatica will become President, Chief Operating Officer and director of the Company upon consummation of the Offering. Mr. Fatica has in excess of 32 years of experience in the fastener distribution business. He has been employed by AXS or its predecessors since 1968, and currently serves as its President. Brian Fontana became Chief Financial Officer of the Company in October 1997. From 1996 to 1997 Mr. Fontana served as Executive Vice President and Chief Financial Officer of Prime Service, Inc., one of the largest rental equipment companies in the United States. From 1990 to 1996, he was employed by National Convenience Stores Incorporated most recently as Vice President and Chief Financial Officer. From 1985 to 1990, Mr. Fontana was employed by Nationsbank as a Vice President of Corporate Banking and earlier by Allied Bank of Texas as Assistant Vice President. Mr. Fontana received a B.B.A. degree in finance from the University of Texas at Austin. Bruce M. Taten became Vice President and General Counsel of the Company in October 1997. From 1993 to 1997, Mr. Taten was employed by Keystone International, Inc. most recently as Vice President and General Counsel. From 1988 to 1993, Mr. Taten practiced law at Sutherland Asbill & Brennan, a law firm based in Atlanta, Georgia. From 1983 to 1986, Mr. Taten practiced law with the New York firm of 42 Simpson, Thacher & Bartlett. Mr. Taten is a C.P.A. and received a J.D. from Vanderbilt University and a B.S. and M.S. from Georgetown University. James C. Jackson became Vice President and Corporate Controller of the Company in January 1998. From 1991 to 1998, Mr. Jackson was employed by Cooper Industries, Inc., a publicly traded international manufacturer of electrical products, tools and hardware and automotive products, serving most recently as Director-Corporate Accounting & Consolidations. From 1976 to 1991, Mr. Jackson was employed by Price Waterhouse. Mr. Jackson is a C.P.A. and received a B.B.A. degree in accounting from Ohio University. Cary M. Grossman is currently the President of the Company and has been a Director of the Company since it was formed. Mr. Grossman will relinquish his position as President upon consummation of the Offering, but will continue as a Director. Mr. Grossman has been involved in the organization of the Company, the acquisition of the Founding Companies and the Offering. Mr. Grossman cofounded McFarland, Grossman & Company, Inc., an investment banking firm, in 1991 and serves as its Chief Executive Officer. From 1977 until 1991 Mr. Grossman was engaged in the practice of public accounting. Mr. Grossman is a C.P.A. and received a B.B.A. in Accounting from the University of Texas. Donald B. List will become a director of the Company upon consummation of the Offering. Mr. List has over 20 years of experience in the fastener and distribution business and has served as President of Alatec since 1980. Mary E. McClure will become a director of the Company upon consummation of the Offering. Ms. McClure cofounded Capitol in 1966 and has served as Capitol's President since 1981. Ms. McClure has served as Chairman of the Southwest Fastener Association and as Chairman/President of the National Fastener Distributor Association. Ms. McClure has also been inducted into the Fastener Hall of Fame. Michael W. Peters will become a director of the Company upon consummation of the Offering. Mr. Peters has over 11 years of experience in the fastener and distribution business. He joined Maumee in 1986 and has served as its Chief Executive Officer since July 1995. Benjamin E. Spence, Jr. will become a director of the Company upon consummation of the Offering. Mr. Spence has over 22 years of experience in the fastener and distribution business and has served as President of SSL since 1986. Jeffrey A. Pugh has served as a director of the Company since it was formed, and will relinquish his position as director upon consummation of the Offering. Mr. Pugh has been an employee with McFarland, Grossman & Company, Inc. since 1996. From 1994 to 1995, Mr. Pugh served as Chief Financial Officer to JAC Home Health, Inc., a home health service provider he helped found in 1993. From 1990 to 1994, Mr. Pugh served as a management consultant with the Chicago office of Deloitte & Touche. Directors are elected at each annual meeting of stockholders. Effective upon consummation of the Offering the Board of Directors will be divided into three classes of directors, with directors serving staggered three-year terms, expiring at the annual meeting of stockholders for fiscal years 1998, 1999 and 2000, respectively. At each annual meeting of stockholders, one class of directors will be elected for a full term of three years to succeed to that class of directors whose terms are expiring. Messrs. List and Fatica will serve for initial three year terms; Messrs. Spence and Peters will serve for initial two year terms and Ms. McClure, Mr. Baldwin and Mr. Grossman will serve for initial one year terms. Mr. Grossman is the director elected by the holders of the Restricted Common Stock. The Company has agreed to nominate each of the Directors from the five Founding Companies for re-election upon any expiration of their terms occurring within five years of the consummation of the Offering. All officers serve at the discretion of the Board of Directors, subject to the terms of their employment agreement. See "-- Employment Agreements" and "Description of Capital Stock." The Board of Directors will establish an Audit Committee and Compensation Committee. The Audit Committee recommends the appointment of auditors and oversees the accounting and audit functions of the Company. The Compensation Committee determines executive officers' and key employees' salaries and bonuses and administers the Pentacon, Inc. 1998 Stock Plan. It is expected that Messrs. and will serve as members of the Company's Compensation Committee and Audit Committee. 43 DIRECTORS' COMPENSATION Directors who are employees of the Company do not receive additional compensation for serving as directors. Each director who is not an employee of the Company receives an annual fee of $16,000 paid in equal quarterly amounts. Directors of the Company are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof, and for other expenses incurred in their capacity as directors of the Company. Each non-employee director will receive stock options to purchase 15,000 shares of Common Stock upon election to the Board of Directors and an annual grant of 5,000 options. See "-- Stock Plan." EXECUTIVE COMPENSATION The Company was incorporated in March 1997 and, prior to the Offering, has not conducted any operations other than activities related to the Acquisitions and the Offering. The Company anticipates that during 1998 annualized base salaries of each of its most highly compensated executive officers, Messrs. Baldwin, Fatica, Taten and Fontana, will be $150,000 and for Mr. Jackson, $100,000. Options for a total of 185,000, 100,000, 85,000 and ______ shares of Common Stock at the initial public offering price have been granted to Messrs. Baldwin, Taten, Fontana and Jackson, respectively. Thirty percent (30%) of the options vest on the second anniversary of the employment agreements and the remainder vest on the third anniversary. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each executive officer of the Company that prohibit such officers from disclosing the Company's confidential information and trade secrets and generally restrict these individuals from competing with the Company for a period of two years after the termination of their respective employment agreements. Mr. Baldwin's employment agreement has an initial term of five years. The agreements for Messrs. Taten and Fontana have an initial term of three years and the agreement for Mr. Jackson has an initial term of one year. All of the employment agreements are terminable by the Company for "good cause" upon ten days' written notice and without "cause" or for "good reason" by the officer upon fourteen days' written notice. All employment agreements provide that if the officer's employment is terminated by the Company without "good cause," such officer will be entitled to receive a lump-sum severance payment at the effective time of termination. The employment agreements of Messrs. Baldwin, Taten and Fontana contain certain provisions concerning a change-in-control of the Company, including the following: (i) in the event that the executive is not notified by the acquiring company that it will assume the Company's obligations under the employment agreement at least five days in advance of the transaction giving rise to the change in control, the change in control will be deemed a termination of the employment agreement by the Company without "cause," and the provisions of the employment agreement governing the same will apply, except that the severance amount otherwise payable (discussed in the preceding paragraph) shall be tripled and the provisions which restrict competition with the Company shall not apply; and (ii) in any change-of-control situation, such officer may elect to terminate his employment by giving five days' written notice prior to the anticipated closing of the transaction giving rise to the change-in-control, which will be deemed a termination of the employment agreement by the Company without "cause," and the provisions of the employment agreement governing the same will apply, except that the severance amount otherwise payable shall be doubled and the time period during which such officer is restricted from competing with the Company will be eliminated. The change-of-control provisions in the employment agreements may discourage bids to acquire the Company or reduce the amount an acquiror is willing to pay for the Company. STOCK PLAN The Board of Directors has adopted, and the stockholders of the Company have approved, the Pentacon, Inc. 1998 Stock Plan (the "Stock Plan"). The purpose of the Stock Plan is to provide directors, officers, key employees and certain other persons who will be instrumental in the success of the Company 44 or its subsidiaries with additional incentives by increasing their proprietary interest in the Company. The aggregate amount of Common Stock with respect to which options may be granted may not exceed 1,700,000 shares (subject to adjustment to reflect stock splits). The Stock Plan is administered by the Compensation Committee, which is composed of non-employee directors (the "Committee"). Subject to the terms of the Stock Plan, the Committee generally determines to whom options will be granted and the terms and conditions of option grants. Options granted under the Stock Plan may be either non-qualified stock options, or may qualify as incentive stock options ("ISOs"), provided that the aggregate fair market value (determined at the time the ISO is granted) of the Common Stock with respect to which ISOs are exercisable for the first time by any employee during any calendar year under all plans of the Company and any parent or subsidiary corporation shall not exceed $100,000. The exercise price of any option may not be less than the fair market value of the underlying Common Stock as of the date of grant and no employee or consultant may receive an option in any year to purchase more than 250,000 shares of Common Stock. The Committee determines the period over which options become exercisable, provided that all options become immediately exercisable upon death of the grantee or upon a change-in-control (as defined in the Stock Plan) of the Company. The Stock Plan also provides for automatic option grants to directors who are not otherwise employed by the Company or its subsidiaries. Upon commencement of service, a non-employee director will receive a non-qualified option to purchase 15,000 shares of Common Stock, and continuing non-employee directors annually will receive options to purchase 5,000 shares of Common Stock. Options granted to non-employee directors are immediately exercisable in full (subject to applicable securities laws). Options which are not exercisable at the time of a voluntary termination of the grantee's employment (or directorship) or in the case of a termination "for cause" are immediately forfeited. In no event may an ISO granted to a control person (as defined in the Stock Plan) be exercisable more than five years from the date of grant. Each option granted to a non-employee director shall have a term of ten years. Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), places a $1 million cap on the deductible compensation that can be paid to certain executives of publicly traded corporations. Amounts that qualify as "performance based" compensation under Section 162(m)(4)(C) of the Code are exempt from the cap and do not count toward the $1 million limit. Generally, options granted with an exercise price at least equal to the fair market value of the shares of Common Stock on the date of grant will qualify as performance based. Upon exercise of a non-qualified option, the optionee generally will recognize ordinary income in the amount of the "option spread" (the difference between the market value of the option shares at the time of exercise and the exercise price), and the Company is generally entitled to a corresponding tax deduction (subject to certain withholding requirements). When an optionee sells shares issued upon the exercise of a non-qualified stock option, the optionee realizes a short-term or long-term capital gain or loss, depending on the length of the holding period but the Company is not entitled to any tax deduction in connection with such sale. An optionee will not be subject to federal income taxation upon the exercise of ISOs granted under the Stock Plan, and the Company will not be entitled to a federal income tax deduction by reason of such exercise. A sale of shares of Common Stock acquired by exercise of an ISO that does not occur within one year after the exercise or within two years after the grant of the option generally will result in the recognition of long-term capital gain or loss in the amount of the difference between the amount realized on the sale and the exercise price, and the Company will not be entitled to any tax deduction in connection therewith. If a sale of shares of Common Stock acquired upon exercise of an ISO occurs within one year from the date of exercise of the option or within two years from the date of the option grant (a "disqualifying disposition"), the optionee generally will recognize ordinary compensation income equal to the lesser of (i) the excess of the fair market value of the shares on the date of exercise of the options over the exercise price, or (ii) the excess of the amount realized on the sale of the shares over the exercise price. Any amount realized on a disqualifying disposition in excess of the amount treated as ordinary compensation income will be a long-term or a short-term capital gain, depending upon the length of time the shares 45 were held. The Company generally will be entitled to a tax deduction on a disqualifying disposition corresponding to the ordinary compensation income recognized by the participant. CERTAIN TRANSACTIONS ORGANIZATION OF THE COMPANY During 1997, members of the management team and certain consultants were assembled by McFarland, Grossman Capital Ventures II, L.C. ("MGCV") to pursue the consolidation of the Founding Companies. MGCV, an investment entity formed to focus on consolidations in highly-fragmented industries, provided the Company with expertise regarding the consolidation process and advanced the Company the capital needed to pay organizational and offering expenses. In connection therewith, on November 18, 1997, Pentacon sold 200,000, 125,000 and 125,000 shares of Common Stock to Messrs. Baldwin, Taten and Fontana, respectively, of the Company for $0.01 per share. As a result, the Company has recorded non-recurring, non-cash compensation charges of $4.7 million in the fourth quarter of 1997, representing the difference between the amount paid for the shares and the estimated initial public offering price net of a twenty percent marketability discount. In February 1997, the Company also granted two consultants warrants to purchase an aggregate of 50,000 shares of Common Stock at the lesser of $8.00 or 60% of the public offering price. The consultants provided business and legal consulting services for the Company in connection with its formation in the first four months of 1997. The Company has agreed to reimburse MGCV for expenses incurred by MGCV in connection with the Acquisitions and the Offering. The Company has agreed to pay Donald Luke, a manager of MGCV, a success fee of $100,000 upon consummation of the Offering. The Company will pay McFarland, Grossman & Company, Inc. ("McFarland, Grossman"), an affiliate of MGCV, customary fees in connection with its placement of the Company's senior debt; the Company has also engaged McFarland, Grossman, on customary terms, to provide financial advice regarding acquisitions during the first four months after the Offering. Simultaneously with the closing of the Offering, the Company will acquire by merger all of the issued and outstanding capital stock of the Founding Companies, at which time each Founding Company will become a wholly owned subsidiary of the Company. The aggregate consideration that will be paid by the Company to acquire the Founding Companies consists of (i) approximately $28.7 million in cash and (ii) 6,720,000 shares of Common Stock. In addition, the Company intends to repay approximately $19.5 million of the indebtedness of the Founding Companies, including approximately $14.4 million from the proceeds of the Offering. The following table sets forth for each Founding Company the approximate consideration to be paid to the stockholders of the Founding Companies (i) in cash and (ii) in shares of Common Stock, in each case subject to adjustments through the date of the consummation of the Acquisition for the amount of S corporation earnings previously taxed to stockholders of certain of the Founding Companies. SHARES OF CASH COMMON STOCK --------- ------------ (IN THOUSANDS OF DOLLARS EXCEPT SHARE AMOUNTS) Alatec............................... $ 12,666 2,969,493 AXS.................................. 7,759 1,819,257 Maumee............................... 5,126 1,201,762 SSL.................................. 2,340 548,554 Capitol.............................. 772 180,934 --------- ------------ Total........................... $ 28,663 6,720,000 ========= ============ Immediately prior to consummation of the Acquisitions, certain of the Founding Companies will make distributions estimated to be approximately $3.6 million, representing S corporation earnings previously 46 taxed to their respective stockholders. The amount of such distributions (in excess of estimated shareholder tax liabilities for 1997 and 1998) shall be deducted from the cash payments indicated in the table above. In connection with the Acquisitions, and as consideration for their interests in the Founding Companies, certain officers, directors and holders of more than 5% of the outstanding shares of the Company, together with trusts for which they act as trustees, will receive cash and shares of Common Stock of the Company as follows. These amounts do not include any S corporation distributions. SHARES OF CASH COMMON STOCK --------- ------------ (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) Donald B. List....................... $ 12,665 2,969,493 Jack L. Fatica....................... 3,404 802,653 Michael Black........................ 3,844 901,321 Benjamin E. Spence, Jr............... 1,170 232,132 Mary E. McClure...................... 661 154,898 --------- ------------ Total........................... $ 21,744 5,060,497 ========= ============ The consummation of each Acquisition is subject to customary conditions. These conditions include, among others, the accuracy on the closing date of the Acquisitions of the representations and warranties by the Founding Companies, their principal stockholders and by the Company; the performance by each of the parties of their respective covenants; and the nonexistence of a material adverse change in the results of operations, financial condition or business of each Founding Company. Certain of the Founding Companies have incurred indebtedness which has been personally guaranteed by their stockholders or by entities controlled by their stockholders. At September 30, 1997, the aggregate amount of indebtedness of these Founding Companies that was subject to personal guarantees was approximately $19.5 million. The Company intends to use a portion of the net proceeds from this Offering, together with borrowings available from the Company's anticipated revolving credit facility, to repay substantially all of the indebtedness of the Founding Companies. There can be no assurance that the conditions to the closing of the Acquisitions will be satisfied or waived or that the agreements relating to the Acquisitions will not be terminated prior to the closing. If any of the Acquisitions is terminated for any reason, the Company does not intend to consummate the Offering on the terms described herein. Pursuant to the agreements relating to the Acquisitions, all significant stockholders of each of the Founding Companies have agreed not to compete with the Company for a period of five years commencing on the date of closing of the Acquisitions. TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS LEASES OF REAL PROPERTY BY FOUNDING COMPANIES Following the Acquisitions, Alatec will continue to lease its facilities located in Chatsworth, California from Mr. List, who will become a director of the Company upon consummation of the Offering. The lease provides for a total annual rent of $462,840 with the term of the lease expiring in March 2012. Alatec shall also pay taxes and utilities on the leased premises. The rent will be adjusted in accordance with the Consumer Price Index ("CPI") subject to a minimum of 4% and a maximum of 8%. In addition, Alatec will continue to lease its warehouse in Fremont, California from FDR Properties, an entity controlled and partially owned by Mr. List. This lease expires August 31, 1998 and provides for an annual rent of $114,336. Alatec shall also pay taxes and utilities on those premises. The Company will also continue to lease from the List Family Trust an office and warehouse in Chatsworth, California. The lease provides for an annual rental of $170,832 and terminates in October, 2012. Alatec shall also pay utilities and taxes on the premises. The Company believes that the rent for each of these properties does not exceed fair market value. 47 Following the Acquisitions, AXS will continue to lease certain real property located in Erie, Pennsylvania from JFJ Realty Company, an entity owned and controlled by Jeffrey Fatica and Jack Fatica. Jack Fatica will become an officer and director of the Company upon consummation of the Offering. The lease for the property runs through August 2006 and provides for an annual rent of $240,000 through August 30, 2001. Beginning September 1, 2001, the rent shall be adjusted to fair market value as determined on February 1, 2001. Furthermore, AXS shall pay taxes and utilities on the leased premises. In addition, following the mergers, AXS will continue to lease certain real property located in Niles, Illinois from the Joseph Hoyt Residual Trust and the Hoyt Family Residual Trust, in which Mr. Hoyt has an economic and beneficial interest. The lease on this property will expire August 30, 2006, and provides for an annual rent of $175,500 through August 31, 2001. Beginning September 1, 2001, the rental shall be adjusted to fair market value as determined on February 1, 2001. Furthermore, AXS shall pay utilities and taxes on the leased premises. The Company believes that the rent for these properties does not exceed fair market value. Following the Acquisitions, SSL will lease certain real properties located in Chester, South Carolina from Chester Associates, LLC, an entity owned and controlled by Messrs. Spence and Knorr. Mr. Spence will become a director of the Company upon the consummation of the Offering. One facility in Chester, South Carolina will be leased for an initial five year term expiring December 31, 2002, with an option to extend the lease for an additional five year term. The annual rent for the first year of this lease is $61,250. The rent shall increase each subsequent year of the lease based on the CPI, not to increase more than 4%. SSL shall be responsible for utilities. Also, certain warehouse space in South Carolina will be leased to SSL. This warehouse will be leased for an initial five year term expiring December 31, 2002, with an option to extend for an additional five year term. The annual rent for the first year of this lease is $55,000, with subsequent rental rates to increase per the CPI, not to exceed 4% in any one year. SSL shall be responsible for utilities. The Company believes that the rent for these properties does not exceed fair market value. Following the Acquisitions, Maumee will continue to lease certain real property located in Fort Wayne, Indiana from Mr. Black. The current lease for the property expires March 31, 1998 and provides for an annual rental of $312,000. In addition, Maumee is required to pay utilities and certain taxes and assessments. The Company currently intends to renew the lease at current rates. The Company believes such rent exceeds fair market value by approximately 30%. Such excess rate was taken into consideration in determining the consideration paid in connection with the acquisition of Maumee. OTHER TRANSACTIONS Mr. List owns approximately 50% of a supplier from which the Company purchased approximately $1.1 million of products during the nine months ended September 30, 1997. The Company believes all such purchases have been at fair market prices. The Company anticipates continuing to purchase products from the supplier in the future so long as the prices and terms remain competitive with those of alternative suppliers. In November 1997, Mr. Grossman and Mr. Pugh, each principals in MGCV, became officers of Alatec in order to assist in, facilitate and expedite the audit process in connection with the Offering. Alatec and Mr. List, its sole stockholder, have agreed to indemnify Messrs. Grossman and Pugh against various claims, damages, costs and expenses which might be incurred by them as officers of Alatec, including their execution of representation letters to Alatec's accountants. The Company has agreed to permit Jack L. Fatica to acquire certain life insurance policies from AXS at a price to be mutually agreed upon, which will approximate the fair market value of the policies. COMPANY POLICY Any future transactions with directors, officers, employees or affiliates of the Company are anticipated to be minimal, and must be approved in advance by a majority of disinterested members of the Board of Directors. 48 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of the Company's Common Stock, after giving effect to the issuance of shares of Common Stock in connection with the Acquisitions and after giving effect to the Offering, by (i) all persons known to the Company to be the beneficial owner of 5% or more thereof, (ii) each director and nominee for director, (iii) each executive officer and (iv) all officers and directors as a group. Unless otherwise indicated, the address of each such person is c/o Pentacon, Inc., 9821 Katy Freeway, Suite 500, Houston, Texas 77024. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated. SHARES BENEFICIALLY OWNED AFTER OFFERING --------------------- NUMBER PERCENT --------- ------- Donald B. List....................... 2,969,493 22.3% MGCV(1).............................. 2,380,000 17.9 Cary M. Grossman(2).................. 2,380,000 17.9 Michael Black........................ 901,321 6.8 Jack L. Fatica....................... 802,656 6.0 Donald L. Luke(3).................... 753,523 5.7 Michael W. Peters.................... 300,441 2.3 Benjamin E. Spence, Jr............... 232,132 1.7 Mary E. McClure(4)................... 154,898 1.2 Mark E. Baldwin...................... 200,000 1.5 Jeffrey A. Pugh(5)................... 132,679 * Brian Fontana........................ 125,000 * Bruce M. Taten....................... 125,000 * James C. Jackson..................... 50,000 * All officers and directors as a group (10 persons)....................... 7,289,620 54.7% - ------------ * Less than one percent. (1) MGCV intends to distribute to its members the Company's Common Stock MGCV holds after the consummation of the Offering. (2) Consists of 2,380,000 shares of Common Stock issued to MGCV. Mr. Grossman is the President of MGCV. Of the shares of Common Stock issued to MGCV, 321,194 shares will be distributed to Mr. Grossman and 224,423 shares will be distributed to McFarland Grossman & Company, Inc., in each case assuming an initial public offering price of $ per share. Mr. Grossman owns a 50% interest in McFarland Grossman & Company, Inc. (3) Mr. Luke is a member of MGCV. Of the shares of Common Stock issued to MGCV, 753,523 shares will be distributed to Mr. Luke, assuming an initial public offering price of $ per share. Mr. Luke's address is 8 Greenway Plaza, Suite 1500, Houston, Texas 77046. (4) Includes 71,759 shares of Common Stock owned by the Earl Milton McClure, Jr. Residuary Trust of which Ms. McClure is trustee. (5) Mr. Pugh is a member of MGCV. Of the shares of Common Stock issued to MGCV, 132,679 shares will be distributed to Mr. Pugh, assuming an initial public offering price of $ per share. 49 DESCRIPTION OF CAPITAL STOCK GENERAL The Company's authorized capital stock consists of 50,000,000 shares of Common Stock, par value $0.01 per share, 1,000,000 shares of Restricted Common Stock, par value $0.01 per share and 10,000,000 shares of Preferred Stock, par value $0.01 per share. After giving effect to the Acquisitions, there will be 9,550,000 shares of Common Stock outstanding, which will be held of record by 31 stockholders, 467,000 shares of Restricted Common Stock outstanding, which are held of record by MGCV and no shares of Preferred Stock outstanding. After the closing of the Offering, 13,323,585 shares of Common Stock will be issued and outstanding and 1,070,000 shares of Common Stock will be reserved for issuance upon exercise of outstanding options and warrants. The following summary of the terms and provisions of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the Company's Certificate of Incorporation and Bylaws, which have been filed as exhibits to the Company's registration statement, of which this Prospectus is a part, and applicable law. COMMON STOCK The holders of Common Stock are each entitled to one vote for each share held on all matters to which they are entitled to vote, including the election of directors. The holders of Restricted Common Stock, voting together as a single class, are entitled to elect one member of the Company's Board of Directors and will be entitled to 0.25 of a vote per share on all other matters on which the Common Stock is entitled to vote. Holders of Restricted Common Stock are not entitled to vote on the election of any other directors. Upon consummation of this Offering, the Board of Directors will be classified into three classes as nearly equal in number as possible, with the term of each class expiring on a staggered basis. The classification of the Board of Directors may make it more difficult to change the composition of the Board of Directors and thereby may discourage or make more difficult an attempt by a person or group to obtain control of the Company. Cumulative voting for the election of directors is not permitted. Any director, or the entire Board of Directors, may be removed at any time, with cause, by a majority of the aggregate number of votes which may be cast by the holders of outstanding shares of Common Stock and Restricted Common Stock entitled to vote for the election of directors, provided, however, that only the holders of the Restricted Common Stock may remove the director such holders are entitled to elect. Subject to the rights of any then outstanding shares of Preferred Stock, the holders of the Common Stock are entitled to such dividends as may be declared in the discretion of the Board of Directors out of funds legally available therefor. See "Dividend Policy." Holders of Common Stock are entitled to share ratably in the net assets of the Company upon liquidation after payment or provision for all liabilities and any preferential liquidation rights of any Preferred Stock then outstanding. The holders of Common Stock have no preemptive rights to purchase shares of stock of the Company. Shares of Common Stock are not subject to any redemption provisions and are not convertible into any other securities of the Company. All outstanding shares of Common Stock are fully paid and nonassessable. Each share of Restricted Common Stock will automatically convert to Common Stock on a share-for-share basis (i) in the event of a disposition of such share of Restricted Common Stock by the holder thereof (other than a distribution which is a distribution by a holder to its partners or beneficial owners, or a transfer to a related party of such holder (as defined in Sections 267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)), (ii) in the event any person acquires beneficial ownership of 30% or more of the outstanding shares of Common Stock, or (iii) in the event any person offers to acquire 30% or more of the total number of outstanding shares of Common Stock. After January 1, 2003, the Board of Directors may elect to convert any outstanding shares of Restricted Common Stock into shares of Common Stock in the event 80% or more of the originally outstanding shares of Restricted Common Stock have been previously converted into shares of Common Stock. 50 PREFERRED STOCK The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Amended and Restated Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the stockholders. The Company has no current plans to issue any shares of Preferred Stock of any class or series. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock at a premium or may otherwise adversely affect the market price of the Common Stock. STATUTORY BUSINESS COMBINATION PROVISION The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or an affiliate, or an associate of such person, who is an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the Board of Directors of the corporation before the person becomes an interested stockholder, (ii) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an interested stockholder (excluding shares owned by persons who are both officers and directors of the corporation, and shares held by certain employee stock ownership plans), or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an "interested stockholder" is defined as any person who is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. A corporation may, at its option, exclude itself from the coverage of Section 203 by including in its certificate of incorporation or by-laws by action of its stockholders to exempt itself from coverage. The Company has not adopted such an amendment to its Amended and Restated Certificate of Incorporation or Bylaws. LIMITATION ON DIRECTORS' LIABILITIES Pursuant to the Company's Amended and Restated Certificate of Incorporation and under Delaware law, directors of the Company are not liable to the Company or its stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of the duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Delaware law or any transaction in which a director 51 has derived an improper personal benefit. The Company has entered into indemnification agreements with its directors and executive officers which indemnify such person to the fullest extent permitted by its Certificate of Incorporation, its Bylaws and the Delaware General Corporation Law. The Company also intends to obtain directors' and officers' liability insurance. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS The Company's Amended and Restated Certificate of Incorporation and Bylaws include provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders. These provisions are summarized in the following paragraphs. CLASSIFIED BOARD OF DIRECTORS. The Amended and Restated Certificate of Incorporation provides for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. The classification of the Board of Directors has the effect of requiring at least two annual stockholders meetings, instead of one, to replace a majority of members of the Board of Directors. SUPERMAJORITY VOTING. The Amended and Restated Certificate of Incorporation requires the approval of the holders of at least 75% of the then outstanding shares of the Company's capital stock entitled to vote thereon on, among other things, certain amendments to the Amended and Restated Certificate of Incorporation. The Board of Directors may amend, alter, change or repeal any bylaws without the assent or vote of the stockholders, but any bylaws made by the Board of Directors may be altered, amended or repealed upon the affirmative vote of at least 66 2/3% of the stock entitled to vote thereon. AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK. The Company's authorized capital, stock will consist of 50,000,000 shares of Common Stock, 1,000,000 shares of Restricted Common Stock, and 10,000,000 shares of preferred stock. After the Offering, the Company will have outstanding 13,323,585 shares of Common Stock and Restricted Common Stock (assuming the Underwriters' over-allotment options are not exercised). The authorized but unissued (and in the case of preferred stock, undesignated) stock may be issued by the Board of Directors in one or more transactions. In this regard, the Company's Amended and Restated Certificate of Incorporation grants the Board of Directors broad power to establish the rights and preferences of authorized and unissued preferred stock. The issuance of shares of preferred stock pursuant to the Board of Directors' authority described above could decrease the amount of earnings and assets available for distribution to holders of Common Stock and adversely affect the rights and powers, including voting rights, of such holders and may also have the effect of delaying, deferring or preventing a change in control of the Company. The Board of Directors does not currently intend to seek stockholder approval prior to any issuance of preferred stock, unless otherwise required by law. SPECIAL MEETING OF STOCKHOLDERS. The Bylaws provide that special meetings of stockholders of the Company may only be called by the Chairman of the Board of Directors upon the written request of the Board of Directors pursuant to a resolution approved by a majority of the whole Board of Directors. STOCKHOLDER ACTION BY WRITTEN CONSENT. The Amended and Restated Certificate of Incorporation and Bylaws generally provide that any action required or permitted by the stockholders of the Company must be effected at a duly called annual or special meeting of the stockholders and may not be effected by any written consent of the stockholders. NOTICE PROCEDURES. The Bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as director, the removal of directors and amendments to the Amended and Restated Certificate of Incorporation or Bylaws to be brought before annual meetings of stockholders of the Company. These procedures provide that notice of such stockholder proposals must be timely given in writing to the Secretary of the Company prior to the annual meeting. Generally, to be timely, notice must be received at the principal executive offices of the Company not less than 80 days prior to an annual meeting (or if fewer than 90 days' notice or prior public disclosure of the date of the annual meeting is given or made by the Company, not later than the tenth day following the date on which the notice of the date of the annual meeting was mailed or such public disclosure was made). The 52 notice must contain certain information specified in the Bylaws, including a brief description of the business desired to be brought before the annual meeting and certain information concerning the stockholder submitting the proposal. CHARTER PROVISIONS RELATING TO RIGHTS PLAN. The Amended and Restated Certificate of Incorporation authorizes the Board of Directors of the Company to create and issue rights (the "Rights") entitling the holders thereof to purchase from the Company shares of capital stock or other securities. The times at which, and the terms upon which, the Rights are to be issued may be determined by the Board of Directors and set forth in the contracts or instruments that evidence the Rights. The authority of the Board of Directors with respect to the Rights includes, but is not limited to, the determination of (i) the initial purchase price per share of the capital stock or other securities of the Company to be purchased upon exercise of the Rights, (ii) provisions relating to the times at which and the circumstances under which Rights may be exercised or sold or otherwise transferred, either together with or separately from, any other securities of the Company, (iii) provisions which adjust the number or excercise price of the Rights or amount or nature of the securities or other property receivable upon exercise of the Rights, (iv) provisions which deny the holder of a specified percentage of the outstanding securities of the Company the right to exercise the Rights and/or cause the Rights held by such holder to become void, (v) provisions which permit the Company to redeem the Rights and (vi) the appointment of a rights agent with respect to the Rights. If authorized by the Board of Directors, the Rights would be intended to protect the Company's stockholders from certain non-negotiated takeover attempts which present the risk of a change of control on terms which may be less favorable to the Company's stockholder than would be available in a transaction negotiated with and approved by the Board of Directors. The Board of Directors believes that the interests of the stockholders generally are best served if any acquisition of the Company or a substantial percentage of the Company's Common Stock results from arm's-length negotiation and reflects the Board of Directors' careful consideration of the proposed terms of a transaction. In particular, the Rights if issued would be intended to help (i) reduce the risk of coercive two-tiered, front-end loaded or partial offers which may not offer fair value to all stockholders of the Company, (ii) deter market accumulators who through open market or private purchases may achieve a position of substantial influence or control without paying to stockholders a fair control premium and (iii) deter market accumulators who are simply intereted in putting the Company "in play." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is American Securities Transfer & Trust Company, Inc. SHARES ELIGIBLE FOR FUTURE SALE The market price of the Common Stock could be adversely affected by the sale of substantial amounts of Common Stock in the public market. Upon consummation of the Offering there will be 13,323,585 shares of Common Stock issued and outstanding. All of the 3,773,585 shares sold in the Offering, except for shares acquired by affiliates of the Company, will be freely tradeable. Simultaneously with the closing of the Offering, the stockholders of the Founding Companies received, in the aggregate, 6,720,000 shares of Common Stock as a portion of the consideration for their businesses. Certain other stockholders of the Company held, in the aggregate, an additional 2,830,000 shares of Common Stock. None of these 9,550,000 shares were issued in a transaction registered under the Securities Act, and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration, including the exemption contained in Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, a person, or persons whose shares are aggregated, who has beneficially owned his or her shares for at least one year, or a person who may be deemed an "affiliate" of the Company who has beneficially owned shares for at least one year, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then 53 outstanding shares of the Common Stock or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the date on which notice of the proposed sale is sent to the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. A person who is not deemed to have been an affiliate of the Company at any time for 90 days preceding a sale and who has beneficially owned his shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the volume limitations, manner of sale provisions, notice requirements or the availability of current public information about the Company. The Company has authorized the issuance of up to 1,700,000 shares of its Common Stock in accordance with the terms of the 1998 Stock Plan. Options to purchase 370,000 shares have been granted to certain officers of Pentacon under the 1998 Stock Plan and it is anticipated that options to purchase 600,000 shares of Common Stock will be granted upon closing of the Offering to certain employees of the Founding Companies. The Company intends to file a registration statement on Form S-8 under the Securities Act registering the issuance of shares upon exercise of options granted under the 1998 Stock Plan. As a result, such shares will be eligible for resale in the public market. The Company currently intends to file a registration statement covering 3,350,000 additional shares of Common Stock under the Securities Act for its use in connection with future acquisitions. These shares generally will be freely tradeable after their issuance by persons not affiliated with the Company unless the Company contractually restricts their resale. The Company has issued to certain consultants warrants to purchase 50,000 shares of Common Stock with an exercise price equal to the lesser of $8.00 or 60% of the public offering price. The Company has agreed that it will not offer or sell any shares of Common Stock or options, rights or warrants to acquire any Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), except for shares issued (i) in connection with acquisitions and (ii) pursuant to the Stock Plan. Further, the Company's directors, officers, stockholders and substantially all of the owners of the Founding Companies who beneficially own approximately 9,320,000 shares in the aggregate have agreed not to directly or indirectly offer for sale, sell or otherwise dispose of any Common Stock for a period of one year after the date of this Prospectus without the prior written consent of DLJ. Prior to the Offering, there has been no established trading market for the Common Stock, and no predictions can be made as to the effect that sales of Common Stock under Rule 144, pursuant to a registration statement, or otherwise, or the availability of shares of Common Stock for sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could depress the prevailing market price. Such sales may also make it more difficult for the Company to issue or sell equity securities or equity-related securities in the future at a time and price that it deems appropriate. See "Risk Factors -- Shares Eligible for Future Sale." The former stockholders of the Founding Companies, after one year, and certain officers, directors and stockholders holding in the aggregate 9,550,000 shares of Common Stock are entitled to certain rights with respect to the registration of their shares of Common Stock under the Securities Act. If the Company proposes to register any of its securities under the Securities Act, such stockholders are entitled to notice of such registration and are entitled to include, at the Company's expense, all or a portion of their shares therein, subject to certain conditions. These registration rights will not apply to the registration statement the Company intends to file for use in future acquisitions. 54 UNDERWRITING Subject to the terms and conditions of an Underwriting Agreement (the "Underwriting Agreement"), the Underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), BT Alex. Brown Incorporated and Schroder & Co. Inc. (collectively, the "Representatives"), have severally agreed to purchase from the Company the respective numbers of shares of Common Stock set forth opposite their names below. NUMBER OF UNDERWRITERS SHARES - ------------------------------------- ---------- Donaldson, Lufkin & Jenrette Securities Corporation............. BT Alex. Brown Incorporated.......... Schroder & Co. Inc................... ---------- Total........................... ========== The Underwriting Agreement provides that the obligations of the several Underwriters to purchase and accept delivery of the shares of Common Stock offered hereby are subject to approval by their counsel of certain legal matters and to certain other conditions. The Underwriters are obligated to purchase and accept delivery of all the shares of Common Stock offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Underwriters initially propose to offer the shares of Common Stock in part directly to the public at the initial public offering price set forth on the cover page of this Prospectus and in part to certain dealers (including the Underwriters) at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $ per share. After the initial offering of the Common Stock, the public offering price and other selling terms may be changed by the Representatives at any time without notice. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted to the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of 566,038 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions. The Underwriters may exercise such option solely to cover over-allotments, if any, made in connection with the Offering. To the extent that the Underwriters exercise such option, each Underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such Underwriter's percentage underwriting commitment as indicated in the preceding table. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Each of the Company, its executive officers and directors and certain stockholders of the Company has agreed, subject to certain exceptions noted below, not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise) for a period of 180 days after the date of this Prospectus without the prior written consent of DLJ. In addition, during such period, the Company has also agreed not to file any registration statement with respect to, and each of its executive officers, directors and certain stockholders of the Company has agreed, except as noted below, not to make any demand for, or exercise any right with respect to, the registration of any shares of 55 Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock without DLJ's prior written consent. The Underwriters have agreed to allow the Company to issue shares of Common Stock in connection with acquisitions after the thirtieth day following the date of the Prospectus and pursuant to the Stock Plan. In addition, the Company intends to register 3,350,000 shares of Common Stock under the Securities Act for use by the Company in future acquisitions. See "Shares Eligible For Future Sale." Prior to the Offering, there has been no established trading market of the Common Stock. The initial public offering price for the shares of Common Stock offered hereby will be determined by negotiation among the Company and the Representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which the Company competes, the past and present operations of the Founding Companies, the historical results of the operations of the Founding Companies, the prospects for future earnings of the Company, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of the Offering. Application will be made to list the Common Stock on the New York Stock Exchange (the "NYSE"). In order to meet the requirements for listing the Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. Other than in the United States, no action has been taken by the Company or the Underwriters that would permit a public offering of the shares of Common Stock offered hereby in any jurisdiction where action for that purpose is required. The shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, nor may this Prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of Common Stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this Prospectus comes are advised to inform themselves about and to observe any restrictions relating to the Offering and the distribution of this Prospectus. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of Common Stock offered hereby in any jurisdiction in which such an offer or a solicitation is unlawful. Certain employees of DLJ and BT Alex. Brown Incorporated are investors in MGCV. Pursuant to the terms of the limited liability company agreement of MGCV, upon completion of the Offering those employees will receive an aggregate of 69,231 shares of Common Stock (assuming an initial public offering price of $ per share) and $225,000 of the proceeds of the Offering. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot the Offering, creating a syndicate short position. The Underwriters may bid for and purchase shares of Common Stock in the open market to cover such syndicate short position or to stabilize the price of the Common Stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. LEGAL MATTERS Certain legal matters in connection with the Common Stock being offered hereby will be passed upon for the Company by Andrews & Kurth L.L.P. and for the Underwriters by Baker & Botts, L.L.P. EXPERTS The financial statements of Pentacon, Inc., as of September 30, 1997 and the period from inception (March 20, 1997) through September 30, 1997, the consolidated financial statements of Alatec Products, Inc., as of September 30, 1997 and for the year ended December 31, 1995 and the period from January 1, 56 1997 through September 30, 1997, the financial statements of AXS Solutions, Inc., as of December 31, 1996 and September 30, 1997 and for the years ended December 31, 1995 and 1996 and the period from January 1, 1997 to September 30, 1997, the financial statements of Maumee Industries, Inc., as of December 31, 1996 and September 30, 1997 and for the years ended December 31, 1995 and 1996 and the period from January 1, 1997 to September 30, 1997, the financial statements of Sales Systems, Limited, as of December 31, 1996 and September 30, 1997 and for the year ended December 31, 1996 and the period from January 1, 1997 to September 30, 1997 appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Alatec Products, Inc. as of December 31, 1996 and for the year then ended, appearing in this Prospectus and Registration Statement have been audited by McGladrey & Pullen, LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, filed as part of the Registration Statement, does not contain all the information contained in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement including the exhibits and schedules thereto. Statements made in the Prospectus as to the contents of any contract, agreement or other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or on the Internet at http://www.sec.gov. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company intends to furnish its stockholders with annual reports containing audited financial statements examined by an independent public accounting firm for each fiscal year. 57 INDEX TO FINANCIAL STATEMENTS PAGE ------ PENTACON, INC. AND FOUNDING COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Combined Financial Statements...... F-2 Unaudited Pro Forma Combined Balance Sheet...................... F-3 Unaudited Pro Forma Combined Statement of Operations............ F-5 Notes to Unaudited Pro Forma Combined Financial Statements...... F-6 PENTACON, INC. Report of Independent Auditors..... F-9 Balance Sheet...................... F-10 Statement of Operations............ F-11 Statement of Stockholders' Deficit............................ F-12 Statement of Cash Flows............ F-13 Notes to Financial Statements...... F-14 FOUNDING COMPANIES(1) ALATEC PRODUCTS, INC. Report of Independent Auditors..... F-17 Independent Auditor's Report....... F-18 Consolidated Balance Sheets........ F-19 Consolidated Statements of Income............................. F-20 Consolidated Statements of Changes in Stockholders' Equity............ F-21 Consolidated Statements of Cash Flows.............................. F-22 Notes to Consolidated Financial Statements......................... F-23 AXS SOLUTIONS, INC. Report of Independent Auditors..... F-30 Balance Sheets..................... F-31 Statements of Income............... F-32 Statements of Changes in Shareholders' Equity............... F-33 Statements of Cash Flows........... F-34 Notes to Financial Statements...... F-35 MAUMEE INDUSTRIES, INC. Report of Independent Auditors..... F-41 Balance Sheets..................... F-42 Statements of Operations........... F-43 Statements of Changes in Stockholders' Deficit.............. F-44 Statements of Cash Flows........... F-45 Notes to Financial Statements...... F-46 SALES SYSTEMS, LIMITED Report of Independent Auditors..... F-51 Balance Sheets..................... F-52 Statements of Income and Retained Earnings........................... F-53 Statements of Cash Flows........... F-54 Notes to Financial Statements...... F-55 F-1 PENTACON, INC. AND FOUNDING COMPANIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma combined financial statements give effect to the acquisition by Pentacon, Inc. ("Pentacon"), of the outstanding capital stock of (a) Alatec Products, Inc. ("Alatec"), (b) AXS Solutions, Inc. ("AXS"), (c) Capitol Bolt & Supply, Inc. ("Capitol"), (d) Maumee Industries, Inc. ("Maumee"), and (e) Sales Systems, Limited ("SSL") (together, the "Founding Companies"). Pentacon and the Founding Companies are hereinafter referred to as the "Company." These acquisitions (the "Acquisitions") will occur simultaneously with the closing of Pentacon's initial public offering (the "Offering") and will be accounted for using the purchase method of accounting. Alatec, one of the Founding Companies, has been identified as the accounting acquiror because its shareholder will receive the largest portion of voting rights of the Company. These statements are based on the historical financial statements of Pentacon, Inc., and the Founding Companies included elsewhere in the Prospectus. The unaudited pro forma combined balance sheet gives effect to the Acquisitions and the Offering as if they had occurred on September 30, 1997. The unaudited pro forma combined statement of operations gives effect to these transactions as if they were consummated on January 1, 1997. The Company has estimated the savings that it expects to be realized by consolidating certain operations and general and administrative functions. To the extent the owners and certain key employees of the Founding Companies have agreed prospectively to reductions in salary, bonuses, benefits, and rent expense paid to the owners, these reductions have been reflected in the unaudited pro forma combined statement of operations. With respect to other potential costs savings, the Company has not and cannot quantify these savings until completion of the combination of the Founding Companies. It is anticipated that these savings will be offset by the costs of being a publicly held company and the incremental increase in costs related to the Company's new management. However, these costs, like the savings that they offset, cannot be estimated at this time. Neither the anticipated savings nor the anticipated costs have been included in the pro forma combined financial information. In addition, the pro forma combined statement of operations does not include an adjustment for a nonrecurring, non-cash charge of $4.7 million for issuing common stock to employees and officers of Pentacon. Such issuance will occur subsequent to September 30, 1997 and prior to completion of the Offering and will be recorded in the period in which it occurs. Upon completion of the Offering, a non-cash, non-recurring charge of approximately $24.8 million based on a twenty percent marketability discount from the estimated Offering price to the public will be recorded in the income statement to reflect Offering expenses related to the 2,380,000 shares of common stock issued to MGCV. Both of these charges will result in an equal increase in common stock and paid in capital. The pro forma adjustments are based on preliminary estimates, available information, and certain assumptions and may be revised as additional information becomes available. The unaudited pro forma financial data does not purport to represent what the Company's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates and are not representative of the Company's financial position or results of operations for any future period. Since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma combined financial statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus. See "Risk Factors" included elsewhere herein. F-2 PENTACON, INC. PRO FORMA COMBINED BALANCE SHEETS -- UNAUDITED SEPTEMBER 30, 1997
MERGER ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS ------------ -------- ------------ ----------- ------------ ----------- ----------- (NOTE 4) ASSETS Cash................................. $ 733,000 $ 1,050 $ 2,777,160 $ 123,865 $ -- $ -- $ -- Accounts receivable.................. 7,892,000 -- 3,160,537 1,326,192 5,200,253 1,090,628 -- Inventory............................ 22,951,000 -- 5,323,516 2,019,545 6,524,717 2,255,465 -- Deferred taxes....................... 1,420,000 -- -- 65,708 139,000 -- -- Other................................ -- -- 197,213 160,643 24,362 6,589 -- ------------ -------- ------------ ----------- ------------ ----------- ----------- Current assets....................... 32,996,000 1,050 11,458,426 3,695,953 11,888,332 3,352,682 -- Property, plant, and equipment, net.. 1,578,000 7,210 1,600,646 276,997 974,983 345,970 -- Deferred taxes....................... 65,000 -- -- 5,130 284,000 -- -- Intangible assets.................... -- -- 3,516,115 -- -- -- 43,300,000 Other................................ 272,000 268,138 1,109,065 79,453 -- 27,109 -- ------------ -------- ------------ ----------- ------------ ----------- ----------- Total assets......................... $ 34,911,000 $276,398 $ 17,684,252 $ 4,057,533 $ 13,147,315 $ 3,725,761 $43,300,000 ============ ======== ============ =========== ============ =========== =========== PRO FORMA OFFERING AS COMBINED ADJUSTMENTS ADJUSTED ------------- ----------- ------------- (NOTE 4) ASSETS Cash................................. $ 3,635,075 $ -- $ 3,635,075 Accounts receivable.................. 18,669,610 -- 18,669,610 Inventory............................ 39,074,243 -- 39,074,243 Deferred taxes....................... 1,624,708 -- 1,624,708 Other................................ 388,807 -- 388,807 ------------- ----------- ------------- Current assets....................... 63,392,443 -- 63,392,443 Property, plant, and equipment, net.. 4,783,806 -- 4,783,806 Deferred taxes....................... 354,130 -- 354,130 Intangible assets.................... 46,816,115 -- 46,816,115 Other................................ 1,755,765 (268,138) 1,487,627 ------------- ----------- ------------- Total assets......................... $ 117,102,259 $ (268,138) $ 116,834,121 ============= =========== =============
F-3 PENTACON, INC. PRO FORMA COMBINED BALANCE SHEETS -- UNAUDITED (CONTINUED) SEPTEMBER 30, 1997
MERGER ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS ------------ -------- ------------ ----------- ------------ ----------- ----------- (NOTE 4) LIABILITIES Accounts payable..................... $ 7,521,000 $ -- $ 1,919,913 $ 741,627 $ 4,967,263 $ 980,922 $ -- Accrued expenses..................... 4,956,000 -- 467,432 239,819 1,850,398 60,484 -- Notes payable and current portion of capital lease obligations.......... 206,000 -- 2,015,420 784,709 6,009,841 420,197 -- Due to related parties............... 158,000 292,945 2,789,613 -- 997,181 23,890 (2,713,162) ------------ -------- ------------ ----------- ------------ ----------- ----------- Current liabilities.................. 12,841,000 292,945 7,192,378 1,766,155 13,824,683 1,485,493 (2,713,162) Loan payable......................... 9,668,000 -- 347,264 82,890 270,984 199,967 -- Capital lease obligations............ 1,489,000 -- 911,955 -- -- -- -- Due to related parties............... 2,529,000 -- -- -- -- 176,154 28,662,387 ------------ -------- ------------ ----------- ------------ ----------- ----------- 13,686,000 -- 1,259,219 82,890 270,984 376,121 28,662,387 STOCKHOLDERS' EQUITY Common stock......................... 1,450,000 23,800 5,705,972 262,758 691,000 6,400 (8,044,430) Additional paid-in capital........... -- 50 -- -- -- -- 28,355,616 Retained earnings.................... 9,624,000 (40,397) 3,526,683 2,046,960 (1,068,802) 1,904,945 (6,369,389) Treasury stock....................... (2,690,000) -- -- (101,230) (570,550) (47,198) 3,408,978 ------------ -------- ------------ ----------- ------------ ----------- ----------- 8,384,000 (16,547) 9,232,655 2,208,488 (948,352) 1,864,147 17,350,775 ------------ -------- ------------ ----------- ------------ ----------- ----------- Total liabilities and stockholders' equity............................. $ 34,911,000 $276,398 $ 17,684,252 $ 4,057,533 $ 13,147,315 $ 3,725,761 $43,300,000 ============ ======== ============ =========== ============ =========== =========== PRO FORMA OFFERING AS COMBINED ADJUSTMENTS ADJUSTED ------------- ----------- ------------- (NOTE 4) LIABILITIES Accounts payable..................... $ 16,130,725 $ -- $ 16,130,725 Accrued expenses..................... 7,574,133 -- 7,574,133 Notes payable and current portion of capital lease obligations.......... 9,436,167 (6,418,748) 3,017,419 Due to related parties............... 1,548,467 (1,289,209) 259,258 ------------- ----------- ------------- Current liabilities.................. 34,689,492 (7,707,957) 26,981,535 Loan payable......................... 10,569,105 (6,844,283) 3,724,822 Capital lease obligations............ 2,400,955 -- 2,400,955 Due to related parties............... 31,367,541 (28,838,541) 2,529,000 ------------- ----------- ------------- 44,337,601 (35,682,824) 8,654,777 STOCKHOLDERS' EQUITY Common stock......................... 95,500 37,736 133,236 Additional paid-in capital........... 28,355,666 43,084,907 71,440,573 Retained earnings.................... 9,624,000 -- 9,624,000 Treasury stock....................... -- -- -- ------------- ----------- ------------- 38,075,166 43,122,643 81,197,809 ------------- ----------- ------------- Total liabilities and stockholders' equity............................. $ 117,102,259 $ (268,138) $ 116,834,121 ============= =========== =============
F-4 PENTACON, INC. PRO FORMA COMBINED STATEMENT OF OPERATIONS -- UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 1997
MERGER ALATEC PENTACON AXS CAPITOL MAUMEE SSL ADJUSTMENTS ------------ -------- ------------ ----------- ------------ ------------ ----------- (NOTE 5) Net sales......................... $ 42,296,000 $ -- $ 22,002,438 $ 9,042,747 $ 27,472,902 $ 11,987,479 $ -- Cost of sales..................... 25,114,000 -- 15,275,990 6,326,112 19,557,148 8,056,780 -- ------------ -------- ------------ ----------- ------------ ------------ ----------- Gross profit...................... 17,182,000 -- 6,726,448 2,716,635 7,915,754 3,930,699 -- Operating expenses................ 11,664,000 17,597 4,979,848 2,469,745 6,628,643 3,096,934 (1,815,079)(1) Goodwill amortization............. -- -- -- -- -- -- 811,875(2) ------------ -------- ------------ ----------- ------------ ------------ ----------- Operating income.................. 5,518,000 (17,597) 1,746,600 246,890 1,287,111 833,765 1,003,204 Other income...................... -- -- 7,513 60,684 10,476 -- -- Interest expense.................. (1,015,000) -- (207,766) (37,422) (547,274) (95,162) -- Interest income................... 26,000 -- -- -- -- -- -- ------------ -------- ------------ ----------- ------------ ------------ ----------- (989,000) -- (200,253) 23,262 (536,798) (95,162) -- ------------ -------- ------------ ----------- ------------ ------------ ----------- Income before taxes............... 4,529,000 (17,597) 1,546,347 270,152 750,313 738,603 1,003,204 Income tax provision.............. 1,860,000 -- -- 87,914 316,000 -- 1,692,379(4) ------------ -------- ------------ ----------- ------------ ------------ ----------- Net income (loss)................. $ 2,669,000 $(17,597) $ 1,546,347 $ 182,238 $ 434,313 $ 738,603 $ (689,175) ============ ======== ============ =========== ============ ============ =========== Net income per share.............. Shares used in computing net income per share (Note 5.(5)).......... PRO FORMA OFFERING AS COMBINED ADJUSTMENTS ADJUSTED ------------- ----------- ------------- (NOTE 5) Net sales............................ $ 112,801,566 $ -- $ 112,801,566 Cost of sales........................ 74,330,030 -- 74,330,030 ------------- ----------- ------------- Gross profit......................... 38,471,536 -- 38,471,536 Operating expenses................... 27,041,688 -- 27,041,688 Goodwill amortization................ 811,875 -- 811,875 ------------- ----------- ------------- Operating income..................... 10,617,973 -- 10,617,973 Other income......................... 78,673 -- 78,673 Interest expense..................... (1,902,624) 1,073,915(3) (828,709) Interest income...................... 26,000 -- 26,000 ------------- ----------- ------------- (1,797,951) 1,073,915 (724,036) ------------- ----------- ------------- Income before taxes.................. 8,820,022 1,073,915 9,893,937 Income tax provision................. 3,956,293 440,305(4) 4,396,598 ------------- ----------- ------------- Net income (loss).................... $ 4,863,729 $ 633,610 $ 5,497,339 ============= =========== ============= Net income per share................. $ 0.41 ============= Shares used in computing net income per share (Note 5.(5))............. 13,342,816
F-5 PENTACON, INC. AND FOUNDING COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. BUSINESS Pentacon, Inc. was organized on March 20, 1997 to (i) become a leading domestic and international value-added distributor of fasteners and other small parts to original equipment manufacturers ("OEMs"), (ii) provide related inventory management services to OEMs and others, and (iii) pursue the consolidation of the highly-fragmented fastener distribution industry. Pentacon has conducted no operations to date and will acquire the Founding Companies simultaneously with the consummation of the Offering. 2. HISTORICAL FINANCIAL STATEMENTS The historical financial statements represent the financial position and results of operations of Pentacon and the Founding Companies and were derived from the respective financial statements. The Company selected a fiscal year-end of September 30 and all Founding Companies have been presented as of and for the nine months ended September 30, 1997, except for Capitol, which has been presented as of and for the period from December 1, 1996 to August 31, 1997. 3. ACQUISITION OF FOUNDING COMPANIES Concurrent with the closing of the Offering, Pentacon will acquire all of the capital stock of the Founding Companies. The acquisition will be accounted for using the purchase method of accounting, and Alatec has been identified as the accounting acquiror. The following table sets forth for each Founding Company the estimated consideration to be paid to its common stockholders (a) in cash and (b) in shares of common stock. The estimated consideration is subject to certain adjustments at and following closing. SHARES OF CASH COMMON STOCK --------- ------------- (DOLLARS IN THOUSANDS) Alatec............................... $ 12,666 2,969,493 AXS.................................. 7,759 1,819,257 Capitol.............................. 772 180,934 Maumee............................... 5,126 1,201,762 SSL.................................. 2,340 548,554 --------- ------------- Total......................... $ 28,663 6,720,000 ========= ============= F-6 PENTACON, INC. AND FOUNDING COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
MERGER OFFERING (A) (B) ADJUSTMENTS (C) (D) ADJUSTMENTS ------------ ------------- ------------- ------------- ------------- ------------- Cash................................. $ -- $ -- $ -- $ 43,122,643 $ (43,122,643) $ -- Other assets......................... -- -- -- (268,138) (268,138) Intangibles.......................... -- 43,300,000 43,300,000 -- -- -- Notes payable and current portion of capital lease obligations.......... -- -- -- -- 6,418,748 6,418,748 Due to related parties............... 2,713,162 -- 2,713,162 268,138 1,021,071 1,289,209 Loan payable......................... -- -- -- -- 6,844,283 6,844,283 Due to related parties............... (2,713,162) (25,949,225) (28,662,387) 28,838,541 28,838,541 Common stock......................... -- 8,044,430 8,044,430 (37,736) -- (37,736) Additional paid-in capital........... -- (28,355,616) (28,355,616) (43,084,907) -- (43,084,907) Retained earnings.................... -- 6,369,389 6,369,389 -- -- -- Treasury stock....................... -- (3,408,978) (3,408,978) -- -- -- ------------ ------------- ------------- ------------- ------------- ------------- $ -- $ -- $ -- $ -- $ -- $ -- ============ ============= ============= ============= ============= =============
- ------------ (a) Reflects the reclass of cumulative S-Corporation earnings that will be repaid with the cash portion of the purchase consideration as accrued at September 30, 1997. (b) Records the purchase of the Founding Companies consisting of $28.7 million in cash and 6,720,000 shares of common stock for a total estimated purchase price of $98.6 million (based on an estimated fair value per share which represents a marketability discount of 20% from the estimated initial public offering price) resulting in excess purchase price over the fair market value of assets acquired of $43.3 million. (c) Records the proceeds of $43.1 million from the issuance of 3,773,585 shares of common stock, net of estimated offering costs of $6.0 million (based on an estimated initial public offering price of $ ). (d) Records cash portion of the consideration to be paid to the stockholders of the Founding Companies in connection with the Acquisitions and the repayment of certain debt obligations with the proceeds of this offering. F-7 PENTACON, INC. AND FOUNDING COMPANIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS Nine months ended September 30, 1997: (1) Adjusts salaries, bonuses, benefits, and lease expense amounts to reflect those established in contractual agreements between the Company and certain owners and key employees of the Founding Companies. (2) Records pro forma goodwill amortization using a 40-year estimated life. (3) Reflects the reduction in interest expense attributed to obligations retired with proceeds from the Offering. (4) Adjusts the provision for federal and state income taxes to an estimated 41% effective tax rate for the Company before the effect of non-deductible goodwill. (5) Includes (i) 2,830,000 shares issued by Pentacon, Inc. prior to the Offering (including 450,000 shares issued to management), (ii) 6,720,000 shares to be issued to the stockholders of the Founding Companies in connection with the Acquisitions, (iii) 3,773,585 shares to be issued in connection with the Offering (excluding the over-allotment), (iv) the effect of the 50,000 warrants with an assumed exercise price of $8.00 per share using the treasury stock method. Excludes 970,000 shares of common stock subject to options to be granted in connection with the Offering at an exercise price equal to the initial public offering price. F-8 REPORT OF INDEPENDENT AUDITORS Board of Directors Pentacon, Inc. We have audited the accompanying balance sheet of Pentacon, Inc. (the "Company"), as of September 30, 1997 and the related statement of operations, stockholders' deficit, and cash flows for the period from inception (March 20, 1997) through September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pentacon, Inc., as of September 30, 1997, and the results of its operations and cash flows for the period from inception (March 20, 1997) through September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas October 16, 1997 F-9 PENTACON, INC. BALANCE SHEET SEPTEMBER 30, 1997 ASSETS Current assets: Cash and cash equivalents.......... $ 1,050 ---------- Total current assets.................... 1,050 Deferred offering costs................. 268,138 Property and equipment.................. 7,210 ---------- Total assets............................ $ 276,398 ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Amounts due to stockholder.............. $ 292,945 Commitments and contingencies Stockholders' deficit: Preferred stock, $0.01 par value, 10,000,000 shares authorized, -0- outstanding....................... -- Common stock, $0.01 par value, 51,000,000 shares authorized, 2,380,000 outstanding............. 23,800 Paid-in capital.................... 50 Accumulated deficit, net of subscriptions receivable.......... (40,397) ---------- Total stockholders' deficit............. (16,547) ---------- Total liabilities and stockholders' deficit............................... $ 276,398 ========== SEE ACCOMPANYING NOTES. F-10 PENTACON, INC. STATEMENT OF OPERATIONS PERIOD FROM INCEPTION (MARCH 20, 1997) THROUGH SEPTEMBER 30, 1997 Net sales............................ $ -- Selling, general, and administrative expenses........................... 17,597 ---------- Loss before income taxes............. (17,597) Income tax expense................... -- ---------- Net loss...................... $ (17,597) ========== SEE ACCOMPANYING NOTES. F-11 PENTACON, INC. STATEMENT OF STOCKHOLDER'S DEFICIT SEPTEMBER 30, 1997
COMMON STOCK ADDITIONAL TOTAL ------------------- SUBSCRIPTIONS PAID-IN ACCUMULATED STOCKHOLDERS SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT DEFICIT -------- ------- ------------- ----------- ------------ ------------- 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) ======== ======= ============= =========== ============ =============
SEE ACCOMPANYING NOTES. F-12 PENTACON, INC. STATEMENT OF CASH FLOWS PERIOD FROM INCEPTION (MARCH 20, 1997) THROUGH SEPTEMBER 30, 1997 OPERATING ACTIVITIES Net loss........................... $ (17,597) Adjustments to reconcile net loss to net cash provided by operating activities: Deferred offering costs....... (268,138) Amounts due to stockholder.... 292,945 ------------ Net cash provided by operating activities........................ 7,210 INVESTING ACTIVITIES Capital expenditures............... (7,210) ------------ Net cash used in investing activities........................ (7,210) FINANCING ACTIVITIES Proceeds from sale of common stock and warrants...................... 1,050 ------------ Net cash provided by financing activities........................ 1,050 ------------ Net increase in cash............... 1,050 Cash and cash equivalents at beginning of year................. -- ------------ Cash and cash equivalents at end of year.............................. $ 1,050 ============ SEE ACCOMPANYING NOTES. F-13 PENTACON, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. BUSINESS AND ORGANIZATION Pentacon, Inc., a Delaware corporation ("Pentacon" or the "Company"), was organized on March 20, 1997 to (i) become a leading domestic and international value-added distributor of fasteners and other small parts to original equipment manufacturers ("OEMs"), (ii) provide related inventory management services to OEMs and others, and (iii) pursue the consolidation of the highly-fragmented fastener distribution industry. Pentacon intends to acquire five businesses (the "Acquisitions"), contemporaneously complete an initial public offering (the "Offering") of its common stock. Pentacon has not conducted any operations, and all activities to date have related to the Offering and the Acquisitions. Initial capitalization of the Company by McFarland, Grossman Capital Ventures II, L.C. ("MGCV"), was $1,000. All expenditures to date have been funded by MGCV, on behalf of the Company. As of September 30, 1997, costs of approximately $268,138 have been paid by MGCV on behalf of the Company in connection with the Offering. Pentacon has treated these costs as deferred offering costs. Pentacon is dependent upon the Offering to execute the pending Acquisitions and to repay MGCV. The Company has agreed to pay Donald Luke, a manager of MGCV, a success fee of $100,000 upon consummation of the Offering. There is no assurance that the pending Acquisitions discussed below will be completed or that Pentacon will be able to generate future operating revenues. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. INCOME TAXES The Company has incurred a net operating loss since inception of which a 100% valuation allowance has been established for financial reporting purposes. Accordingly no deferred tax asset has been recorded. 2. STOCKHOLDERS' EQUITY COMMON STOCK Pentacon has entered into agreements whereby the total shares and warrants to purchase shares of common stock of Pentacon held by MGCV, certain consultants to MGCV, and management of the Company, will represent 30% of the total shares outstanding immediately before completion of the Offering. Of these shares, certain members of management will hold 4.7% of the total shares outstanding immediately before completion of the Offering and MGCV will hold the remaining shares. Based on these agreements and the estimated total shares to be outstanding upon completion of the Offering, the shares presented herein have been restated to effect 2,380-for-one stock split and an increase in authorized shares of common stock to 50,000,000 voting shares and 1,000,000 non-voting shares. In connection with the organization and initial capitalization of Pentacon, the Company issued 2,380,000 shares of common stock to MGCV. In November 1997, management of the Company acquired 450,000 shares of common stock for $0.01 per share. As a result of the issuance of the 450,000 shares, the Company will record a nonrecurring, non-cash compensation charge in November 1997 of approximately $4.7 million, based on an estimated Offering price to the public net of a twenty percent marketability discount. Upon completion of the Offering, a non-cash, non-recurring charge of approximately $24.8 million based on a twenty percent marketability discount from the estimated initial public offering price will be recorded to reflect Offering expenses related to the 2,380,000 shares of common stock held by MGCV. F-14 PENTACON, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) RESTRICTED COMMON STOCK In December 1997, MGCV exchanged 367,000 shares of Common Stock for an equal number of shares of restricted voting common stock ("Restricted Common Stock"). The holder of Restricted Common Stock is entitled to elect one member of the Company's Board of Directors and to 0.25 of one vote for each share held on all other matters on which they are entitled to vote. Each share of Restricted Common Stock will automatically convert into Common Stock on a share-for-share basis (a) in the event of a disposition of such share of Restricted Common Stock by the holder thereof (other than a disposition which is a distribution by a holder to its partners or beneficial owners or a transfer to a related party of such holder (as defined)), (b) in the event any person acquires beneficial ownership of 15% or more of the outstanding shares of Common Stock of the Company, or (c) in the event any person offers to acquire 15% or more of the total number of outstanding shares of Common Stock. After January 1, 2000, the Corporation may elect to convert any outstanding shares of Restricted Common Stock into shares of Common Stock. WARRANTS At the date of the Company's organization, warrants were issued for 50,000 shares of common stock with an exercise price equal to the lesser of $8 per share or 60% of the initial public offering price. These warrants were issued to legal and investment advisors for a total of $50. As the Company was subject to significant uncertainties, the value of the warrants and their underlying shares was de minimus at that date and no value beyond the consideration received has been assigned to them. The warrants may be exercised up to four years after the consummation of the Offering. STOCK PLAN The board of directors of the Company intends to adopt the Pentacon, Inc. 1998 Stock Plan (the "Plan"). The Company anticipates that upon or shortly after the consummation of its Offering that it will have granted options to purchase up to 1.7 million shares of common stock. Subsequent to September 30, 1997 the Company has granted certain members of management options for 370,000 shares of common stock and intends to grant additional options for 600,000 shares of common stock with the exercise prices to be equal to the Offering price. The Company will account for options issued to employees and nonemployee directors under the Plan in accordance with APB Opinion No. 25 and, accordingly, no compensation cost will be recognized to the extent that shares are issued at the fair market value as of the date of grant. The Company will provide the pro forma disclosure of net earnings per share in the notes to the financial statements as if the fair value-based method of accounting has been applied to awards as required by Statement of Financial Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. 3. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, EARNINGS PER SHARE. For the Company, SFAS No. 128 will be effective for the first quarter ended December 31, 1997. SFAS No. 128 simplifies the standards required under current accounting rules for computing earnings per share and replaces the presentation of primary earnings per share and fully diluted earnings per share with a presentation of basic earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS"). Basic EPS excludes dilution and is determined by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue common stock were exercised or converted into common stock. Diluted EPS is computed similarly to fully diluted earnings per share under 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. F-15 PENTACON, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. EVENT SUBSEQUENT TO THE DATE OF AUDITOR'S REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): Wholly-owned subsidiaries of Pentacon, Inc. have signed definitive agreements to acquire by merger or share exchange five companies ("Founding Companies") to be effective contemporaneously with the Offering. The companies to be acquired are Alatec Products, Inc., AXS Solutions, Inc., Capitol Bolt & Supply, Inc., Maumee Industries, Inc., and Sales Systems, Limited The aggregate consideration that will be paid by Pentacon to acquire the Founding Companies is approximately $28.7 million in cash and 6,720,000 shares of Common Stock. In December 1997 Pentacon filed a registration statement on Form S-1 for the sale of its common stock. In January 1998 the Company has reached an agreement in principle with a bank for a credit facility of $50 million. The bank has also agreed in principle 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 agreed to grant options to purchase 50,000 shares of Common Stock at the public offering price. F-16 REPORT OF INDEPENDENT AUDITORS Pentacon, Inc. and Board of Directors Alatec Products, Inc. We have audited the accompanying consolidated balance sheet of Alatec Products, Inc., as of September 30, 1997, and the related statements of income, stockholders' equity, and cash flows for the year ended December 31, 1995 and the period from January 1, 1997 through September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alatec Products, Inc., as of September 30, 1997, and the results of its operations and its cash flows for the year ended December 31, 1995 and the period from January 1, 1997 through September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas November 21, 1997, except for Note 3, as to which the date is November 26, 1997 F-17 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Alatec Products, Inc. Chatsworth, California We have audited the accompanying consolidated balance sheet of Alatec Products, Inc., as of December 31, 1996, and the related statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alatec Products, Inc., as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Pasadena, California November 21, 1997, except for Note 3, as to which the date is November 26, 1997 F-18 ALATEC PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- ASSETS Current assets: Cash............................... $ 256,000 $ 733,000 Receivables, less allowance for doubtful accounts of $118,000 and $173,000 in 1996 and 1997, respectively...................... 5,304,000 7,892,000 Inventory.......................... 19,615,000 22,951,000 Deferred taxes..................... 1,457,000 1,420,000 ------------ ------------- Total current assets.......... 26,632,000 32,996,000 Property under capital lease, leasehold improvements and equipment, net....... 1,583,000 1,578,000 Other assets: Deferred taxes..................... 32,000 65,000 Security deposits and other........ 272,000 272,000 ------------ ------------- Total other assets............ 304,000 337,000 ------------ ------------- Total assets.................. $ 28,519,000 $ 34,911,000 ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of note payable to related party.................. $ -- $ 158,000 Current maturities of long-term debt.............................. 169,000 169,000 Current maturities of obligation under capital lease............... 32,000 37,000 Accounts payable................... 5,771,000 7,521,000 Income taxes payable............... 2,668,000 3,594,000 Accrued compensation and commissions....................... 556,000 866,000 Other accrued expenses............. 306,000 496,000 ------------ ------------- Total current liabilities..... 9,502,000 12,841,000 Subordinated note payable to related party, less current maturities........ 776,000 2,529,000 Revolving line of credit................ 8,800,000 9,500,000 Long-term debt, less current maturities............................ 294,000 168,000 Obligation under capital lease, less current maturities.................... 1,517,000 1,489,000 ------------ ------------- Total liabilities............. 20,889,000 26,527,000 Commitments and contingencies Stockholders' equity: Common stock, $10 par value; authorized 2,500,000 shares; issued 100 shares (pre stock-split) in 1996 and 145,000 shares in 1997.................... 1,000 1,450,000 Treasury stock, 51,290 shares at cost.............................. -- (2,690,000) Additional paid-in capital......... 24,000 -- Retained earnings.................. 7,605,000 9,624,000 ------------ ------------- Total stockholders' equity.... 7,630,000 8,384,000 ------------ ------------- Total liabilities and stockholders' equity...... $ 28,519,000 $ 34,911,000 ============ ============= SEE ACCOMPANYING NOTES. F-19 ALATEC PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME
JANUARY 1, YEAR ENDED DECEMBER 31, 1997 THROUGH ------------------------------ SEPTEMBER 30, 1995 1996 1997 -------------- -------------- ------------- Net sales............................... $ 41,204,000 $ 44,726,000 $ 42,296,000 Cost of goods sold...................... 26,196,000 26,707,000 25,114,000 -------------- -------------- ------------- Gross profit............................ 15,008,000 18,019,000 17,182,000 Selling, general and administrative expenses.............................. 11,285,000 12,818,000 11,664,000 -------------- -------------- ------------- Operating income........................ 3,723,000 5,201,000 5,518,000 Interest expense........................ (1,235,000) (1,118,000) (1,015,000) Interest income......................... 22,000 56,000 26,000 Other expense........................... (91,000) -- -- -------------- -------------- ------------- Income before income taxes.............. 2,419,000 4,139,000 4,529,000 Provision for income taxes.............. 995,000 1,628,000 1,860,000 -------------- -------------- ------------- Net income.............................. $ 1,424,000 $ 2,511,000 $ 2,669,000 ============== ============== =============
SEE ACCOMPANYING NOTES. F-20 ALATEC PRODUCTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TREASURY STOCK AT COST ----------------------- PAID-IN ------------------------- RETAINED SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS --------- ------------ ---------- --------- -------------- ------------ 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 ========= ============ ========== ========= ============== ============
SEE ACCOMPANYING NOTES. F-21 ALATEC PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
JANUARY 1, 1997 THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER ------------------------------ 30, 1995 1996 1997 -------------- -------------- ------------ OPERATING ACTIVITIES Net income......................... $ 1,424,000 $ 2,511,000 $ 2,669,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............... 271,000 180,000 129,000 Deferred taxes................ (173,000) (372,000) 4,000 Loss on disposal of asset..... 14,000 -- -- Changes in operating assets and liabilities: Accounts receivable...... (612,000) 847,000 (2,588,000) Inventory................ (2,502,000) (5,567,000) (3,336,000) Other receivables........ -- (31,000) -- Accounts payable and accrued expenses...... 501,000 2,023,000 3,176,000 -------------- -------------- ------------ Net cash provided by (used in) operating activities............. (1,077,000) (409,000) 54,000 INVESTING ACTIVITIES Collections of note receivable..... -- 42,000 -- (Investment in) return of security deposits and other assets........ 6,000 (251,000) -- Purchase of leasehold improvements and equipment.................... (89,000) (114,000) (138,000) Proceeds from sale of assets....... 13,000 -- 14,000 -------------- -------------- ------------ Net cash used in investing activities....................... (70,000) (323,000) (124,000) FINANCING ACTIVITIES Principal payments on long-term debt............................. (128,000) (169,000) (127,000) Net advances on revolving line of credit........................... 1,175,000 1,063,000 700,000 Principal payments on obligation under capital lease.............. (20,000) (23,000) (23,000) Repayment on stockholder note...... -- -- (3,000) -------------- -------------- ------------ Net cash provided by financing activities....................... 1,027,000 871,000 547,000 -------------- -------------- ------------ Net increase (decrease) in cash.... (120,000) 139,000 477,000 Cash at beginning of year.......... 237,000 117,000 256,000 -------------- -------------- ------------ Cash at end of year................ $ 117,000 $ 256,000 $ 733,000 ============== ============== ============ Cash paid during the year for: Interest...................... $ 899,000 $ 1,029,000 $ 829,000 ============== ============== ============ Income taxes.................. $ 715,000 $ 404,000 $ 930,000 ============== ============== ============
SEE ACCOMPANYING NOTES. F-22 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS Alatec Products, Inc. (the "Company") is a wholesale distributor of industrial and aerospace fasteners throughout the United States, Canada, Europe, South America, and the Far East. Sales to the aerospace and defense industries represent a significant portion of the Company's total annual sales. The Company's corporate headquarters are based in Chatsworth, California, and it has regional sales offices in six states. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company's wholly owned subsidiaries, Trace Alatec Supply Company, Inc.; Alatec Race, Inc.; Alatec Fastener and Component Group, Inc.; Alatec Cable Harness and Assembly Division, Inc.; and Alatec International Sales, Inc., a foreign international sales corporation. All significant intercompany accounts and transactions have been eliminated. CONCENTRATIONS OF CREDIT RISK The Company distributes industrial and aerospace fasteners to manufacturers in a wide variety of industries including the aerospace and defense industries. Credit is extended based on an evaluation of the customer's financial condition and collateral is typically not required. Credit losses are provided for in the financial statements through a charge to operations. Credit losses have been consistently within management's expectations. Provisions for bad debts and accounts receivable write-offs have not been significant. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash maintained in bank deposit accounts. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVENTORIES Inventories consist primarily of industrial and aerospace fasteners and related hardware held for sale and are valued at the lower of cost (first-in, first-out method) or market. PROPERTY UNDER CAPITAL LEASES, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT Leasehold improvements, buildings acquired under capital leases, and equipment are recorded at cost. Depreciation is computed using straight-line and primarily accelerated methods over useful lives ranging from 5 to 20 years. Leasehold improvements and buildings acquired under capital leases are amortized over the lesser of the life of the lease or the life of the improvements. The amortization expense on assets acquired under capital leases is included with depreciation expense on owned assets. CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of accounts receivable, prepaid expenses, and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying value of the Company's debt facilities and capital lease agreements approximates fair value because the rates on such facilities are F-23 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) variable, based on current market, or are at fixed rates currently available to the Company. The rate of the subordinated note payable to stockholder (discussed in Note 4 and Note 7) is less than the market rate currently available to the company, however, the difference between the carrying value of this note and the fair value is not significant. NET SALES RECOGNITION Net sales are recognized upon shipment of the product to the customer. Adjustments to arrive at net sales are primarily allowances for discounts and returns. EXPORT SALES The Company recorded export sales of $8,847,000, $8,875,000, and $9,434,000 in the years ended December 31, 1995 and 1996 and the period from January 1, 1997 through September 30, 1997, respectively. The Company has export sales through its foreign sales corporation to Canada, Europe, South America, and the Far East of which no country or region is individually significant. ACCOUNTING FOR LONG-LIVED ASSETS In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of 1996 and the effect of adoption had no impact on the financial statements. INCOME TAXES Income taxes have been provided using the liability method in accordance with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FISCAL YEAR In 1997, the Company changed its fiscal year end from December 31 to September 30. 2. PROPERTY AND EQUIPMENT Property under capital leases, leasehold improvements, and equipment consist of: DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------- -------------- Automobile equipment................. $ 181,000 $ 181,000 Leasehold improvements............... 201,000 208,000 Office equipment..................... 299,000 327,000 Warehouse equipment.................. 290,000 312,000 Computer equipment................... 674,000 741,000 Buildings acquired under capital leases............................... 1,637,000 1,637,000 ------------- -------------- 3,282,000 3,406,000 Less accumulated depreciation, including amortization of assets acquired under capital leases...... 1,699,000 1,828,000 ------------- -------------- $ 1,583,000 $1,578,000 ============= ============== F-24 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. REVOLVING LINE OF CREDIT The revolving line of credit represents borrowings under a $13.3 million line of credit with a bank. This facility expires in June 1999. At September 30, 1997, unused credit available under this facility was $3,000,000. The Company has classified all borrowings outstanding under its line of credit as a long-term liability as it intends to maintain borrowings of at least $9.5 million during 1998. The Company may borrow amounts against 80% of eligible trade receivables and 50% of eligible inventory, up to $7,000,000. The note provides for interest at the prime rate (8.5% at September 30, 1997) and is collateralized by inventory, accounts receivable, equipment and the personal guarantee of a stockholder. The credit agreement also provides for standby letters of credit of up to $100,000. At September 30, 1997, there were no amounts outstanding on the letters of credit. The credit agreement contains certain restrictive financial covenants including, but not limited to, minimum working capital requirements and dividend restrictions. As of September 30, 1997, the Company was in compliance with the financial covenants. However, at September 30, 1997, the Company was not in compliance with certain nonfinancial covenants relating to providing information and notice of defined transactions and events to the bank. The bank has provided a written waiver for these covenant violations and management believes that the Company will be in compliance with these covenants in future periods. 4. LONG-TERM DEBT Long-term debt consisted of the following: DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Note payable to a bank, secured by a vehicle costing $32,850, with monthly payments of $507, including interest at 9.99%, maturing June 1999.......... $ 13,000 $ 9,000 Note payable to a bank, secured by accounts receivable, inventory and equipment, with monthly payments of $13,646 plus interest at .75% over the bank's prime rate (8.5% at September 30, 1997), maturing September 1999.... 450,000 328,000 Note payable to a stockholder, unsecured, due February 1998, with interest payable monthly at 9%, subordinated to all senior bank debt.................................. 776,000 -- Note payable to a former stockholder, secured by assets of the corporation, due November 2024, with interest payable monthly at 5.64%, subordinated to all senior bank debt............... -- 2,687,000 ------------ ------------- 1,239,000 3,024,000 Less current maturities................. 169,000 327,000 ------------ ------------- $1,070,000 $ 2,697,000 ============ ============= As discussed in Note 7, the $776,000 note payable to a stockholder was cancelled in exchange for 45 shares (pre stock-split) of common stock. F-25 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The aggregate maturities required on long-term debt at September 30, 1997 (not including the revolving line of credit) are due in future years as follows: Fiscal year ending: 1998............................... $ 327,000 1999............................... 334,000 2000............................... 174,000 2001............................... 182,000 2002............................... 191,000 Thereafter......................... 1,816,000 ------------ $ 3,024,000 ============ 5. LEASE COMMITMENTS The Company leases a portion of its facilities, equipment, and vehicles under noncancelable capital and operating lease agreements. In April 1992, the Company entered into a capital lease with a stockholder for its Chatsworth facilities with an original cost of $1,637,000. Monthly installments, subject to Consumer Price Index adjustments and including interest at 11.6%, are required through March 2012. Additionally, the Company leases a smaller facility from the stockholder under an operating lease. Future minimum lease payments under the capital and operating leases, together with the present value of the net minimum lease payments, as of September 30, 1997 are as follows:
RELATED-PARTY ------------------------ CAPITAL OPERATING LEASE LEASES OTHER TOTAL ---------- ---------- ---------- ------------ 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 ==========
Total rental and interest expense charged to operations for the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995 was approximately $640,000, $778,000, and $697,000, respectively, including amounts to related parties of $451,000, $359,000, and $322,000, respectively. 6. 401(K) PLAN The Company has a defined contribution 401(k) plan (the "Plan") for substantially all of the Company's full-time employees. The Company may make discretionary contributions and, in addition, may match participants' contributions. The Company contributed $80,000, $99,000, and $80,000 in matching contributions to the plan for the nine months ended September 30, 1997 and the years ended December 31, F-26 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1996 and 1995, respectively. Additionally, in 1997, the Board of Directors approved a $300,000 discretionary contribution to the Plan. Accordingly, the contribution was accrued and expensed as of September 30, 1997. 7. RELATED-PARTY TRANSACTIONS EQUITY TRANSACTIONS At December 31, 1996, the Company was a closely held corporation and all of the outstanding common stock was owned by immediate family members. During May 1997, certain equity transactions occurred simultaneously. The Company issued 45 shares (pre stock-split) of common stock in exchange for the cancellation of a stockholder note payable of $776,000. Simultaneously, the Company purchased as treasury stock 51.29 shares (pre stock split) of common stock representing all of the shares of common stock held by one of the family members in exchange for a note payable in the original amount of $2,690,000. The terms of these notes payable are described below. NOTES PAYABLE AND RECEIVABLE As discussed above, the Company had a 9%, $776,000 note payable to a stockholder at December 31, 1996. At September 30, 1997, the Company had a 5.64%, $2,687,000 note payable to a former stockholder and current Director, due November 2024. The note is subordinated to all senior bank debt and is guaranteed by the President and sole remaining stockholder of the Company. The note contains provisions that upon the death of the former stockholder, the note will be terminated and the related debt will be cancelled. During the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997, interest expense of $70,000, $69,000, and $50,000, respectively, was incurred on these notes. In addition, the Company has a non-interest-bearing receivable from a stockholder of $9,000 as of December 31, 1996 and accrued rents and interest due to a stockholder of $88,000 as of December 31, 1996. These balances are included in receivables and other accrued expenses, respectively. DEBT GUARANTEE The U.S. Small Business Administration ("SBA") has issued a Secured Business Disaster Loan to a related party for earthquake repairs and improvements to the Chatsworth facility, which is owned by a stockholder and leased to the Company. The Company is identified as a co-borrower; however, the Company has reflected this as a contingent liability similar to a debt guarantee. The remaining balance on the SBA loan was $1,255,231 and $1,217,000 at December 31, 1996 at September 30, 1997, respectively. The debt matures in August 2024. No amount of this debt is recorded in the accompanying financial statements. RELATED PARTY PURCHASES The Company purchased approximately $1,100,000, $1,386,000, and $1,100,000 in 1995, 1996, and during the period from January 1, 1997 through September 30, 1997, respectively, from a supplier which is 50 percent owned by the principal stockholder. Additionally, the Company owed $136,000, $209,000, and $154,000 for the respective periods related to goods purchased for resale classified as accounts payable in the balance sheet. 8. CONTINGENCIES INCOME TAX EXAMINATION The Company's federal income tax returns for the year ended January 31, 1995 are currently being examined by the Internal Revenue Service (the "IRS"). No notices of deficiency have been issued. The Internal Revenue Service has proposed the capitalization of certain repairs to the Company's Chatsworth facilities, which sustained earthquake damage, rather than to treat them as deductible expenses in the year F-27 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) incurred, capitalization of freight costs and adjustments for certain other nondeductible accrued expenses. The Company has recorded an adjustment of approximately $120,000 for these known deficiencies as a result of the examination. $116,000 of this adjustment is reflected in the 1996 tax provision and approximately $4,000 in the 1997 tax provision. The Company has reached an understanding that resolves all open issues on the audit; however, this understanding is subject to final IRS approval. There can be no assurance that there will be no additional assessments; however, management believes that any additional assessment would not be material. During 1997, the Company detected that it had erroneously omitted certain amounts of inventory from its financial statements for federal and state income tax purposes for tax years ending December 31, 1995 and 1996. The Company anticipates filing amended returns for 1996 and certain prior periods and has accrued the tax liability and related interest totaling approximately $2,568,000 and $2,225,000 in 1997 and 1996, respectively. No underpayment or late payment penalties have been accrued in the financial statements based on preliminary discussions with the IRS indicating that no penalties would be assessed. If assessed, these penalties could be as much as $850,000. Based on management's discussion with the IRS, it is their opinion that no significant penalties will be assessed, and management believes it will be successful in settling this issue with the Internal Revenue Service and state taxing authorities within the amounts accrued in the financial statements. 9. INCOME TAXES Components of income tax expense are as follows: JANUARY 1, 1997 YEAR ENDED DECEMBER 31, THROUGH -------------------------- SEPTEMBER 30, 1995 1996 1997 ------------ ------------ -------------- Currently paid or payable: Federal........................ $ 1,049,000 $ 1,611,000 $1,496,000 State.......................... 119,000 389,000 360,000 ------------ ------------ -------------- 1,168,000 2,000,000 1,856,000 Deferred: Federal........................ (157,000) (357,000) 3,000 State.......................... (16,000) (15,000) 1,000 ------------ ------------ -------------- (173,000) (372,000) 4,000 ------------ ------------ -------------- $ 995,000 $ 1,628,000 $1,860,000 ============ ============ ============== F-28 ALATEC PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net deferred tax assets (liabilities) consist of the following: NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------- -------------- Deferred tax assets: Receivables allowance.............. $ 47,000 $ 75,000 Inventory allowance................ 562,000 632,000 Accrued expenses................... 239,000 243,000 Equipment.......................... 32,000 198,000 Uniform cost capitalization........ 618,000 583,000 ------------- -------------- 1,498,000 1,731,000 ------------- -------------- Deferred tax liabilities, other...... (9,000) (246,000) ------------- -------------- $ 1,489,000 $1,485,000 ============= ============== Net deferred taxes consist of the following: Current assets....................... $ 1,457,000 $1,420,000 Noncurrent assets.................... 32,000 65,000 ------------- -------------- $ 1,489,000 $1,485,000 ============= ============== The Company's effective tax rate varied from the federal statutory tax rate during the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995 for the following reasons: YEAR ENDED DECEMBER JANUARY 1, 31, 1997 THROUGH -------------------- SEPTEMBER 30, 1995 1996 1997 --------- --------- ------------- Expected income tax rate................ 34.0% 34.0% 34.0% International export sales partially exempt from federal income taxes (FSC benefit).............................. (9.2) (4.4) (2.6) State taxes, net of federal benefit..... 7.3 7.7 7.2 Adjustment to reflect proposed IRS audit settlement............................ -- 6.0 0.2 Nondeductible expenses.................. 4.3 2.1 1.0 Other................................... 4.7 (6.1) 1.3 --------- --------- ------------- Effective tax rate...................... 41.1% 39.3% 41.1% ========= ========= ============= 10. STOCKHOLDERS' EQUITY In May 1997, the Company's Board of Directors (the "Board") authorized an increase in the authorized shares of common stock from 2,500 shares to 2,500,000 shares. Concurrently, the Board approved a 1,000 for 1 stock-split. 11. SUBSEQUENT EVENT (UNAUDITED) In December 1997, the Company and its stockholder entered into a definitive agreement with a wholly owned subsidiary of Pentacon, Inc., which among other things calls for the merger of the Company with the Pentacon, Inc. subsidiary. F-29 REPORT OF INDEPENDENT AUDITORS Pentacon, Inc. and The Board of Directors AXS Solutions, Inc. We have audited the accompanying balance sheets of AXS Solutions, Inc. as of December 31, 1996 and September 30, 1997, and the related statements of income, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AXS Solutions, Inc. at December 31, 1996 and September 30, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas November 7, 1997 F-30 AXS SOLUTIONS, INC. BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- ASSETS Current assets: Cash and cash equivalents.......... $ 3,487,371 $ 2,777,160 Accounts receivable -- net of allowance for doubtful accounts of $91,500 in 1996 and $105,000 in 1997.............................. 3,710,420 3,160,537 Inventory.......................... 4,952,648 5,323,516 Prepaid expenses and other current assets............................ 66,839 27,737 Receivable from shareholder........ 169,476 169,476 ------------ ------------- Total current assets.................... 12,386,754 11,458,426 Property and equipment: Building and improvements.......... 192,763 212,437 Machinery and equipment............ 2,162,291 2,220,002 Assets under capital lease......... 1,058,589 1,058,589 ------------ ------------- Total cost.............................. 3,413,643 3,491,028 Less: accumulated depreciation and amortization...................... (1,719,540) (1,890,382) ------------ ------------- 1,694,103 1,600,646 Goodwill................................ 3,118,414 3,058,310 Non-compete agreement................... 537,050 457,805 Cash surrender value of life insurance............................. 617,196 654,198 Other................................... 336,832 454,867 ------------ ------------- Total assets............................ $ 18,690,349 $ 17,684,252 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Demand note payable................ $ 3,300,000 $ 1,939,000 Accounts payable................... 1,878,235 1,919,913 Accrued expenses and other current liabilities....................... 713,010 467,432 Shareholder distribution payable... -- 2,713,162 Current portion of long-term debt to former shareholder............. 70,199 76,451 Current portion of capital lease obligation........................ 53,215 76,420 ------------ ------------- Total current liabilities............... 6,014,659 7,192,378 Long-term debt to former shareholder, less current portion.................. 423,715 347,264 Capital lease obligation, less current portion............................... 988,375 911,955 Commitments and contingencies Shareholders' equity: Common stock: AXS Solutions, Inc. class A voting common stock, no par value, authorized 1,000 shares, issued and outstanding, 100 shares... 55,785 55,785 AXS Solutions, Inc. class B nonvoting common stock, no par value, authorized 99,000 shares, issued and outstanding, 9,900 shares.................... 5,522,687 5,650,187 Retained earnings.................. 5,685,128 3,526,683 ------------ ------------- Total shareholders' equity.............. 11,263,600 9,232,655 ------------ ------------- Total liabilities and shareholders' equity................................ $ 18,690,349 $ 17,684,252 ============ ============= SEE ACCOMPANYING NOTES. F-31 AXS SOLUTIONS, INC. STATEMENTS OF INCOME
NINE-MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- Net sales............................... $ 20,227,664 $ 23,176,615 $ 22,002,438 Cost of goods sold...................... 12,993,622 15,052,732 15,275,990 ------------ ------------ ------------- Gross profit............................ 7,234,042 8,123,883 6,726,448 Selling, general and administrative expenses.............................. 4,709,974 5,647,019 4,979,848 ------------ ------------ ------------- Operating income........................ 2,524,068 2,476,864 1,746,600 Interest expense........................ (289,310) (326,785) (207,766) Other income............................ 232,747 19,619 7,513 ------------ ------------ ------------- Net income.............................. $ 2,467,505 $ 2,169,698 $ 1,546,347 ============ ============ =============
SEE ACCOMPANYING NOTES. F-32 AXS SOLUTIONS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------------------------ AXS SOLUTIONS, INC. ---------------------- CHAMPION RETAINED CLASS A CLASS B BOLT CORP. EARNINGS TOTAL ------- ------------ ----------- -------------- -------------- Balance at January 1, 1995.............. $ -- $ -- $ 378,472 $ 5,350,075 $ 5,728,547 1995 Net income......................... -- -- -- 2,467,505 2,467,505 1995 Shareholder distributions.......... -- -- -- (3,294,756) (3,294,756) ------- ------------ ----------- -------------- -------------- Balance at December 31, 1995............ -- -- 378,472 4,522,824 4,901,296 1996 Net income......................... -- -- -- 2,169,698 2,169,698 Issuance of AXS Solutions, Inc. Common Stock (80 Shares Voting Common and 7,920 Nonvoting Common) in exchange for all of Champion Bolt Corp. Common Stock................................. 3,785 374,687 (378,472) -- -- Purchase of Hoyt Fastener Corp. in exchange for AXS Solutions, Inc. Common Stock (20 Shares Voting Common and 1,980 Shares Nonvoting Common).... 52,000 5,148,000 -- -- 5,200,000 1996 Shareholder distributions.......... -- -- -- (1,007,394) (1,007,394) ------- ------------ ----------- -------------- -------------- Balance at December 31, 1996............ 55,785 5,522,687 -- 5,685,128 11,263,600 1997 Net income......................... -- -- -- 1,546,347 1,546,347 Transfer of 75 Nonvoting Common Shares from existing shareholders in exchange for acquired customers................ -- 127,500 -- -- 127,500 1997 Shareholder distributions.......... -- -- -- (991,630) (991,630) Distribution of cumulative S-Corporation earnings.............................. -- -- -- (2,713,162) (2,713,162) ------- ------------ ----------- -------------- -------------- Balance at September 30, 1997........... $55,785 $ 5,650,187 $ -- $ 3,526,683 $ 9,232,655 ======= ============ =========== ============== ==============
SEE ACCOMPANYING NOTES. F-33 AXS SOLUTIONS, INC. STATEMENTS OF CASH FLOWS
NINE-MONTHS YEAR ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- OPERATING ACTIVITIES Net income........................... $ 2,467,505 $ 2,169,698 $ 1,546,347 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.... 250,887 326,550 373,095 Loss on disposal of fixed assets........................... 50,371 6,299 -- Gain on sale of fixed assets..... (232,747) -- -- Increase in cash surrender value of officers' life insurance... (59,529) (58,393) (37,002) Changes in operating assets and liabilities: Accounts receivable......... 284,696 (712,179) 549,883 Inventory................... 1,237,850 759,041 (370,868) Prepaid expenses and other current assets............ (38,803) (16,531) 39,102 Receivable from shareholder................. -- (169,476) -- Other....................... (82,856) 611 6,714 Accounts payable............ (450,351) 150,587 41,678 Accrued expenses and other current liabilities....... (50,335) 1,511 (245,578) ------------ ------------ ------------- Net cash provided by operating activities......................... 3,376,688 2,457,718 1,903,371 INVESTING ACTIVITIES Purchases of property and equipment............................ (210,567) (152,223) (137,538) Proceeds from sale of fixed assets... -- 25,300 -- Cash acquired during acquisition of Hoyt Fastener Corp. ............... -- 416,743 -- ------------ ------------ ------------- Net cash (used in) provided by investing activities............... (210,567) 289,820 (137,538) FINANCING ACTIVITIES Proceeds from demand note payable.... 19,850,000 23,500,000 12,589,000 Payments on demand note payable...... (18,950,000) (23,300,000) (13,950,000) Payments on long-term debt to former shareholder........................ (58,487) (84,541) (70,199) Payments on capital lease obligation........................... -- (16,999) (53,215) Shareholder distributions............ (3,294,756) (1,007,394) (991,630) ------------ ------------ ------------- Net cash used in financing activities........................... (2,453,243) (908,934) (2,476,044) ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents................... 712,878 1,838,604 (710,211) Cash and cash equivalents at beginning of period................ 935,889 1,648,767 3,487,371 ------------ ------------ ------------- Cash and cash equivalents at end of period............................. $ 1,648,767 $ 3,487,371 $ 2,777,160 ============ ============ ============= SUPPLEMENTARY CASH FLOW DATA: - ------------------------------------- Interest paid........................ $ 284,796 $ 323,753 $ 217,305 ============ ============ =============
SIGNIFICANT NON-CASH TRANSACTIONS - ------------------------------------- 1995: Sale of fixed assets in exchange for note receivable of $250,000 1996: Incurred capital lease obligation for $1,058,589 Acquisition of Hoyt Fastener Corp. in exchange for $5,200,000 of AXS Solutions, Inc. common stock (net assets of $1,638,130, net of cash acquired of $416,743) 1997: Transferred 75 nonvoting common shares ($127,500) from existing shareholder in exchange for acquired customers Accrual of S-Corporation distribution of $2,713,162 SEE ACCOMPANYING NOTES. F-34 AXS SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. BUSINESS AND BASIS OF PRESENTATION AXS Solutions, Inc. ("AXS Solutions") is a wholesaler and distributor of threaded fastener products, including nuts, bolts, washers and screws, to customers located predominantly in the Northeastern and Midwestern United States. AXS Solutions was incorporated on August 19, 1996. On August 31, 1996, the shareholders of Champion Bolt Corp. ("Champion Bolt") surrendered all of their shares of common stock of Champion Bolt in exchange for shares of both voting and non-voting common stock of AXS Solutions. There was deemed to be no change of control as a result of this transaction. Subsequently, the Champion Bolt shares were cancelled for no consideration. AXS Solutions then acquired all of the common stock of Hoyt Fastener Corp. ("Hoyt Fastener") in exchange for shares of both voting and non-voting common stock of AXS Solutions. This acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price (approximately $5.2 million based on an independent valuation) has been allocated to the assets purchased and the liabilities assumed based upon the fair values at the date of acquisition. Goodwill of approximately $3,145,000 was recorded as a result of this acquisition. The Hoyt Fastener shares were also subsequently cancelled. The operating results of the acquired business, Hoyt Fastener, have been included in the income statement from the date of the acquisition. The financial statements presented herein represent the operating results of Champion Bolt for the period from January 1, 1995 through August 31, 1996 and the operating results of AXS Solutions for the period from September 1, 1996 through September 30, 1997. The reference to "Company" in these financial statements includes such presentation. The following unaudited results of operations have been prepared assuming the acquisition had occurred on January 1, 1995. These results are not necessarily indicative of results of future operations nor of results that would have occurred had the acquisitions been consummated as of January 1, 1995: 1995 1996 -------------- -------------- Net sales............................... $ 27,332,285 $ 28,044,941 Net income.............................. $ 2,803,676 $ 2,428,068 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORY Inventory consists of product held for resale and is stated at the lower of cost or market, with cost determined using the first-in, first-out (FIFO) method of inventory valuation. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided on the straight-line method over the respective estimated useful lives of the assets ranging from 5 to 40 years. The capital lease is amortized over the estimated useful life of the asset or lease term, as appropriate, using the straight-line method. Depreciation expense includes amortization of assets recorded under the capital lease. Accumulated amortization for the capital lease was $35,288 and $114,686 at December 31, 1996 and September 30, 1997, respectively. NON-COMPETE AGREEMENT The cost of the non-compete agreement is being amortized over 10 years, the term of the covenant. Accumulated amortization amounted to $519,495 and $598,740 at December 31, 1996 and September 30, 1997, respectively. F-35 AXS SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) GOODWILL Goodwill is being amortized over a period of 40 years. Accumulated amortization amounted to $26,713 and $86,817 at December 31, 1996 and September 30, 1997, respectively. CASH EQUIVALENTS The Company considers all investments purchased with a maturity of three months or less to be cash equivalents. INCOME TAXES The Company is a Subchapter S Corporation and as such, its stockholders are taxed directly on all income. NET SALES RECOGNITION Net sales are recognized upon shipment of the product to the customer. Adjustments to arrive at net sales are primarily related to discounts. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable. One customer accounted for approximately 55%, 50% and 45% of revenues for 1995, 1996 and the period from January 1, 1997 through September 30, 1997, respectively. At December 31, 1996 and September 30, 1997, accounts receivable balances related to this customer represented approximately 34% and 28% of total accounts receivable, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of accounts receivable, prepaid expenses, and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying value of the Company's debt facilities and capital lease agreements approximate fair value because the rates on such facilities are variable, based on current market or are at fixed rates currently available to the Company. ACCOUNTING FOR LONG-LIVED ASSETS In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of 1996 and the effect of adoption had no impact on the financial statements. F-36 AXS SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. DEBT Long-term debt consists of the following: DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Non-interest bearing obligation payable to a former shareholder for non-compete agreement, payable in monthly payments of $10,000 through January 15, 2002. Implicit interest of 8.5%.................................. $493,914 $ 423,715 Less current portion.................... 70,199 76,451 ------------ ------------- $423,715 $ 347,264 ============ ============= Scheduled maturities on long-term debt for each of the next five years as of September 30, 1997 are as follows: Year ending September 30, 1998.......... $ 76,451 1999....... 94,092 2000....... 102,409 2001....... 111,461 2002....... 39,302 ---------- $ 423,715 ========== The Company has a demand note payable with a bank up to a maximum of $3,000,000, with interest payable at the prime rate. The demand note payable is guaranteed by separate balances with this bank of two of the four voting shareholders of the Company. 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 Rent expense was approximately $288,000, $258,000 and $188,000 for 1995, 1996 and the period from January 1, 1997 through September 30, 1997, respectively. The Company is also obligated under a capital lease with a related party which expires August 31, 2006. Under this lease, the lessor of warehouse and office space in Niles, Illinois includes family residual trusts which represent two of the four voting shareholders of the Company. F-37 AXS SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future minimum annual capital lease payments as of September 30, 1997 are as follows: TOTAL ------------ Year ending September 30, 1998....... $ 157,500 1999.... 157,500 2000.... 157,500 2001.... 157,500 2002.... 157,500 Thereafter......................... 630,000 ------------ Total minimum lease payments......... 1,417,500 Amount representing interest......... 429,125 ------------ Present value of minimum lease payments............................. 988,375 Current maturities................... 76,420 ------------ Long-term portion.................... $ 911,955 ============ 5. EMPLOYEE BENEFIT PLANS The Company maintains a non-contributory defined-benefit pension plan covering all of its employees. The benefits are based on years of service and the employee's compensation during the entire period of employment. The Company's funding policy is to contribute annually the amount necessary to meet minimum funding standards of ERISA. Plan assets are invested primarily in corporate stocks and government securities. The following table sets forth the plan's funded status and amounts recognized in the Company's respective balance sheets: DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Actuarial present value of benefit obligations: Vested............................. $ (352,039) $(406,538) Non-vested......................... (37,690) (34,920) ------------ ------------- Accumulated benefit obligations......... $ (389,729) $(441,458) ============ ============= Projected benefit obligation............ $ (503,184) $(559,125) Plan assets at fair value............... 714,701 806,946 ------------ ------------- Plan assets in excess of projected benefit obligation.................... 211,517 247,821 Unrecognized net transition obligation............................ 2,005 1,671 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions........................... (108,110) (156,660) ------------ ------------- Prepaid pension cost.................... $ 105,412 $ 92,832 ============ ============= F-38 AXS SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The prepaid pension costs are recorded in other noncurrent assets on each of the respective balance sheets. Net pension expense was comprised of the following: PERIOD FROM YEARS ENDED JANUARY 1, 1997 DECEMBER 31, TO SEPTEMBER 30, ---------------------- ---------------- 1995 1996 1997 ---------- ---------- ---------------- Service cost....................... $ 43,376 $ 43,219 $ 39,305 Interest cost on projected benefit obligation....................... 31,594 34,419 37,739 Actual return on plan assets....... (86,202) (46,590) (114,545) Net amortization and deferral...... 52,751 (2,978) 18,921 ---------- ---------- ---------------- $ 41,519 $ 28,070 $ (18,580) ========== ========== ================ The assumptions used in these calculations were as follows for each of the periods presented: Weighted average discount rate.......... 7.5% Rate of increase in compensation levels................................ 3% Expected long-term rate of return on assets................................ 8% Employee turnover....................... None Mortality Table......................... 1983 GAM The Company also sponsors two defined contribution plans under Section 401(k) of the Code. The first plan covers all eligible Pennsylvania employees of the Company, and participants are permitted to make elective pretax deferrals up to 20% of their compensation. Under this plan, the Company has the ability to make additional discretionary contributions allocated to the participants as a flat dollar amount or in proportion to their compensation. The second plan covers all eligible Illinois employees of the Company, and participants are permitted to make elective pretax deferrals up to a set percentage of their compensation (to be determined by the Company) as well as post-tax contributions subject to IRS limitations. Under this plan, the Company has the ability to make additional discretionary contributions allocated to the participants in proportion to their compensation. The Company contributed approximately $0, $19,200, and $9,600 to these plans for 1995, 1996, and the period January 1, 1997 through September 30, 1997, respectively. 6. RELATED PARTIES The Company has a receivable from a shareholder which represents an excess S Corporation distribution which is expected to be paid back to the Company by December 31, 1997. The shareholder distribution payable is a result of the Company declaring a dividend in 1997 in the amount equal to the total undistributed S Corporation accumulated earnings of the Company as of September 30, 1997. 7. COMMITMENTS AND CONTINGENCIES Under terms of the Shareholders Agreement, upon the death or withdrawal of a shareholder, the Company has the option to purchase that shareholder's non-voting shares at the purchase price as defined in the Shareholders Agreement. The remaining shareholders then have the option to purchase the remaining decedent/withdrawn shareholder's non-voting shares at the purchase price as defined in the Shareholders Agreement. If any of the decedent/withdrawn shareholder's non-voting shares remain, the decedent/withdrawn shareholder's estate has the option to require the Company to redeem such non-voting shares at the purchase price as defined in the Shareholders Agreement. F-39 AXS SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Upon the death or withdrawal of a shareholder, the Company is required to redeem the voting shares of the decedent/withdrawn shareholder at the purchase price as defined in the Shareholders Agreement. 8. SUBSEQUENT EVENT (UNAUDITED) In December 1997, the Company and its shareholders entered into a definitive agreement with a wholly-owned subsidiary of Pentacon, Inc. which among other things calls for the merger of the Company with the Pentacon, Inc. subsidiary. F-40 REPORT OF INDEPENDENT AUDITORS Pentacon, Inc. and Board of Directors Maumee Industries, Inc. We have audited the accompanying balance sheets of Maumee Industries, Inc. (the "Company"), as of December 31, 1996 and September 30, 1997, and the related statements of operations, stockholders' deficit, and cash flows for each of the two years in the period ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Maumee Industries, Inc., at December 31, 1996 and September 30, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas October 15, 1997 F-41 MAUMEE INDUSTRIES, INC. BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- ASSETS Current assets: Accounts receivable, less allowance of $45,000 in 1996 and $70,000 in 1997............................. $ 3,421,509 $ 5,200,253 Inventories........................ 4,265,628 6,524,717 Prepaid expenses and other assets........................... 26,562 24,362 Deferred income taxes.............. 165,000 139,000 ------------ ------------- Total current assets.................... 7,878,699 11,888,332 Deferred income taxes................... 329,000 284,000 Property and equipment, at cost: Machinery and equipment............ 2,367,139 2,781,709 Leasehold improvements............. 399,301 440,516 ------------ ------------- 2,766,440 3,222,225 Less accumulated depreciation and amortization.......................... 1,994,219 2,247,242 ------------ ------------- 772,221 974,983 ------------ ------------- Total assets............................ $ 8,979,920 $ 13,147,315 ============ ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Bank overdraft..................... $ 403,811 $ 1,001,999 Accounts payable................... 2,800,950 3,965,264 Income taxes payable............... 513,744 708,744 Accrued expenses................... 505,634 1,141,654 Notes payable...................... 5,605,357 5,855,550 Notes payable to principal stockholder...................... 997,181 997,181 Current portion of capital lease obligations...................... 39,412 154,291 ------------ ------------- Total current liabilities............... 10,866,089 13,824,683 Long-term portion of capital lease obligations........................... 146,496 270,984 ------------ ------------- Total liabilities....................... 11,012,585 14,095,667 Commitments and contingencies Stockholders' deficit: Common stock, no par value: Authorized shares -- 2,830 Issued shares -- 318 Outstanding shares -- 103.5 in 1996 and 318 in 1997....... 41,000 691,000 Accumulated deficit..................... (1,503,115) (1,068,802) ------------ ------------- (1,462,115) (377,802) Less treasury stock -- 77 shares in 1996 and 218 shares in 1997, at cost....... 570,550 570,550 ------------ ------------- Total stockholders' deficit............. (2,032,665) (948,352) ------------ ------------- Total liabilities and stockholders' deficit............................... $ 8,979,920 $ 13,147,315 ============ ============= SEE ACCOMPANYING NOTES. F-42 MAUMEE INDUSTRIES, INC. STATEMENTS OF OPERATIONS
PERIOD FROM JANUARY 1, 1997 YEARS ENDED DECEMBER 31, THROUGH ------------------------------ SEPTEMBER 30, 1995 1996 1997 -------------- -------------- ------------- Net sales............................... $ 20,582,200 $ 26,234,653 $ 27,472,902 Cost of sales........................... 16,099,808 19,712,909 19,557,148 -------------- -------------- ------------- Gross profit............................ 4,482,392 6,521,744 7,915,754 Selling and administrative expenses..... 4,626,153 5,277,107 6,628,643 -------------- -------------- ------------- Operating income (loss)................. (143,761) 1,244,637 1,287,111 Interest expense........................ (572,387) (585,090) (547,274) Other income (expense).................. 2,578 (23,680) 10,476 -------------- -------------- ------------- Income (loss) before taxes.............. (713,570) 635,867 750,313 Income tax expense (benefit)............ (250,000) 304,000 316,000 -------------- -------------- ------------- Net income (loss)....................... $ (463,570) $ 331,867 $ 434,313 ============== ============== =============
SEE ACCOMPANYING NOTES. F-43 MAUMEE INDUSTRIES, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT
COMMON STOCK TREASURY STOCK TOTAL ------------------- --------------------- ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT DEFICIT DEFICIT ------ ---------- ------ ------------ ----------- ------------- Balance at December 31, 1994......... 103.5 $ 41,000 (77 ) $ (570,550) $(1,371,412) $ (1,900,962) Net loss for 1995.................... -- -- -- -- (463,570) (463,570) ------ ---------- ------ ------------ ----------- ------------- Balance at December 31, 1995......... 103.5 41,000 (77 ) (570,550) (1,834,982) (2,364,532) Net income for 1996.................. -- -- -- -- 331,867 331,867 ------ ---------- ------ ------------ ----------- ------------- Balance at December 31, 1996......... 103.5 41,000 (77 ) (570,550) (1,503,115) (2,032,665) Stock split (2.83 for 1)............. 189.5 -- (141 ) -- -- -- Net income for 1997.................. -- -- -- -- 434,313 434,313 Issuance of common stock............. 25 650,000 -- -- -- 650,000 ------ ---------- ------ ------------ ----------- ------------- Balance at September 30, 1997........ 318 $ 691,000 (218 ) $ (570,550) $(1,068,802) $ (948,352) ====== ========== ====== ============ =========== =============
SEE ACCOMPANYING NOTES. F-44 MAUMEE INDUSTRIES, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1997 YEARS ENDED DECEMBER 31, THROUGH ------------------------------- SEPTEMBER 30, 1995 1996 1997 -------------- --------------- -------------- OPERATING ACTIVITIES Net income (loss).................. $ (463,570) $ 331,867 $ 434,313 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization............... 358,681 327,945 316,823 Issuance of common stock for compensation............... -- -- 650,000 (Gain) or loss on disposal of equipment.................. (1,283) 28,290 (8,980) Deferred income taxes......... (22,000) (448,000) 71,000 Changes in operating assets and liabilities: Accounts receivable...... (453,257) (725,349) (1,778,744) Inventories.............. (480,392) (1,328,228) (2,259,089) Prepaid expenses and other assets.......... (23,164) 12,912 2,200 Income tax receivable.... (239,150) 239,150 -- Accounts payable......... 762,714 866,783 1,164,314 Income taxes payable..... (36,653) 501,700 195,000 Accrued expenses......... (27,593) 160,410 636,020 -------------- --------------- -------------- Net cash used in operating activities....................... (625,667) (32,520) (577,143) INVESTING ACTIVITIES Capital expenditures............... (204,581) (133,704) (210,968) Proceeds from sale of equipment.... 2,367 1,342 59,200 -------------- --------------- -------------- Net cash used in investing activities....................... (202,214) (132,362) (151,768) FINANCING ACTIVITIES Bank overdraft..................... (548,755) (100,295) 598,188 Payments on capital leases......... (26,475) (48,764) (119,472) Proceeds from revolving line of credit........................... 6,000,200 10,042,100 20,464,195 Payments on revolving line of credit........................... (4,396,709) (10,003,263) (20,504,163) Proceeds from notes payable........ 50,000 467,796 424,000 Payments on notes payable.......... (250,380) (192,692) (133,837) -------------- --------------- -------------- Net cash provided by financing activities....................... 827,881 164,882 728,911 Net increase (decrease) in cash.... -- -- -- Cash at beginning of year.......... -- -- -- -------------- --------------- -------------- Cash at end of year................ $ -- $ -- $ -- ============== =============== ==============
SEE ACCOMPANYING NOTES. F-45 MAUMEE INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Maumee Industries, Inc. (the "Company") is engaged in the wholesale distribution of fasteners and nonfastener small parts primarily to Midwestern-based manufacturers in the automotive industry. During for the years ended December 31, 1995, and 1996, and period from January 1, 1997 through September 30, 1997, net sales to two customers approximated $18,000,000, $23,100,000, and $21,800,000, respectively. In relation to these customers, approximately $4,300,000 was included in accounts receivable at September 30, 1997. NET SALE RECOGNITION Net sales are recognized upon shipment of the product to the customer. Adjustments to arrive at net sales are primarily related to discounts. INVENTORIES Inventories consist of goods held for resale and are valued at the lower of cost (first-in, first-out method) or market. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated on the cost basis. Equipment is depreciated using accelerated depreciation methods based on estimated useful lives ranging from three to ten years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the term of the related lease. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of accounts receivable, prepaid expenses, and accounts payable approximate fair value due to the short-term maturities of these instruments. The carrying value of the Company's debt facilities and capital lease agreements approximates fair value because the rates on such facilities are variable, based on current market, or are at fixed rates currently available to the Company. ACCOUNTING FOR LONG-LIVED ASSETS In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of 1996 and the effect of adoption had no impact on the financial statements. INCOME TAXES Income taxes have been provided using the liability method in accordance with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES. F-46 MAUMEE INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. NOTES PAYABLE At September 30, 1997, the Company has a bank line of credit under which the Company may borrow up to $7,700,000. At September 30, 1997, the unused portion of the line of credit was $2,194,032. Borrowings under this line of credit bear interest at 1.5% over the bank's base rate (10% at September 30, 1997) and expire on May 31, 2000. The line of credit is collateralized by substantially all of the Company's assets, including equipment, general intangibles, inventory, receivables, and any balance in the collateral account. The Company's principal stockholder has guaranteed the line of credit. The line of credit agreement includes provisions for maintenance of minimum net worth and restrictions on capital expenditures. The Company was in compliance with these financial covenants at September 30, 1997. At September 30, 1997, the Company has a special accommodation/over advance note payable to a bank. The note is payable on demand and accrues interest at the bank's base rate plus 2.5% (11% at September 30, 1997). If no demand is made, the note is payable in 18 monthly installments of $16,667 plus interest, beginning June 1, 1997. There was $233,332 outstanding on this note at September 30, 1997. At September 30, 1997, the Company has an equipment loan payable to a bank. The loan is payable on demand and accrues interest at the bank's base rate plus 1.5% (10% at September 30, 1997). 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 a note payable to the principal stockholder. The note payable represents amounts advanced to the Company by the principal stockholder. The notes require monthly interest payments at rates ranging from 6.5% to 13.8% with principal payable upon demand. Interest payments for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 through September 30, 1997 was approximately $45,377, $0, and $56,000, respectively. 4. CAPITAL LEASE OBLIGATIONS The Company has entered into capital lease arrangements to finance the purchase of machinery and equipment. Future minimum payments under these agreements as of September 30, 1997 are as follows: 1998................................. $ 189,251 1999................................. 134,959 2000................................. 91,196 2001................................. 53,532 2002................................. 39,237 ---------- Total minimum lease payments......... 508,175 Amount representing interest......... 82,900 ---------- Present value of minimum lease payments............................. 425,275 Current maturities................... 154,291 ---------- Long-term portion.................... $ 270,984 ========== F-47 MAUMEE INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The cost of assets held under capital leases as of September 30, 1997 and December 31, 1996 was $619,987 and $261,149, respectively. Amortization of equipment acquired under capital lease arrangements is included in depreciation and amortization expense. 5. COMMITMENTS The Company leases certain of its facilities and equipment under noncancelable operating leases. Rent expense for the years ended December 31, 1995 and 1996 and the period from January 1, 1997 through September 30, 1997 was $138,000, $174,000, and $120,000, respectively. Lease commitments at September 30, 1997 for long-term noncancelable operating leases are as follows: 1998................................. $ 278,299 1999................................. 82,486 2000................................. 43,040 ---------- $ 403,825 ========== 6. INCOME TAXES Significant components of the provision for income taxes are as follows: PERIOD FROM JANUARY 1, 1997 YEARS ENDED DECEMBER 31, THROUGH -------------------------- SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- Current: Federal...................... $ (183,000) $ 591,000 $ 192,000 State........................ (45,000) 161,000 53,000 ------------ ------------ ------------- (228,000) 752,000 245,000 Deferred: Federal...................... (22,000) (448,000) 71,000 ------------ ------------ ------------- $ (250,000) $ 304,000 $ 316,000 ============ ============ ============= The reconciliation of the income tax expense computed at U.S. federal statutory tax rates to the reported tax expense is as follows: PERIOD FROM JANUARY 1, 1997 YEARS ENDED DECEMBER 31, THROUGH -------------------------- SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- Expected income tax expense (benefit) at 34%............................. $ (242,615) $ 216,194 $ 255,106 State income taxes, net of federal benefit............................ (36,099) 36,444 43,428 Non-deductible expenses.............. 2,662 26,050 17,466 Other................................ 26,052 25,312 -- ------------ ------------ ------------- Reported total income tax expense (benefit).......................... $ (250,000) $ 304,000 $ 316,000 ============ ============ ============= The Company paid $59,076, $-0- and $50,000 of income taxes for the years ended December 31, 1995 and 1996 and the period from January 1, 1997 through September 30, 1997, respectively. F-48 MAUMEE INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of the deferred tax assets are as follows: DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- Deferred tax assets: Change in inventory estimate....... $378,834 $ 284,125 Nondeductible accruals: Accrued interest.............. 21,496 21,496 Pension....................... 53,986 53,558 Other.............................. 39,684 63,821 ------------ ------------- Total deferred tax assets............... $494,000 $ 423,000 ============ ============= 7. EMPLOYEE RETIREMENT PLANS The Company maintains a defined contribution pension plan for all eligible full-time employees. All contributions to the plan are made by the Company at an amount equal to 7% of each participant's annual salary. The plan provides for 100% vesting of values accumulated for the employee after six years of service. The Company also sponsors an employee savings plan under Section 401(k) of the Internal Revenue Code which covers substantially all full-time employees. The plan allows for both employee and Company contributions. The Company contribution consists of a matching contribution of 50% of employee contributions, up to 6% of eligible employee compensation. Employees vest immediately in their contribution and vest in the Company contribution over a six-year period of service. The following is a summary of employee retirement plan expense for the years ended December 31, 1995 and 1996 and the period from January 1, 1997 through September 30, 1997.
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- Defined contribution pension plan....... $106,917 $104,819 $ 103,520 401(k) matching contribution............ 26,694 33,183 32,690 ------------ ------------ ------------- Total................................... $133,611 $138,002 $ 136,210 ============ ============ =============
8. RELATED PARTY TRANSACTIONS The Company leases its main building facility from Maumee Properties, which is owned by the primary shareholder and president. Annual rental expense under the lease amounted to $312,000 for the years ended December 31, 1995 and 1996, respectively, and $234,000 for the period from January 1, 1997 through September 30, 1997. The Company rents an airplane from Summit Transportation, which is owned by the primary shareholder and president. The related expense for use of the airplane amounted to $-0- and $46,028 for the years ended December 31, 1995 and 1996, respectively, and $4,171 for the nine months ended September 30, 1997. 9. COMMON STOCK On September 30, 1997, the Company executed a share split of 2.83 ordinary shares for each authorized ordinary share. F-49 MAUMEE INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) On September 30, 1997, pursuant to an agreement in July 1997 and subsequent to the aforementioned share split, 25 shares of common stock were issued to the chief executive officer. The issuance of the common stock resulted in a compensation charge to the Company of $650,000 based on an independent valuation of the Company. 10. SUBSEQUENT EVENTS (UNAUDITED) In December 1997, Maumee Industries, Inc., and its shareholders entered into a definitive agreement with a wholly owned subsidiary of Pentacon, Inc., which among other things calls for the merger of Maumee Industries, Inc., with the Pentacon, Inc., subsidiary. F-50 REPORT OF INDEPENDENT AUDITORS Pentacon, Inc. and Board of Directors Sales Systems, Limited We have audited the balance sheets of Sales Systems, Limited (the "Company"), as of December 31, 1996 and September 30, 1997, and the related statements of income and retained earnings and cash flows for the year ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sales Systems, Limited, at December 31, 1996 and September 30, 1997, and the results of its operations and its cash flows for the year ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas October 20, 1997 F-51 SALES SYSTEMS, LIMITED BALANCE SHEETS DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- ASSETS Current assets: Cash............................... $ 63,755 $ -- Trade accounts receivable, less allowance for doubtful accounts of $38,000 at December 31, 1996 and September 30, 1997................ 1,129,433 1,090,628 Inventories........................ 2,723,660 2,255,465 Prepaid expenses and other current assets............................ -- 6,589 ------------ ------------- Total current assets.................... 3,916,848 3,352,682 Property, plant, and equipment: Fixtures and equipment............. 1,030,403 1,123,795 Automotive equipment............... 82,151 82,151 ------------ ------------- 1,112,554 1,205,946 Less accumulated depreciation........... (778,625) (859,976) ------------ ------------- 333,929 345,970 Other assets............................ 8,477 27,109 ------------ ------------- Total assets............................ $4,259,254 $ 3,725,761 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Note payable....................... $1,250,000 $ 342,347 Trade accounts payable and accrued expenses.......................... 943,109 980,922 Accrued salaries, wages, payroll expenses, and commissions......... 138,804 60,484 Advances payable................... 40,000 -- Current maturities of unsecured notes to officers................. 22,670 23,890 Current maturities of long-term debt.............................. 78,823 77,850 ------------ ------------- Total current liabilities............... 2,473,406 1,485,493 Long-term debt, less current maturities............................ 257,176 199,967 Unsecured notes to officers, less current maturities.................... 194,228 176,154 ------------ ------------- Total liabilities....................... 2,924,810 1,861,614 Shareholders' equity: Common stock, $100 par value: Authorized shares -- 100 Issued and outstanding shares -- 64............... 6,400 6,400 Retained earnings.................. 1,375,242 1,904,945 ------------ ------------- 1,381,642 1,911,345 Less 14 shares of treasury stock at cost.................................. (47,198) (47,198) ------------ ------------- Total shareholders' equity.............. 1,334,444 1,864,147 ------------ ------------- Total liabilities and shareholders' equity................................ $4,259,254 $ 3,725,761 ============ ============= SEE ACCOMPANYING NOTES. F-52 SALES SYSTEMS, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS PERIOD FROM JANUARY 1, 1997 YEAR ENDED THROUGH DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ --------------- Net sales............................... $ 15,663,326 $11,987,479 Cost of goods sales..................... 10,495,123 8,056,780 ------------ --------------- Gross profit............................ 5,168,203 3,930,699 Selling, general, and administrative expenses.............................. 4,598,895 3,096,934 ------------ --------------- Operating income........................ 569,308 833,765 Interest expense........................ (106,799) (95,162) Other income............................ 17,912 -- ------------ --------------- Net income.............................. 480,421 738,603 Retained earnings at beginning of period................................ 1,114,575 1,375,242 Distributions to shareholders........... (219,754) (208,900) ------------ --------------- Retained earnings at end of period...... $ 1,375,242 $ 1,904,945 ============ =============== SEE ACCOMPANYING NOTES. F-53 SALES SYSTEMS, LIMITED STATEMENTS OF CASH FLOWS PERIOD FROM JANUARY 1, 1997 YEAR ENDED THROUGH DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ --------------- OPERATING ACTIVITIES Net income.............................. $ 480,421 $ 738,603 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation....................... 94,668 81,351 Loss on sale of equipment.......... 1,052 -- Change in operating assets and liabilities: Trade accounts receivable..... (343,571) 38,805 Inventories................... (518,271) 468,195 Prepaid expenses and other current assets............. -- (6,589) Other assets.................. -- (18,632) Trade accounts payable and accrued expenses........... 28,375 37,813 Accrued salaries, wages, and payroll withholdings....... 102,289 (78,320) Advances payable.............. 40,000 (40,000) ------------ --------------- Net cash provided by (used in) operating activities............................ (115,037) 1,221,226 INVESTING ACTIVITIES Capital expenditures.................... (216,869) (93,392) ------------ --------------- Net cash used in investing activities... (216,869) (93,392) FINANCING ACTIVITIES Distributions paid to shareholders...... (219,754) (208,900) Borrowings on term loans................ 61,582 -- Payments on term loans.................. (91,523) (75,036) Net borrowings (repayments) on line of credit................................ 525,555 (907,653) Other................................... (992) -- ------------ --------------- Net cash provided by (used in) financing activities............................ 274,868 (1,191,589) ------------ --------------- Decrease in cash........................ (57,038) (63,755) Cash at beginning of period............. 120,793 63,755 ------------ --------------- Cash at end of period................... $ 63,755 $ -- ============ =============== SEE ACCOMPANYING NOTES. F-54 SALES SYSTEMS, LIMITED NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY DESCRIPTION Sales Systems, Limited (the "Company") is a wholesaler and distributor of industrial fasteners, primarily to manufacturers in the eastern United States. INVENTORIES Inventories consist of goods held for resale and are stated at the lower of cost or market using the first-in, first-out method. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation and amortization expense, including amounts related to capital leases, is calculated by accelerated methods over the estimated useful lives of the assets, which vary from three to eight years. NET SALES RECOGNITION Net sales are recognized upon shipment of the product to the customer. Adjustments to arrive at net sales are primarily for discounts. INCOME TAXES Effective January 1, 1995, the Company made an election to be taxed as an S corporation for federal purposes and for the majority of states in which the Company operates. Correspondingly, tax liabilities subsequent to this date related to the Company's ongoing operations will generally be the responsibility of the individual shareholders. STATEMENT OF CASH FLOWS Cash paid for interest during the year ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997 was $106,799 and $95,167, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of accounts receivable, prepaid expenses, and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying value of the Company's debt facilities approximates fair value because the rates on such facilities are variable, based on current market, or are at fixed rates currently available to the Company. ACCOUNTING FOR LONG-LIVED ASSETS In March 1995, the FASB issued Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of 1996 and the effect of adoption had no impact on the financial statements. F-55 SALES SYSTEMS, LIMITED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. CONCENTRATION OF CREDIT RISK AND SALES TO LARGEST CUSTOMERS Sales to the Company's two largest customers were approximately $9,500,000, or 60.6% of net sales, for the year ended December 31, 1996. Sales to the Company's four largest customers were approximately $9,400,000, or 78.7% of net sales, for the period January 1, 1997 through September 30, 1997. The related accounts receivable balances were $442,545 and $538,940 as of December 31, 1996 and September 30, 1997, respectively. 3. FINANCING ARRANGEMENTS NOTE PAYABLE The Company has a $1,250,000 line of credit agreement with a bank. The line of credit matures on June 1, 1998, subject to automatic renewals thereof on an annual basis unless a contrary notice is delivered by either party within a prescribed period. The line of credit is secured by accounts receivable and inventory, and is guaranteed by the Company's shareholders. The line of credit bears interest at the New York prime rate (8.5% at September 30, 1997). At September 30, 1997, there were available amounts of $907,626 to be borrowed under the line of credit. The agreement includes certain restrictive covenants with respect to, among other matters, distributions paid to shareholders, purchase or redemption of the Company's stock, mergers or consolidated transactions, asset dispositions, and the incurrence of additional debt. It also includes additional financial covenants related to the maintenance of net worth, working capital, and net income levels along with a limitation on annual capital expenditures. At September 30, 1997 the Company was in compliance with these covenants. LONG-TERM DEBT DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------- -------------- Note payable to bank requiring monthly principal payments of $4,167 plus interest at a variable rate (9.25% at September 30, 1997); due January 2003, secured by equipment, furniture and fixtures, accounts receivable, and inventory.......................... $ 254,167 $ 216,667 Notes payable to bank requiring monthly payments totaling $2,462 including interest at 8.2% -- 8.5%; maturing January 2002, secured by equipment.......................... 71,176 53,715 Notes payable to bank requiring monthly payments totaling $418 including interest at 7.75%; maturing March 1999; secured by a vehicle............................ 10,656 7,435 ------------- -------------- 335,999 277,817 Less current portion................. 78,823 77,850 ------------- -------------- Long-term debt, net of current portion............................ $ 257,176 $ 199,967 ============= ============== F-56 SALES SYSTEMS, LIMITED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The aggregate annual principal maturities of long-term debt for each of the next five years are as follows: 1998................................. $ 77,850 1999................................. 60,782 2000................................. 59,313 2001................................. 58,616 2002................................. 21,256 ---------- $ 277,817 ========== 4. LEASES AND TRANSACTIONS WITH RELATED PARTIES The Company leases an Allentown warehouse and office facility under an informal lease arrangement, presently requiring monthly payments of $6,631. The Company leases a South Carolina warehouse and office facility under an informal lease arrangement with a partnership whose partners are the shareholders of the Company. This partnership advanced $40,000 to the Company during 1996, which was repaid during 1997. Rent expense for these facilities for the year ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997 was $165,500 and $144,000, respectively. 5. PENSION PLAN The Company has a qualified profit sharing plan covering substantially all employees with at least one year of service. Employee 401(k) contributions are permitted and the Company is committed to contribute $1 for each $1 of employee contributions, up to 6% of the employee's salary. The matching contributions were $134,772 and $95,971 for the year ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997, respectively. There were no discretionary contributions made by the Company for the year ended December 31, 1996 and the period from January 1, 1997 through September 30, 1997. 6. RELATED PARTY TRANSACTIONS The Company has 10% unsecured subordinated notes to certain officers totaling $174,087 as of September 30, 1997. The Company also has an unsecured note payable to an officer requiring monthly payments of $2,079, including interest at 7% through October 1998, totaling $25,957 as of September 30, 1997. 7. SUBSEQUENT EVENT (UNAUDITED) In December 1997, Sales Systems, Limited, and its shareholders entered into a definitive agreement with a wholly owned subsidiary of Pentacon, Inc., which among other things calls for the merger of the Company with the Pentacon, Inc., subsidiary. In October 1997, an agreement was signed whereby the Company is to purchase the interests of two owners of the Company conditioned upon the occurrence of the above-named acquisition and resulting initial public offering. F-57 NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS PAGE Prospectus Summary...................... 3 Risk Factors............................ 10 The Company............................. 15 Use of Proceeds......................... 17 Dividend Policy......................... 17 Capitalization.......................... 18 Dilution................................ 19 Selected Financial Data................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 22 Business................................ 33 Management.............................. 42 Certain Transactions.................... 46 Principal Stockholders.................. 49 Description of Capital Stock............ 50 Shares Eligible for Future Sale......... 53 Underwriting............................ 55 Legal Matters........................... 56 Experts................................. 56 Additional Information.................. 57 Index to Financial Statements........... F-1 ------------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3,773,585 SHARES PENTACON, INC. (LOGO) COMMON STOCK _____________________ PROSPECTUS _____________________ DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BT ALEXL BROWN SCHRODER & CO. INC. , 1998 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1) SEC Registration Fee................. $ 17,923 NASD Filing Fee...................... 6,576 Listing Fee.......................... * Accounting Fees and Expenses......... * Legal Fees and Expenses.............. * Printing Expenses.................... * Transfer Agent's Fees................ * Miscellaneous........................ * --------- Total........................... $ * ========= - ------------ (1) The amounts set forth above, except for the SEC and NASD fees, are in each case estimated. * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Subsection (a) of section 145 of the General Corporation Law of the State of Delaware empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection (b) of Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been made to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides that to the extent a director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 in the defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; that indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer of the II-1 corporation against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. Section 102(b)(7) of the General Corporation Law of the State of Delaware provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Article 7 of the Company's Amended and Restated Certificate of Incorporation states that: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty by such director as a director; provided, however, that this Article 7 shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Eighth shall apply to, or have any effect on, the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. The Company intends to enter into indemnification agreements with each of its executive officers and directors. In November 1997, Messrs. Grossman and Pugh, each principals in MGCV, became officers of Alatec in order to assist in, facilitate and expedite the audit process in connection with the Offering. Alatec and Mr. List, its sole stockholder, have agreed to indemnify Messrs. Grossman and Pugh against various claims, damages, costs and expenses which might be incurred by them as officers of Alatec, including their execution of representation letters to Alatec's accountants. Under Section of the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement, the Underwriters have agreed to indemnify, under certain conditions, the Company, its officers and directors, and persons who control the Company within the meaning of the Securities Act of 1933, as amended, against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is certain information concerning all sales of securities by the Company during the past three years that were not registered under the Securities Act of 1933. The number of shares have been adjusted for a 2,380-for-1 split of the Common Stock effected after November 18, 1997. (a) On March 31, 1997, the Company issued 2,380,000 shares of its Common Stock to MGCV for an aggregate price of $1,000. (b) On March 31, 1997, the Company issued warrants to purchase 50,000 shares of its Common Stock with an exercise price equal to the lesser of $8.00 or 60% of the public offering price; the warrants were issued for an aggregate price of $50 to two consultants providing services to the Company. (c) On November 18, 1997, the Company issued 450,000 shares of its Common Stock to certain executive officers for an aggregate price of $4,500. (d) See "Certain Transactions" for a discussion of the issuance of shares of Common Stock in connection with the Acquisitions. These transactions were completed without registration under the Securities Act of 1933 in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits EXHIBIT
1.1* -- Form of Underwriting Agreement. 3.1* -- Amended and Restated Certificate of Incorporation. 3.2* -- Bylaws. 4.1* -- Specimen Common Stock Certificate. 5.1* -- Opinion of Andrews & Kurth, L.L.P. as to the legality of the securities being registered. 10.1 -- Agreement and Plan of Organization respecting Alatec Products, Inc. dated as of December 1, 1997. 10.2 -- Agreement and Plan of Organization respecting AXS Solutions, Inc. dated as of December 1, 1997. 10.3 -- Agreement and Plan or Organization respecting Capitol Bolt & Supply, Inc. dated as of December 1, 1997. 10.4 -- Agreement and Plan of Organization respecting Maumee Industries, Inc. dated as of December 1, 1997. 10.5 -- Agreement and Plan of Organization respecting Sales Systems, Limited dated as of December 1, 1997. 10.6 -- Employment Agreement with Mark Baldwin. 10.7 -- Employment Agreement with Bruce Taten. 10.8 -- Employment Agreement with Brian Fontana. 10.9* -- Form of Officer and Director Indemnification Agreement. 10.10 -- Pentacon, Inc. 1998 Stock Plan. 21.1+ -- List of Subsidiaries 23.1* -- Consent of Andrews & Kurth, L.L.P. (included in Exhibit 5.1). 23.2 -- Consent of Ernst & Young LLP. 23.3 -- Consent of McGladrey & Pullen, LLP. 23.4+ -- Consent of Donald B. List to be appointed director. 23.5+ -- Consent of Jack L. Fatica to be appointed director. 23.6+ -- Consent of Michael W. Peters to be appointed director. 23.7+ -- Consent of Benjamin E. Spence, Jr. to be appointed director. 23.8+ -- Consent of Mary E. McClure to be appointed director. 24.1+ -- Powers of Attorney (included in signature page set forth on page II-5). 27.1+ -- Financial Data Schedule.
- ------------ * to be filed by amendment. + filed previously. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question II-3 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) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-4 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 JANUARY 9, 1998. PENTACON, INC. By: /s/ MARK E. BALDWIN MARK E. BALDWIN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Mark E. Baldwin and Bruce M. Taten, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any subsequent registration statements filed by the Registrant pursuant to Rule 462(b) of the Securities Act of 1933, which relate to this Registration Statement, and to file same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------------------------ ------------------------------ ----------------- /s/MARK E. BALDWIN Chairman of the Board of January 9, 1998 MARK E. BALDWIN Directors, and Chief Executive Officer (Principal Executive Officer) /s/BRIAN FONTANA Senior Vice President and January 9, 1998 BRIAN FONTANA Chief Financial Officer (Principal Financial and Accounting Officer) /s/CARY M. GROSSMAN Director January 9, 1998 CARY M. GROSSMAN /s/JEFFREY A. PUGH Director January 9, 1998 JEFFREY A. PUGH
II-5 EX-10.1 2 - ------------------------------------------------------------------------------ AGREEMENT AND PLAN OF ORGANIZATION dated as of the 1st day of December 1997 by and among PENTACON, INC. ALATEC PRODUCTS ACQUISITION COMPANY (a subsidiary of Pentacon, Inc.) ALATEC PRODUCTS, INC. and the STOCKHOLDERS named herein - ------------------------------------------------------------------------------ TABLE OF CONTENTS Page RECITALS.....................................................................1 1. THE MERGER.............................................................5 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................5 1.2 EFFECTIVE TIME OF THE MERGER.....................................5 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION............................................6 1.4 EFFECT OF MERGER.................................................6 2. CONVERSION OF STOCK....................................................7 2.1 MANNER OF CONVERSION.............................................7 3. DELIVERY OF MERGER CONSIDERATION.......................................8 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8 4. CLOSING................................................................8 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS...........................................................9 5.1 DUE ORGANIZATION.................................................9 5.2 AUTHORIZATION...................................................10 5.3 CAPITAL STOCK OF THE COMPANY....................................10 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10 5.5 NO BONUS SHARES.................................................10 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................11 5.7 PREDECESSOR STATUS; ETC.........................................11 5.8 SPIN-OFF BY THE COMPANY.........................................11 5.9 FINANCIAL STATEMENTS............................................11 5.10 LIABILITIES AND OBLIGATIONS.....................................11 5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12 5.12 PERMITS AND INTANGIBLES.........................................12 5.13 ENVIRONMENTAL MATTERS...........................................13 5.14 PERSONAL PROPERTY...............................................14 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15 5.16 REAL PROPERTY...................................................16 5.17 INSURANCE.......................................................16 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............17 -i- 5.19 EMPLOYEE PLANS..................................................17 5.20 COMPLIANCE WITH ERISA...........................................18 5.21 CONFORMITY WITH LAW; LITIGATION.................................19 5.22 TAXES...........................................................19 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21 5.25 ABSENCE OF CHANGES..............................................21 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................23 5.27 VALIDITY OF OBLIGATIONS.........................................23 5.28 RELATIONS WITH GOVERNMENTS......................................23 5.29 DISCLOSURE......................................................23 5.30 PROHIBITED ACTIVITIES...........................................24 5.31 NO WARRANTIES OR INSURANCE......................................24 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS....................................................24 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................24 5.34 PREEMPTIVE RIGHTS...............................................25 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................25 6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25 6.1 DUE ORGANIZATION................................................25 6.2 AUTHORIZATION...................................................25 6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................26 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26 6.5 SUBSIDIARIES....................................................26 6.6 FINANCIAL STATEMENTS............................................26 6.7 LIABILITIES AND OBLIGATIONS.....................................26 6.8 CONFORMITY WITH LAW; LITIGATION.................................27 6.9 NO VIOLATIONS...................................................27 6.10 VALIDITY OF OBLIGATIONS.........................................28 6.11 PENTACON STOCK..................................................28 6.12 NO SIDE AGREEMENTS..............................................28 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................28 6.14 DISCLOSURE......................................................29 6.15 NO INTEREST IN COMPETITORS......................................29 7. COVENANTS PRIOR TO CLOSING............................................29 7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29 7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................30 7.3 PROHIBITED ACTIVITIES...........................................31 7.4 NO SHOP.........................................................32 7.5 NOTICE TO BARGAINING AGENTS.....................................32 7.6 AGREEMENTS......................................................32 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDER AND THE COMPANY.........................................................33 -ii- 7.8 AMENDMENT OF SCHEDULES..........................................33 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............34 7.10 FINAL FINANCIAL STATEMENTS......................................35 7.11 FURTHER ASSURANCES..............................................35 7.12 AUTHORIZED CAPITAL..............................................35 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........35 7.14 PRE-CLOSING NOTIFICATIONS.......................................36 7.15 PAYMENT OF INDEBTEDNESS.........................................36 7.16 MINIMUM VALUE...................................................36 7.17 DIRECTORS.......................................................36 7.18 TRANSACTION REPORTING...........................................36 7.19 PERMITS.........................................................36 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY...............................................................36 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......37 8.2 SATISFACTION....................................................37 8.3 NO LITIGATION...................................................37 8.4 OPINION OF COUNSEL..............................................37 8.5 REGISTRATION STATEMENT..........................................38 8.6 CONSENTS AND APPROVALS..........................................38 8.7 GOOD STANDING CERTIFICATES......................................38 8.8 NO MATERIAL ADVERSE CHANGE......................................38 8.9 CLOSING OF IPO..................................................38 8.10 SECRETARY'S CERTIFICATE.........................................38 8.11 EMPLOYMENT AGREEMENTS...........................................38 8.12 TAX MATTERS.....................................................38 8.13 EXCHANGE LISTING................................................39 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO .....................................................................39 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....39 9.2 NO LITIGATION...................................................39 9.3 SECRETARY'S CERTIFICATE.........................................39 9.4 NO MATERIAL ADVERSE EFFECT......................................40 9.5 STOCKHOLDER'S RELEASE...........................................40 9.6 SATISFACTION....................................................40 9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................40 9.8 OPINION OF COUNSEL..............................................40 9.9 CONSENTS AND APPROVALS..........................................40 9.10 GOOD STANDING CERTIFICATES......................................41 9.11 REGISTRATION STATEMENT..........................................41 -iii- 9.12 EMPLOYMENT AGREEMENTS...........................................41 9.13 CLOSING OF IPO..................................................41 9.14 FIRPTA CERTIFICATE..............................................41 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING .....................................................................41 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................41 10.2 PREPARATION AND FILING OF TAX RETURNS...........................41 10.3 DIRECTORS.......................................................42 11. INDEMNIFICATION.......................................................42 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDER......................42 11.2 INDEMNIFICATION BY PENTACON.....................................43 11.3 THIRD PERSON CLAIMS.............................................44 11.4 EXCLUSIVE REMEDY................................................45 11.5 LIMITATIONS ON INDEMNIFICATION..................................45 11.6 SPECIAL INDEMNITY ISSUES........................................47 12. TERMINATION OF AGREEMENT..............................................47 12.1 TERMINATION.....................................................47 12.2 LIABILITIES IN EVENT OF TERMINATION.............................48 13. NONCOMPETITION........................................................48 13.1 PROHIBITED ACTIVITIES...........................................48 13.2 DAMAGES.........................................................49 13.3 REASONABLE RESTRAINT............................................49 13.4 SEVERABILITY; REFORMATION.......................................49 13.5 INDEPENDENT COVENANT............................................50 13.6 MATERIALITY.....................................................50 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................50 14.1 STOCKHOLDER.....................................................50 14.2 PENTACON AND NEWCO..............................................51 14.3 DAMAGES.........................................................51 14.4 SURVIVAL........................................................51 15. TRANSFER RESTRICTIONS.................................................52 15.1 TRANSFER RESTRICTIONS...........................................52 16. FEDERAL SECURITIES ACT REPRESENTATIONS................................52 16.1 COMPLIANCE WITH LAW.............................................52 16.2 ECONOMIC RISK; SOPHISTICATION...................................53 -iv- 17. REGISTRATION RIGHTS...................................................53 17.1 PIGGYBACK REGISTRATION RIGHTS...................................53 17.2 REGISTRATION PROCEDURES.........................................54 17.3 INDEMNIFICATION.................................................55 17.4 UNDERWRITING AGREEMENT..........................................56 17.5 RULE 144 REPORTING..............................................56 18. GENERAL...............................................................56 18.1 COOPERATION.....................................................56 18.2 SUCCESSORS AND ASSIGNS..........................................57 18.3 ENTIRE AGREEMENT................................................57 18.4 COUNTERPARTS....................................................57 18.5 BROKERS AND AGENTS..............................................57 18.6 EXPENSES........................................................57 18.7 NOTICES.........................................................58 18.8 GOVERNING LAW...................................................59 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................59 18.10 EXERCISE OF RIGHTS AND REMEDIES.................................59 18.11 TIME............................................................59 18.12 REFORMATION AND SEVERABILITY....................................59 18.13 REMEDIES CUMULATIVE.............................................59 18.14 CAPTIONS........................................................59 -v- ANNEXES Annex I - Consideration to Be Paid to Stockholders Annex II - Stockholders and Stock Ownership of the Company Annex III - Certificate of Incorporation and By-Laws of Pentacon and Newco Annex IV - Form of Opinion of Counsel to Pentacon and Newco Annex V - Form of Opinion of Counsel to Company and Stockholders Annex VI - Form of Founder Employment Agreement -vi- SCHEDULES 5.1 Due Organization 5.2 Authorization 5.3 Capital Stock of the Company 5.4 Transactions in Capital Stock, Organization Accounting 5.5 No Bonus Shares 5.6 Subsidiaries 5.7 Predecessor Status; etc 5.8 Spin-off by the Company 5.9 Financial Statements 5.10 Liabilities and Obligations 5.11 Accounts and Notes Receivable 5.12 Permits and Intangibles 5.13 Environmental Matters 5.14 Personal Property 5.15 Significant Customers; Material Contracts and Commitments 5.16 Real Property 5.17 Insurance 5.18 Compensation; Employment Agreements; Labor Matters 5.19 Employee Plans 5.20 Compliance with ERISA 5.21 Conformity with Law; Litigation 5.22 Taxes 5.23 No Violations, Consents, etc. 5.24 Government Contracts 5.25 Absence of Changes 5.26 Deposit Accounts; Powers of Attorney 5.30 Prohibited Activities 5.31 No Warranties or Insurance 5.32 Related Party Transactions 6.3 Capital Stock of Pentagon and Newco 6.4 Options, Warrants and Rights 6.8 Litigation 6.9 No Violations 6.12 Side Agreements 7.2 Conduct of Business Pending Closing 7.3 Prohibited Activities 7.5 Notice to Bargaining Agents 7.6 Termination Agreements 7.15 Obligations to be Paid at Closing 9.7 Continuing Related Party Agreements 9.12 Employment Agreements 13.1 Prohibited Activities 18.5 Brokers and Agents -vii- AGREEMENT AND PLAN OF ORGANIZATION THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of the 1st day of December, 1997, by and among PENTACON, INC., a Delaware corporation ("Pentacon"), ALATEC PRODUCTS ACQUISITION COMPANY, a Delaware corporation ("Newco"), ALATEC PRODUCTS, INC., a California corporation (the "Company"), and DON LIST, who is the sole stockholder of the Company (the "Stockholder"), who herein agree as follows: RECITALS WHEREAS, Newco is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on November 26, 1997, solely for the purpose of completing the transactions set forth herein, and is a wholly owned subsidiary of Pentacon, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective boards of directors of Newco and the Company (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that Newco merge with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and the State of Incorporation (as hereinafter defined); WHEREAS, Pentacon is entering into other separate agreements substantially similar to this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Organization," with each of the Other Founding Companies (as defined herein) and their respective stockholders in order to acquire additional fasteners companies; WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon Plan of Organization;" WHEREAS, the Stockholder and the boards of directors and the stockholders of Pentacon, each of the Other Founding Companies and each of the subsidiaries of Pentacon that are parties to the Other Agreements have approved and adopted the Pentacon Plan of Organization as an integrated plan pursuant to which the Stockholder and the stockholders of each of the other Founding Companies will transfer the capital stock of each of the Founding Companies to Pentacon and the stockholders of each of the other Founding Companies will acquire the stock of Pentacon (but not cash or other property) as a tax-free transfer of property under Section 351 of the Code; WHEREAS, the Board of Directors of the Company has approved this Agreement as part of the Pentacon Plan of Organization in order to transfer the capital stock of the Company to Pentacon; -1- WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 ACT" means the Securities Act of 1933, as amended. "1934 ACT" means the Securities Exchange Act of 1934, as amended. "ACQUIRED PARTY" means the Company, any subsidiary and any member of a Relevant Group. "ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware companies wholly-owned by Pentacon prior to the Consummation Date. "AFFILIATES" shall mean with respect to any person or entity, any other person or entity that directly or indirectly, controls, is controlled, or is under common control with such person or entity. For purposes hereof, control shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger with respect to the Merger in such forms as may be required by the laws of the State of Delaware and the State of Incorporation. "BALANCE SHEET DATE" means September 30, 1997. "CHARTER DOCUMENTS" has the meaning set forth in Section 5.1. "CLOSING" has the meaning set forth in Section 4. "CLOSING DATE" has the meaning set forth in Section 4. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY STOCK" has the meaning set forth in Section 2.1. "CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital of this Agreement. "CONSUMMATION DATE" has the meaning set forth in Section 4. "DELAWARE GCL" has the meaning set forth in Section 1.4. -2- "DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of the Registration Statement, and any corrections thereto and supplemental information delivered by Pentacon to the Company for delivery to the Stockholder prior to the time this Agreement is delivered by the Company and the Stockholder to Pentacon. "EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger becomes effective, which shall occur on the Consummation Date. "ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13. "ERISA" has the meaning set forth in Section 5.19. "EXPIRATION DATE" has the meaning set forth in Section 5(A). "FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "FOUNDING COMPANIES" means: Alatec Products, Inc., a California corporation; AXS Solutions, Inc., a Delaware corporation; Capitol Bolt & Supply, Inc., a Texas corporation; Maumee Industries, Inc., an Indiana corporation; and Sales Systems, Limited, a Pennsylvania corporation. "HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13. "HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c). "INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "IPO" means the initial public offering of Pentacon Stock pursuant to the Registration Statement described herein. "LICENSES" has the meaning set forth in Section 5.12. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise), of the subject entity and its subsidiaries taken as a whole. -3- "MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a). "MERGER" means the merger of Newco with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and the laws of the State of Incorporation. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of Newco. "OTHER AGREEMENTS" has the meaning set forth in the third recital hereof. "OTHER FOUNDING COMPANIES" means all of the Founding Companies other than the Company. "PBGC" has the meaning set forth in Section 5.19. "PENTACON" has the meaning set forth in the first paragraph of this Agreement. "PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1 "PENTACON STOCK" means the common stock, par value $.01 per share, of Pentacon. "PERSON" means an individual, partnership, joint venture, corporation, bank, trust, unincorporated organization or other entity. "PRICING" means the date of determination by Pentacon and the Underwriters of the public offering price of the shares of Pentacon Stock in the IPO; the parties hereto contemplate that the Pricing shall take place on the Closing Date. "PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30. "QUALIFIED PLANS" has the meaning set forth in Section 5.20. "REGISTRATION STATEMENT" means that certain registration statement on Form S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued in the IPO and all amendments thereto. "RELEVANT GROUP" means the Company and any affiliated, combined, consolidated, unitary or similar group of which the Company is or was a member. -4- "RETURNS" means any returns, reports or statements (including any information returns) required to be filed for purposes of reporting, computing or otherwise required in connection with a particular Tax. "SCHEDULE" means each Schedule (including attachments) attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STATE OF INCORPORATION" means the State of California. "STOCKHOLDER" has the meaning set forth in the first paragraph of this Agreement. "SUBSIDIARIES" means with respect to a person or entity, any corporation or other entity in which such person or entity owns a 5% or greater ownership interest. "SURVIVING CORPORATION" has the meaning set forth in Section 1.2. "TAX" OR "TAXES" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, withholding, employment, excise, property, deed, stamp, alternative or add on minimum, or other taxes, assessments, duties, fees, levies or other governmental charges, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "UNDERWRITERS" means the prospective underwriters identified in the Draft Registration Statement. "YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(i). 1. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause the Articles of Merger to be signed, verified and delivered to Pentacon (to the attention of Pentacon's in-house counsel) to be held for filing with the Secretary of State of the State of Delaware and the Secretary of State (or other appropriate authority) of the State of Incorporation on or effective as of the Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, Newco shall be merged with and into the Company in accordance with the Articles of Merger and the separate existence of Newco shall cease. The Company shall be the surviving party in the Merger and the Company is sometimes hereinafter referred to as the "Surviving Corporation". As a result of the -5- Merger, the outstanding shares of capital stock of Newco and the Company shall be converted or canceled in the manner provided in Section 2. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the Company then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of Newco then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended (and such By-laws shall be amended, if necessary, to comply with applicable state law); (iii) the Board of Directors of the Surviving Corporation shall consist of the persons who are on the Board of Directors of the Company immediately prior to the Effective Time of the Merger, provided that Bruce Taten shall become an additional director of the Surviving Corporation effective as of the Effective Time of the Merger, and the number of directors constituting the entire Board of Directors of the Company shall be increased, if necessary, to accommodate the addition of such additional director; the Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Incorporation and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the Company immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Brian Fontana shall become an additional Vice President and Bruce Taten will become the Secretary of the Surviving Corporation, such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until their respective successors are duly elected and qualified. The Stockholder may cause to be changed the persons on the Board of the Company at any time up until the Closing Date. 1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of the State of Incorporation. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the Company shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of Newco shall be merged with and into the Company, and the Company, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of Newco shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and -6- all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the Company or Newco shall be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Company and Newco; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the State of Incorporation vested in the Company or Newco, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the Company and Newco and any claim existing, or action or proceeding pending, by or against the Company or Newco may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the Company or Newco shall be impaired by the Merger, and all debts, liabilities and duties of the Company and Newco shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. 2. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the Company ("Company Stock") into shares of Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of Company Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) the right to receive the number of shares of Pentacon Stock set forth on Annex I hereto with respect to such holder and (2) the right to receive the amount of cash set forth on Annex I hereto with respect to such holder; (ii) all shares of Company Stock that are held by the Company as treasury stock or which are otherwise issued but not outstanding shall be canceled and retired and shall cease to exist and no shares of Pentacon Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of Newco Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of Pentacon, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and -7- outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All Pentacon Stock received by the Stockholder pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding Pentacon Stock by reason of the provisions of the Certificate of Incorporation of Pentacon or as otherwise provided by the Delaware GCL. All Pentacon Stock received by the Stockholder shall be issued and delivered to the Stockholder free and clear of any liens, claims or encumbrances of any kind or nature. All voting rights of such Pentacon Stock received by the Stockholder shall be fully exercisable by the Stockholder and the Stockholder shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, Pentacon shall have no class of capital stock issued and outstanding other than the Pentacon Stock. 3. DELIVERY OF MERGER CONSIDERATION 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. Prior to the Closing, Stockholder shall deliver to Pentacon (to the attention of Pentacon's in-house counsel) to be held until the Closing Date all of the Stockholder's outstanding capital stock of the Company. Such stock shall be deemed surrendered on the Closing Date and Stockholder shall be entitled in accordance with terms of this Agreement to receive the respective number of shares of Pentacon Stock and the amount of cash described on Annex I hereto, said cash to be payable by certified check, or if hereafter agreed by the Stockholder and Pentacon, by wire transfer. 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholder shall deliver to Pentacon at the Closing the certificates representing Company Stock, duly endorsed in blank by the Stockholder, or accompanied by blank stock powers, and with all necessary transfer tax and other revenue stamps, acquired at the Stockholder's expense, affixed and canceled. The Stockholder agrees promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such Company Stock or with respect to the stock powers accompanying any Company Stock. 4. CLOSING At or prior to the Pricing, the parties shall take all actions reasonably necessary to prepare to (i) effect the Merger (including the execution of the Articles of Merger which shall be placed in escrow with Pentacon (to the attention of Pentacon's in-house counsel) for filing with the appropriate authorities effective on the Consummation Date, subject, however, to satisfaction or waiver of all conditions precedent) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) (or wire transfers) referred to in Section 3 hereof, each of which actions shall only be taken upon the Consummation Date as herein provided. In the event that there is no Consummation Date and this Agreement automatically terminates as provided in this Section 4 the Articles of Merger shall not be filed and shall be promptly returned -8- to the Stockholder. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between the Stockholder and Pentacon. On the Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities so that they shall be, as early as practicable on the Consummation Date, effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check or checks (or wire transfers) in an amount equal to the cash portion of the consideration which the Stockholder shall be entitled to receive pursuant to Section 3 hereof shall occur and be completed and (z) the closing with respect to the IPO shall occur and be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date." During the period from the Closing Date to the Consummation Date, this Agreement may be terminated by the parties only as specifically set forth in this Agreement or if the underwriting agreement in respect of the IPO is terminated pursuant to the terms of such underwriting agreement. This Agreement shall also in any event automatically terminate if the Consummation Date has not occurred within 15 business days following the Closing Date. Time is of the essence. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDER. The Stockholder and the Company represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that the warranties and representations set forth in Sections 5.13 and 5.22 hereof shall survive until such time as the applicable statute of limitations period has run or for five (5) years if there is no applicable statute of limitations, which shall be deemed to be the Expiration Date for Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall mean and refer to the Company and all of its Subsidiaries, if any. 5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the State of Incorporation, and has the requisite power and authority to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which failure to so qualify would reasonably be expected to have a Material Adverse Effect on the Company. Schedule 5.1 sets forth a list of all jurisdictions in which the Company is authorized or qualified to do business. True, complete and correct copies of (i) the Certificate of Incorporation and By-laws, each as amended, of the Company (the "Charter Documents"), and (ii) the stock records of the Company (including, without limitation, a copy of the Company's stock ledger), are all attached to Schedule 5.1. The Company has delivered complete and correct copies of all minutes of meetings, -9- written consents and other written evidence, if any, of deliberations of or actions taken by the Company's Board of Directors, any Committees of the Board of Directors and stockholders during the last five years. 5.2 AUTHORIZATION. (i) The officers or other representatives of the Company executing this Agreement have the authority to enter into and bind the Company to the terms of this Agreement and (ii) the Company has the full legal right, power and authority to enter into this Agreement and the Merger. The directors and Stockholder have approved this Agreement and the transactions contemplated hereby in all respects, and copies of all such resolutions, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, are attached hereto as Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company is as set forth on Schedule 5.3. All of the issued and outstanding shares of the capital stock of the Company are owned by the Stockholder in the amounts set forth in Annex II. Each Stockholder, severally, represents and warrants that except as set forth on Schedule 5.3, the shares of capital stock of the Company owned by such Stockholder are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the Stockholder and further, such shares were offered, issued, sold and delivered by the Company in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of any preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the Company has not acquired or redeemed any Company Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the Company to issue any of its authorized but unissued capital stock; (ii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the Company nor the relative ownership of shares among any of its respective Stockholders has been altered or changed in contemplation of the Merger and/or the Pentacon Plan of Organization. Except as set forth in Schedule 5.4, there are no voting trusts, proxies or other agreements or understandings to which the Company or any of the Stockholder is a party or is bound with respect to the voting of any shares of capital stock of the Company. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of Company Stock was issued pursuant to awards, grants or bonuses in contemplation of the Merger or the Pentacon Plan of Organization. -10- 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule 5.6, the Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all predecessor companies of the Company, including the names of any entities acquired by the Company (by stock purchase, merger or otherwise) or owned by the Company or from whom the Company previously acquired material assets, in any case, from the earliest date upon which any Stockholder acquired his or her stock in any Company. Except as disclosed on Schedule 5.7, the Company has not been, within such period of time, a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the Company or any other person or entity that is an Affiliate of the Company since January 1, 1995. 5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following financial statements of the Company as audited by Ernst & Young and McGladdrey and Pullen are attached hereto as Schedule 5.9: (i) the balance sheets of the Company as of December 31, 1995 and 1996 and the related statements of operations, stockholder's equity and cash flows for the two-year period ended December 31, 1996, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Year-end Financial Statements"); and (ii) the balance sheet of the Company as of September 30, 1997, (the "Interim Balance Sheet") and the related statements of operations, stockholder's equity and cash flows for the nine-month periods ended September 30, 1997, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Interim Financial Statements"). The Year-end Financial Statements and the Interim Financial Statements are collectively called the "Financial Statements". 5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate list as of the Balance Sheet Date of (i) all liabilities of the Company which are not reflected on the Interim Balance Sheet of the Company at the Balance Sheet Date or otherwise reflected in the Interim Financial Statements at the Balance Sheet Date except for those liabilities not required to be reflected or disclosed under generally accepted accounting principles or F.A.S.B. 5 and which were not -11- reflected or disclosed in the Interim Balance Sheet, and (ii) all loan agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other security agreements to which the Company is a party or by which its properties may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet Date, the Company has not incurred any liabilities or obligations of any kind, character or description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business and consistent with past practices. The Company has also delivered to Pentacon on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, a good faith and reasonable estimate (to the extent the Company can reasonably make an estimate) of the maximum amount which the Company reasonably expects may be payable and the amount, if any, accrued or reserved for each such potential liability on the Company's Financial Statements. If no estimate is provided, the estimate shall for purposes of this Agreement be deemed to be zero. For each such contingent liability or liability for which the amount is not fixed or is contested, the Company has provided to Pentacon the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding; (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date (if any) on which such claim, suit or proceeding was instituted or the date (period) to which such claim relates. 5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate list of the accounts and notes receivable of the Company, as of the Balance Sheet Date, including any such amounts which are not reflected in the Interim Balance Sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the Stockholder, which are identified as such. Except to the extent reflected on Schedule 5.11, such accounts, notes and other receivables are collectible in the amounts shown on Schedule 5.11, net of reserves reflected in the Interim Balance Sheet of the Balance Sheet Date. 5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses, franchises, permits and other governmental authorizations ("Licenses") necessary to conduct the business of the Company and the Company has delivered to Pentacon an accurate list and summary description (which is set forth on Schedule 5.12) of all such material Licenses, including any material trademarks, trade names, patents, patent applications and copyrights owned or held by the Company or any of its employees (including interests in software or other technology systems, programs and intellectual property). At or prior to the Closing, all rights to such trademarks, trade names, patents, -12- patent applications, copyrights and other intellectual property held by the Stockholder or his Affiliates will be assigned or licensed to the Company for no additional consideration. The Licenses and other rights listed on Schedule 5.12 are valid, and the Company has not received any notice that any person intends to cancel, terminate or not renew any such License or other right. The Company has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in the Licenses and other rights listed on Schedule 5.12 and is not in violation of any of the foregoing. Except as specifically provided in Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the Company by, any such Licenses or other rights. 5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached hereto, (i) the Company has conducted its businesses in compliance with all applicable Environmental Laws, including, without limitation, having all environmental permits, licenses and other approvals and authorizations necessary for the operation of its business as presently conducted, (ii) none of the properties owned by the Company contain any Hazardous Substance as a result of any activity of the Company in amounts exceeding the levels permitted by applicable Environmental Laws, (iii) the Company has not received any notices, demand letters or requests for information from any Federal, state, local or foreign governmental entity or third party indicating that the Company may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of its business, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or to the knowledge of the Stockholder threatened, against the Company relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law, (vi) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law from any properties owned by the Company as a result of any activity of the Company during the time such properties were owned, leased or operated by the Company, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analysis regarding compliance or non-compliance with any applicable Environmental Law conducted by or which are in the possession of or readily available to the Company relating to the activities of the Company which are not listed on Schedule 5.13 attached hereto prior to the date hereof, (viii) there are no underground storage tanks on, in or under any properties owned by the Company and no underground storage tanks have been closed or removed from any of such properties during the time such properties were owned, leased or operated by the Company, (ix) there is no asbestos or asbestos containing material present in any of the properties owned by the Company, and no asbestos has been removed from any of such properties during the time such properties were owned, leased or operated by the Company, and (x) neither the Company nor any of its respective properties are subject to any material liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law. -13- (b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity which is applicable where the Company conducts or conducted business or owns or owned property or is applicable to any disposal, transportation or release of Hazardous Substances by or for the Company and, in each case, relates to (x) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as in effect on the Closing Date. The term Environmental Law includes, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as in effect on the Closing Date, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. (c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any government authority or any Environmental Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. 5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.14) of (x) all personal property material to the operations of the Company included in "plant, property and equipment" on the Interim Balance Sheet of the Company, (y) all other personal property owned by the Company with an individual fair market value in excess of $5,000 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all material leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases and (2) an indication as to which assets are currently owned, or were formerly owned, by Stockholder, relatives of Stockholder, or Affiliates of the Company. Except as set forth on Schedule 5.14, (i) all material personal property used by the Company in its business is either owned by the Company or leased by the Company pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on -14- Schedule 5.14 is in working order and condition sufficient for the operation of the Company's business, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.15) of all customers (persons or entities) representing 5% or more of the Company's annual revenues for the period covered by any of the most current Year-End Financial Statements. Except to the extent set forth on Schedule 5.15, none of such customers have canceled or substantially reduced or, to the knowledge of the Company and the Stockholder, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the Company. (b) Except as set forth on Schedule 5.15, the Company has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the Company is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances and options to purchase land), other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered (or, in the case of supplier and distributor contracts and customer contracts on standard purchase forms, has made available) true, complete and correct copies of such agreements to Pentacon. The Company has also indicated on Schedule 5.15 a summary description of all plans or projects commenced or approved in the last six (6) months and involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets (other than acquisitions of inventory and other assets used in the business in the ordinary course of business) requiring, in any event, the payment of more than $20,000 by the Company during any 12-month period. (c) Except as set forth on Schedule 5.15, since January 1, 1995, the Company has not experienced any difficulties in obtaining any inventory items necessary to the operation of its business, and, to the knowledge of the Company and the Stockholder, no such shortage of supply of inventory items is threatened or pending. To the knowledge of the Company and the Stockholder, no customer or supplier of the Company will cease to do business with, or substantially reduce its purchases from, the Company after the consummation of the transactions contemplated hereby. (d) The Company is not required to provide any bonding or other financial security arrangements in any material amount in connection with any transactions with any of its customers or suppliers. (e) Except with respect to the Bausch and Firestone litigation, neither the Company nor any of its Affiliates has entered into any agreements which obligate the Company or any subsidiary -15- of the Company to continue to use the services of specific accounting or legal professionals following the Closing Date. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the Company at the date hereof and all other real property, if any, used by the Company in the conduct of its business. Except as set forth on Schedule 5.16, any such real property owned by the Company will be sold or distributed by the Company on terms acceptable to Pentacon and leased back by the Company on terms no less favorable to the Company than those available from an unaffiliated party and otherwise reasonably acceptable to Pentacon at or prior to the Closing Date. The Company has good and insurable title to any real property owned by it that is shown on Schedule 5.16, other than property intended to be sold or distributed prior to the Closing Date, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.16 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title which do not adversely affect the current use of the property. True, complete and correct copies of all leases and agreements in respect of such real property leased by the Company are attached to Schedule 5.16, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by Stockholder or Affiliates of the Company or Stockholder is included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the Balance Sheet Date of all insurance policies carried by the Company, (ii) an accurate list of all insurance loss runs (to the extent available) or workers compensation claims received for the past three policy years. True, complete and correct copies of all insurance policies currently in effect have been delivered or made available to Pentacon. Such insurance policies evidence all of the insurance that the Company is required to carry pursuant to all of its contracts and other agreements and pursuant to all applicable laws, and, in the reasonable judgment of the Company's management, provide adequate coverage against the risks involved in the Company's business. All of such insurance policies are currently in full force and effect and are scheduled to remain in full force and effect through the Consummation Date. Since January 1, 1995, no insurance carried by the Company has been canceled by the insurer and the Company has not been denied coverage. -16- 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS. (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.18) showing all officers, directors and key employees of the Company, listing all current employment agreements with such officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided to Pentacon true, complete and correct copies of any existing employment agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and except as described in Schedule 5.18, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices and bonuses, approved in writing by Pentacon. (b) Except as set forth on Schedule 5.18, (i) the Company is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the Company are represented by any labor union or covered by any collective bargaining agreement, (iii) to the best knowledge of the Company, no campaign to establish such representation is in progress and (iv) there is no pending or, to the knowledge of the Company and the Stockholder, threatened labor dispute involving the Company and any group of its employees nor has the Company experienced any labor interruptions over the past three years. (c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no significant controversies pending or, to the knowledge of the Company and the Stockholder, threatened between the Company and any of its employees, (ii) the Company has complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, and (iii) to the knowledge of the Company and the Stockholder, no person has asserted that the Company is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee benefit plans of the Company, including all employment agreements and other agreements or arrangements containing "golden parachute" or other similar provisions, and deferred compensation agreements, together with true, complete and correct copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Balance Sheet Date. Except for the employee benefit plans, if any, described on Schedule 5.19, the Company does not sponsor, maintain or contribute to any plan program, fund or arrangement that constitutes an "employee pension benefit plan", and neither the Company nor any subsidiary has any obligation to contribute to or accrue or pay any benefits under any deferred compensation or retirement funding arrangement on behalf of any employee or employees (such as, for example, and without limitation, any individual retirement account or annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred compensation arrangement). For the purposes of this Agreement, the term "employee pension -17- benefit plan" shall have the same meaning as is given that term in Section 3(2) of ERISA. The Company has not sponsored, maintained or contributed to any employee pension benefit plan other than the plans set forth on Schedule 5.19, and the Company is not or could not be required to contribute to any retirement plan pursuant to the provisions of any collective bargaining agreement establishing the terms and conditions or employment of any of the Company's employees. Except as set forth on Schedule 5.19, the Company is not now, or will not as a result of its past activities become, liable to the Pension Benefit Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit plan under the provisions of Title IV of ERISA. All employee benefit plans listed on Schedule 5.19 and the administration thereof are in compliance with their terms and all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable federal, state and local statutes, ordinances and regulations. All accrued contribution obligations of the Company with respect to any plan listed on Schedule 5.19 as of the Balance Sheet Date have either been fulfilled in their entirety or are fully reflected on the Interim Balance Sheet as of the Balance Sheet Date. 5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedules 5.19 and 5.20, All such plans listed on Schedule 5.19 that are intended to qualify (the "Qualified Plans") under Section 401 (a) of the Code are, and have been so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the most recent determination letters with respect thereto are attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies of the most recent reports and filing relating thereto are included as part of Schedule 5.19 hereof. Neither Stockholder, any such plan listed in Schedule 5.19, nor the Company has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the Company has not incurred any liability for excise tax or penalty due to the Internal Revenue Service nor any liability to the PBGC. The Stockholder further represents that except as set forth on Schedule 5.19 hereto: (i) there have been no terminations, partial terminations or discontinuations of contributions to any Qualified Plan intended to qualify under Section 401(a) of the Code without notice to and approval by the Internal Revenue Service; (ii) no plan listed in Schedule 5.19 subject to the provisions of Title IV of ERISA has been terminated; -18- (iii) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any such plan listed in Schedule 5.19; (iv) the Company (including any subsidiaries) has not incurred liability under Section 4062 of ERISA; and (v) to the knowledge of the Company and the Stockholder, no circumstances exist pursuant to which the Company would be reasonably likely to have any direct or indirect liability whatsoever (including, but not limited to, any liability to any multiemployer plan or the PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty, or being subject to any statutory lien to secure payment of any such liability) with respect to any plan now or heretofore maintained or contributed to by any entity other than the Company that is, or at any time was, a member of a "controlled group" (as defined in Section 412(n)(6)(B) of the Code) that includes the Company. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it; and except to the extent set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or proceedings, pending (as opposed to threatened claims or other claims for which there is not an actual proceeding pending or claim actually made) or, to the knowledge of the Company and the Stockholder, threatened against or affecting, the Company, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Company, and, to the knowledge of the Company and the Stockholder, there is no basis for any such claim, action, suit or proceeding. The Company has conducted and is now conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, orders, approvals, variances, rules and regulations. 5.22 TAXES. Except as set forth in Schedule 5.22, the Company has timely filed all requisite Federal, state and other Tax Returns or extension requests for all fiscal periods ended on or before the Balance Sheet Date; and except as set forth on Schedule 5.22, the Company has no notice that any examinations are in progress or that any claims are pending against it for federal, state and other Taxes (including penalties and interest) for any period or periods prior to and including the Balance Sheet Date and no notice of any claim for Taxes, whether pending or threatened, has been received. Except as set forth in Schedule 5.22, all Tax, including interest and penalties (whether or not shown on any Tax Return) owed by the Company has been paid or accrued in its financial accounts. The amounts shown as accruals for Taxes on the Company Financial Statements are sufficient for the payment of all Taxes of the kinds indicated (including penalties and interest) for all fiscal periods ended on or before that date. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal and local income Tax Returns and -19- franchise Tax Returns of Company for their last three (3) fiscal years, or such shorter period of time as any of them shall have existed, are attached hereto as Schedule 5.22 or have otherwise been delivered to Pentacon. The Company has a taxable year ended December 31. Except as set forth on Schedule 5.22, Company uses the accrual method of accounting for income tax purposes, and the Company's methods of accounting have not changed in the past five years. The Company is not an investment Company as defined in Section 351(e)(1) of the Code. Except as set forth in Schedule 5.22, the Company is not and has not during the last five years been a party to any tax sharing agreement or agreement of similar effect. The Company is not and has not during the last five years been a member of any consolidated group. Except as set forth on Schedule 5.22, the Company has not received, been denied, or applied for any private letter ruling during the last ten years. 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC. (a) The Company is not in violation of any Charter Document. Except as set forth in Schedule 5.23, neither the Company nor, to the best knowledge of the Company and the Stockholder, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"). (b) Except as set forth in Schedule 5.23, the execution and delivery of this Agreement by each of the Company and the Stockholder do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the Charter Documents (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any Material Document or other material instrument, obligation or agreement of any kind to which the Company or any of the Stockholder is now a party or by which the Stockholder or the Company or any of its properties or assets may be bound or affected. The consummation by the Company and the Stockholder of the transactions contemplated hereby will not result in any violation, conflict, breach, right of termination or acceleration or creation of liens under any of the terms, conditions or provisions of the items described in clauses (i) through (iii) of the preceding sentence, subject, in the case of the terms, conditions or provisions of the items described in clause (iii) above, to obtaining (prior to the Effective Time of the Merger) such consents as may be required from commercial lenders, lessors or other third parties. (c) Except as set forth on Schedule 5.23 and documents required to be filed as specifically referenced in this Agreement, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect, and consummation of -20- the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any material right or benefit. (d) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (iv) for filings in connection with listing on the NASDAQ National Market System or New York Stock Exchange or other nationally recognized securities exchange; (v) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13 and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholder are required to make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by the Company and the Stockholder or the consummation by the Company and the Stockholder of the transactions contemplated hereby. (e) Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the Company, Pentacon or Newco of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the Company from freely providing services or selling products to any other customer or potential customer of the Company, Pentacon, Newco or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth on Schedule 5.24, the Company is not now a party to any governmental contract that, by its express terms, is subject to price redetermination or renegotiation or that is customarily subject to price redetermination or renegotiations in the ordinary course of business. Except as set forth on Schedule 5.24, the Company is not now a party to any material contract based on minority ownership which would be canceled or otherwise materially adversely impacted by completion of the Pentacon Plan of Organization. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25 or on the other schedules hereto, or as otherwise contemplated hereby, there has not been: (i) any Material Adverse Effect with respect to the Company; (ii) any damage, destruction or loss (whether or not covered by insurance), alone or in the aggregate, materially adversely affecting the properties or business of the Company; (iii) any change in the authorized capital of the Company or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; -21- (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the Company except for distributions that would have been permitted after the date hereof under Section 7.3(iii) hereof, (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the Company to any of its officers, directors, Stockholder, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business or future prospects of the Company; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of Company outside of the ordinary course of business to any person, including, without limitation, the Stockholder and his affiliates; (viii)any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the Company, including without limitation any indebtedness or obligation of any Stockholder or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the Company or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the Company's business; (xi) any waiver of any material rights or claims of the Company; (xii) any amendment or termination of any Material Document; (xiii)any transaction by the Company outside the ordinary course of its business; (xiv) any cancellation or termination of a Material Document or material customer contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the Company other than in the ordinary course of business and other than distributions of real estate and other assets as permitted by this Agreement. -22- 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an accurate schedule as of the date of the Agreement of: (i) the name of each financial institution in which the Company has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the Company and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the Company and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the Company and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5.28 RELATIONS WITH GOVERNMENTS. Neither the Company, the Stockholder, or any Affiliate of any of them has given or offered anything of value to any governmental official, political party or candidate for government office in violation of any applicable laws, rules or regulations, nor has it or any of them otherwise taken any action which would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any applicable law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules hereto, furnished to Pentacon by the Company and the Stockholder in connection herewith, do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements herein and therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by Pentacon or Newco. (b) The Company and the Stockholder acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither Pentacon or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the Company, the Stockholder or any other person affiliated or associated with the Company for any failure of the Registration Statement to become effective, the IPO to occur at -23- a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of Stockholder to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to Pentacon or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the Company has not, between the Balance Sheet Date and the date hereof, taken any of the actions which are prohibited ("Prohibited Activities") in Section 7.3. 5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to the knowledge of the Company or the Stockholder, the Company has no liability or potential liability to any person under any product or service warranty and the Company does not offer or sell insurance or consumer protection plans or other similar arrangements that could result in the Company being required to make any material payment to or perform any material service for any person thereunder. 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS. Except as described on Schedule 5.32, no Stockholder, officer, director or Affiliate of the Company (i) possesses, directly or indirectly, any financial interest in, or is a director, officer, employee or affiliate of, any corporation, firm, association or business organization that is a client, supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a party to an agreement or relationship, that involves the receipt by such person of compensation or property from the Company other than through a customary employment relationship. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. The Stockholder represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement as they relate to such Stockholder and that the representations and warranties set forth in this Sections 5(B) shall survive the Consummation Date. 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Stockholder has the full legal right, power and authority to enter into this Agreement. Stockholder owns beneficially and of record all of the shares of the Company stock identified on Annex II as being owned by Stockholder, and, except as set forth on Schedule 5.3, such Company Stock is owned free and clear of all liens, encumbrances and claims of every kind. This Agreement is a legal, valid, and binding obligation of Stockholder. 5.34 PREEMPTIVE RIGHTS. Such Stockholder does not have, or hereby waives, any preemptive or other right to acquire shares of Company Stock or Pentacon Stock that such Stockholder has or may have had. Nothing herein, however, shall limit or restrict the rights of any Stockholder to acquire Pentacon Stock pursuant to (i) this Agreement or (ii) any option granted by Pentacon. -24- 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. Except for obligations which could arise under the pledge agreement described on Schedule 5.3, Stockholder is not under any binding commitment or contract to sell, exchange or otherwise dispose of shares of Pentacon Stock received as described in Section 3.1. 6. REPRESENTATIONS OF PENTACON AND NEWCO Pentacon and Newco, jointly and severally, represent and warrant to the Stockholder that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Consummation Date, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of determining whether a claim for indemnification under Section 11.2(iv) hereof has been made on a timely basis, and solely to the extent that in connection with the IPO, any of the Stockholder actually incurs liability under the 1933 Act, the 1934 Act, or any other Federal or state securities laws, the representations and warranties of Pentacon and Newco set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly incorporated and organized, validly existing and in good standing under the laws of the State of Delaware, and each has the requisite power and authority to carry on its business as it is now being conducted. Pentacon and Newco are each qualified to do business and are each in good standing in each jurisdiction in which the nature of its business makes such qualification necessary. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter Documents") are all attached hereto as Annex III. 6.2 AUTHORIZATION. (i) The respective officers or other representatives of Pentacon and Newco executing this Agreement have the authority to enter into and bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and Newco have the full legal right, power and authority to enter into this Agreement and the Other Agreements and consummate the Merger. All corporate acts and other proceedings required to have been taken by Pentacon and Newco to authorize the execution, delivery and performance of this Agreement and the consummation of the Merger have been duly and properly taken. 6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration Statement. All of the issued and outstanding shares of the capital stock of Newco are owned by Pentacon and all of the issued and outstanding shares of the capital stock of Pentacon are owned by the persons set forth on Schedule 6.3 hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, -25- restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of Pentacon and Newco have been duly authorized and validly issued, are fully paid and nonassessable, and further, such shares were offered, issued, sold and delivered by Pentacon and Newco in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of Pentacon or Newco. 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the Other Agreements and except as set forth in the Draft Registration Statement or in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates Pentacon or Newco to issue any of their respective authorized but unissued capital stock; (ii) no voting trust, voting agreement, proxy or other agreements or understandings exist with respect to the voting of any shares of capital stock of Pentacon; and (iii) neither Pentacon nor Newco has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes a list of all outstanding options, warrants or other rights to acquire shares of the stock of Pentacon. 6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries except for Newco and each of the companies identified as "Newco" in each of the Other Agreements. Except as set forth in the preceding sentence, neither Pentacon nor Newco presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, and neither Pentacon nor Newco, directly or indirectly, is a participant in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in the Draft Registration Statement (the "Pentacon Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon), and the balance sheet included therein presents fairly the financial position of Pentacon as of its date. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft Registration Statement, Pentacon and Newco have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees generally described in Part II of the Draft Registration Statement and incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the Draft Registration Statement, neither Pentacon nor Newco is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending -26- or, to the knowledge of Pentacon or Newco, threatened against or affecting, Pentacon or Newco, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. Pentacon and Newco have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation, in any material respect, of any of the foregoing. 6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of Pentacon and Newco, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which Pentacon or Newco is a party, or by which Pentacon or Newco, or any of their respective properties, are bound (collectively, the "Pentacon Documents"); and (a) the rights and benefits of Pentacon and Newco under the Pentacon Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of their obligations hereunder and thereunder do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof will not, conflict with, or result in any violation or default (with or without notice or lapse of time, or both), under or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any lien upon any of the assets of Pentacon or Newco under, any provision of (i) the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the comparable governing instruments of Newco, (ii) any note, bond, mortgage, indenture or deed of trust or any license, lease, contract, commitment, agreement or arrangement to which Pentacon or Newco is a party or by which any of their respective properties or assets are bound or (iii) any judgment, order, decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or their respective properties or assets. (b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the Pentacon Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. (c) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) filings with blue sky authorities in connection with the transactions contemplated by this Agreement, (iv) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (v) for filings in consideration for listing on the NASDAQ National Market System or the New York Stock Exchange or other nationally recognized securities exchange; and (vi) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not required make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval -27- of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the transactions contemplated hereby. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the respective Boards of Directors and stockholders of Pentacon and Newco and this Agreement and the Other Agreements have been duly and validly authorized by all necessary corporate action and are legal, valid and binding obligations of Pentacon and Newco, enforceable against them in accordance with their respective terms. 6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the Stockholder, the Pentacon Stock to be delivered to the Stockholder pursuant to this Agreement will constitute valid and legally issued shares of Pentacon, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all substantive respects (which do not include the form of certificate upon which it is printed or the presence or absence of a CUSIP number on any such certificate) to the Pentacon Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the Stockholder shall at the time of such issuance and delivery be free and clear of any liens, claims or encumbrances of any kind or character. The shares of Pentacon Stock to be issued to the Stockholder pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither Pentacon nor Newco has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or Pentacon other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements and real property leases referred to herein or entered into in connection with the transactions contemplated hereby and thereby. Pentacon has not entered into any agreements which obligate Pentacon or any of its Affiliates to continue to use the services of specific accounting or legal professionals following the Closing Date. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on March 20, 1997 and has conducted only limited operations since that time. Neither Pentacon nor Newco has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Except as described in the Draft Registration Statement, neither Pentacon nor Newco owns or has at any time owned any real property or any material personal property or is a party to any other material agreement other than the Other Agreements, the agreements contemplated thereby and such agreements as will be filed as Exhibits to the Registration Statement. -28- 6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company and the Stockholder, together with this Agreement and the information furnished to the Company and the Stockholder in connection herewith, does not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by the Company or the Stockholder or information pertaining to the Company or a Stockholder which is confirmed in writing by the Company or such Stockholder. 6.15 NO INTEREST IN COMPETITORS. To the knowledge of Pentacon, neither Pentacon, Newco or any of their directors, officers or affiliates (other than stockholders of the Founding Companies) owns directly or indirectly any interest in a competitor of the Company or any of the Founding Companies. 7. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Consummation Date, the Company will afford to the officers and authorized representatives of Pentacon access to all of the Company's sites, properties, books and records and will furnish Pentacon with such additional financial and operating data and other information as to the business and properties of the Company as Pentacon may from time to time reasonably request; provided, however, that the Company shall not prior to the Closing Date be required to disclose to the Other Founding Companies, and Pentacon shall not without first obtaining the written approval of the Company disclose to the Other Founding Companies, information relating to pricing or profitability on an account-by-account basis or any pricing information relating to the Company's suppliers on a supplier-by-supplier basis. The Company will cooperate with Pentacon, its representatives, auditors and counsel and the Other Founding Companies in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. Pentacon, Newco, the Stockholder and the Company will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, Pentacon will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1(a) requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Consummation Date, Pentacon will afford to the officers and authorized representatives of the Company and the Stockholder access to all of Pentacon's and Newco's sites, properties, books and records and will furnish the Company with such additional financial and operating data and other information as to the business and properties of Pentacon and Newco as the Company may from time to time reasonably request. -29- Pentacon and Newco will cooperate with the Company, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The Company will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Consummation Date, the Company will, except as set forth on Schedule 7.2 or as otherwise expressly contemplated by this Agreement: (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) use commercially reasonable efforts to maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform in all material respects all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) use commercially reasonable efforts to keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use commercially reasonable efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with material suppliers, customers and others having business relations with the Company; (vi) use commercially reasonable efforts to maintain compliance with all material permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments without the knowledge and consent of Pentacon (which consent shall not be unreasonably withheld, delayed or conditioned), provided that debt and/or lease instruments may be replaced without the consent of Pentacon if such replacement instruments are on terms at least as favorable to the Company as the instruments being replaced; and (viii)maintain or reduce present salaries and commission levels for all officers, directors, employees and agents except for ordinary and customary bonus and salary increases for employees in accordance with the Company's past practices. -30- 7.3 PROHIBITED ACTIVITIES. Except as disclosed in Section 5 or set forth on Schedule 7.3 or as otherwise expressly contemplated by this Agreement, between the date hereof and the Consummation Date, the Company will not, without prior written consent of Pentacon: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options, warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock; (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $25,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $25,000 necessary or desirable for the conduct of the businesses of the Company, (2) (A) liens for Taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested Taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business and other than distributions of real estate and other assets as permitted in this Agreement (including the Schedules hereto); (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii)merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the Company, provided that the Company may negotiate and adjust bills and accounts in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such -31- adjustments shall not be deemed to be included in Schedule 5.11 to the extent they exceed the reserves, if any, established therefor, or unless specifically listed thereon; (x) amend or terminate any material agreement, permit, license or other right of the Company provided that the Company may continue to administer vendor and supplier contracts in the ordinary course of business provided written notice of any such material amendments or terminations is provided to Pentacon as soon as possible following such action and in any event prior to the Closing; or (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder. 7.4 NO SHOP. Except as contemplated hereby, the Stockholder, the Company, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than Pentacon, Newco or their authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the Company or a merger, consolidation or business combination of the Company. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide Pentacon on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The Stockholder and the Company shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the Company and any employee listed on Schedule 9.12 hereto and (ii) any existing agreement between the Company and any Stockholder, on or prior to the Consummation Date provided that nothing herein shall prohibit or prevent the Company from paying (either prior to or on the Closing Date) notes or other obligations from the Company to the Stockholder in accordance with the terms thereof, which terms have been disclosed to Pentacon. Such termination agreements are listed on Schedule 7.6 and copies thereof shall be attached thereto. -32- 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDER AND THE COMPANY. The Stockholder and the Company shall give prompt notice to Pentacon of (i) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the Company or the Stockholder contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any Stockholder or the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. Pentacon and Newco shall give prompt notice to the Company of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of Pentacon or Newco contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of Pentacon or Newco to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery or deemed delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. If, prior to the Closing Date, the Chief Executive Officer, the Chief Financial Officer or the General Counsel of Pentacon shall determine that any of Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder for indemnification against any Stockholder(s) (whether or not such claim might exceed the Indemnification Threshold), then Pentacon shall promptly advise the affected Stockholder(s), in writing, of such potential claim and provide information supporting the basis and potential amount of such claim (a "Potential Claim Notice"). This procedure with respect to Potential Claim Notices is intended to afford the affected Stockholder(s) notice so that it may attempt to cure or otherwise address the claim prior to Closing; provided, however, that (i) this procedure shall not affect or delay Closing and (ii) neither the failure or delay by Pentacon to give a Potential Claim Notice nor the information included or omitted from a Potential Claim Notice shall constitute a waiver of, or shall otherwise adversely affect the right to receive indemnification for, any such claim paid by Pentacon, Newco, the Surviving Corporation or the Company hereunder after the Closing Date. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until 24 hours prior to the anticipated effectiveness of the Registration Statement to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date, unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the Company that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to the Company may be made unless Pentacon and a majority of the Founding Companies other than the Company consent to such amendment or -33- supplement; and provided further, that no amendment or supplement to a Schedule prepared by Pentacon or Newco that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to Pentacon or Newco may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, Pentacon shall give the Company written notice promptly after it has knowledge thereof. If Pentacon and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given by Pentacon or any Founding Company if no response is received within 24 hours following receipt of written notice of such amendment or supplement (or sooner if reasonable and if required by the circumstances under which such consent is requested), but the Company does not give its consent, the Company may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the Company seeks to amend or supplement a Schedule pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that Pentacon or Newco seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and Stockholder shall furnish or cause to be furnished to Pentacon and the Underwriters all of the information concerning the Company and the Stockholder reasonably required for inclusion in, and will cooperate with Pentacon and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement, except that the cost of the preparation of any such audited and unaudited Financial Statements shall be borne by Pentacon). The Company and the Stockholder agree promptly to advise Pentacon if at any time during the period in which a prospectus relating to the IPO is required to be delivered under the Securities Act, any information contained in the prospectus concerning the Company or the Stockholder becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the Company or the Stockholder, the Company represents and warrants as to such information with respect to itself, and each Stockholder represents and warrants, as to such information with respect to the Company and himself or herself, severally, but not jointly, that the information expressly provided for inclusion in the Registration Statement or otherwise confirmed -34- in writing by such Stockholder will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. If at least 20 days have elapsed since the end of a fiscal quarter, the Company shall provide prior to the Consummation Date, and Pentacon shall have had sufficient time to review the unaudited consolidated balance sheets of the Company as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the Company for all fiscal quarters ended after the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the Company for the periods indicated therein, subject to adjustments based upon normal review. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall maintain its authorized capital stock as set forth in the Registration Statement filed with the SEC except for such changes in authorized capital stock as are made to respond to comments made by the SEC or requirements of any exchange or automated trading system for which application is made to register the Pentacon Stock and any changes necessary or advisable in order to permit the delivery of the opinion contemplated by Section 8.12 hereof. 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby recognize that one or more filings under the Hart-Scott-Rodino Act may be required in connection with the transactions contemplated herein. If it is determined by the parties to this Agreement that filings under the Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act, (ii) such compliance by the Stockholder and the Company shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 9 of this Agreement, and (iii) the parties agree to cooperate and use their best efforts to cause all filings required under the Hart-Scott-Rodino Act to be made. If filings under the Hart-Scott-Rodino Act are required, the costs and expenses thereof (including filing fees) shall be borne by Pentacon. The obligation of each party to consummate the transactions contemplated by this Agreement is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, if applicable. -35- 7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date of the final prospectus of Pentacon utilized in connection with the IPO, the Company or the Stockholder becomes aware of any fact or circumstance which would materially affect the accuracy of a representation or warranty of Company or Stockholder in this Agreement, the Company and the Stockholder shall promptly give notice of such fact or circumstance to Pentacon. However, subject to the provisions of Section 7.8, such notification shall not relieve either the Company or the Stockholder of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of Pentacon, the truth and accuracy of any and all warranties and representations of the Company, or on behalf of the Company and of Stockholder at the date of this Agreement and on the Closing Date and on the Consummation Date, shall be a precondition to the consummation of this transaction. 7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately following the Effective Time of the Merger, Pentacon will pay, or cause to be paid, all of the outstanding liabilities, obligations and indebtedness of Company to the lenders identified on Schedule 7.15 hereto. In connection with such repayment of indebtedness, all associated guaranties of Founder Stockholder shall be terminated and cancelled. 7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that one of the conditions to the Stockholder consummating the transactions contemplated herein is that the IPO shall be closed and the Stockholder shall be entitled to receive consideration not less than the Minimum Value set forth on Annex I attached hereto. 7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon shall not exceed nine members immediately following the IPO unless the Founding Stockholder representatives to serve on such board agree in writing to a larger number of directors. Don List will initially be provided the opportunity to serve in the longest initial term for directors. 7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise required by applicable law, Pentacon will describe or report the transaction in any required tax reports of Pentacon as a tax-free transaction (insofar as its relates to the delivery of Pentacon Stock for Company Stock) in a manner consistent with the tax opinion referenced in Section 8.12. 7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain all material Licenses necessary for Pentacon to commence the conduct of business on the Consummation Date. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of Stockholder and the Company with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the Stockholder and the Company with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the -36- Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such conditions have not been satisfied, the Stockholder (acting in unison) shall have the right to terminate this Agreement, or in the alternative, waive any condition not so satisfied. The delivery of certificates representing Company Stock to Pentacon as of the Consummation Date shall constitute a waiver of any conditions not so satisfied. However, no such waiver shall be deemed to affect the survival of the representations and warranties of Pentacon and Newco contained in Section 6 hereof or the rights of the Stockholder pursuant to Section 11 hereof. 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of Pentacon and Newco contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by Pentacon and Newco on or before the Closing Date and the Consummation Date shall have been duly complied with and performed in all material respects; and certificates to the foregoing effect dated the Closing Date and the Consummation Date, respectively, and signed by the President or any Vice President of Pentacon shall have been delivered to the Stockholder. 8.2 SATISFACTION. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall be reasonably satisfactory to the Company and its counsel. The Stockholder and the Company shall be satisfied that the Registration Statement and the prospectus forming a part thereof, including any amendments thereof or supplements thereto, shall not contain any untrue statement of a material fact, or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that, subject to the provisions set forth in the introductory paragraph of this Section 8, the condition contained in this sentence shall be deemed waived if the Company or Stockholder shall have failed to inform Pentacon in writing prior to the effectiveness of the Registration Statement of the existence of an untrue statement of a material fact or the omission of such a statement of a material fact. 8.3 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of the Company as a result of which the management of the Company deems it inadvisable to proceed with the transactions hereunder. 8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed hereto as Annex IV. -37- 8.5 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of Pentacon Stock to be received by the Stockholder is not less than the Minimum Value set forth on Annex I. 8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency or any third party relating to the consummation of the transactions contemplated herein or set forth in Schedule 5.23 hereto shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Company as a result of which Company deems it inadvisable to proceed with the transactions hereunder. 8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have delivered to the Company a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which Pentacon or Newco is authorized to do business, showing that each of Pentacon and Newco is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for Pentacon and Newco, respectively, for all periods prior to the Closing have been filed and paid. 8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to Pentacon or Newco which would constitute a Material Adverse Effect. 8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of Pentacon and of Newco, certifying the truth and correctness of attached copies of the Pentacon's and Newco's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the Stockholders of Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall have been afforded the opportunity to enter into an employment agreement substantially in the form of Annex VI hereto. 8.12 TAX MATTERS. The shall have received an opinion of Ernst & Young, L.L.P. or other tax advisor of national recognition reasonably acceptable to the Stockholder that the Pentacon Plan of Organization will qualify as a tax-free transfer of property under Section 351 of the Code and that the Stockholder will not recognize gain to the extent the Stockholder exchanges stock of the -38- Company for Pentacon stock (but not cash or other property) pursuant to the Pentacon Plan of Organization. 8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for listing on the New York Stock Exchange, NASDAQ National Market System or the American Stock Exchange. 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO The obligations of Pentacon and Newco with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of Pentacon and Newco with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of the Consummation Date, if any such conditions have not been satisfied, Pentacon and Newco shall have the right to terminate this Agreement, or waive any such condition, but no such waiver shall be deemed to affect the survival of the representations and warranties contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the representations and warranties of the Stockholder and the Company contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the Stockholder and the Company on or before the Closing Date or the Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the Stockholder shall have delivered to Pentacon certificates dated the Closing Date and the Consummation Date, respectively, and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which the management of Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate, dated the Closing Date and signed by the secretary of the Company, certifying the truth and correctness of attached copies of the Company's Certificate of Incorporation (including amendments thereto), ByLaws (including amendments thereto), and resolutions of the board of directors and the Stockholder approving the Company's entering into this Agreement and the consummation of the transactions contemplated hereby. -39- 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the Company which would constitute a Material Adverse Effect, and the Company shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the Company to conduct its business. 9.5 STOCKHOLDER'S RELEASE. The Stockholder shall have delivered to Pentacon (to the attention of Pentacon's in-house counsel) an instrument dated the Closing Date, which shall be effective only upon the occurrence of the Consummation Date and shall relate only to matters accruing on or prior to the Consummation Date, releasing the Company and Pentacon from (i) any and all claims of the Stockholder against the Company and Pentacon and (ii) obligations of the Company and Pentacon to the Stockholder, except for (w) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the Stockholder, (x) continuing obligations to Stockholder relating to their employment by the Company or Pentacon, (y) any obligations or liabilities arising under this Agreement or the transactions contemplated hereby and (z) real estate lease agreements between the Company and Stockholder, as amended which have been accepted or approved by Pentacon as set forth on Exhibit 9.5. In the event that the Consummation Date does not occur, then the release instrument referenced herein shall be void and of no further force or effect. 9.6 SATISFACTION. All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or incidental hereto and all other related legal matters shall have been approved by counsel to Pentacon. 9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.7, all existing agreements between the Company and the Stockholder (and entities controlled by the Stockholder) shall have been canceled effective prior to or as of the Consummation Date. 9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from Counsel to the Company and the Stockholder, dated the Closing Date, substantially in the form annexed hereto as Annex V. 9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which Pentacon deems it inadvisable to proceed with the transactions hereunder. -40- 9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to Pentacon a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the Company's state of incorporation and, unless waived by Pentacon, in each state in which the Company is authorized to do business, showing the Company is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the Company for all periods prior to the Closing have been filed and paid. 9.11 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall enter into an employment agreement substantially in the form of Annex VI hereto. 9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Consummation Date, Pentacon shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the organization, including without limitation: (a) the retirement or reacquisition, directly or indirectly, of all or part of the Pentacon Stock issued in connection with the transactions contemplated hereby; or (b) the entering into of financial arrangements for the benefit of the Stockholder. 10.2 PREPARATION AND FILING OF TAX RETURNS. (i) The Company, if possible, or otherwise the Stockholder shall file or cause to be filed all Tax Returns (federal, state, local or otherwise) of any Acquired Party for all taxable periods that end on or before the Consummation Date, and shall permit Pentacon to review all such Returns prior to such filings. Unless the Company is a C corporation, the Stockholder shall pay or cause to be paid all Tax liabilities (in excess of all amounts already paid with respect thereto or properly accrued or reserved with respect thereto on the Financial Statements) shown by such Returns to be due. -41- (ii) Pentacon shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Consummation Date. (iii) Each party hereto shall, and shall cause its Subsidiaries and Affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies, at the expense of the requesting party, of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the Company, Newco, Pentacon and each Stockholder shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free contribution under Section 351(a) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code. 10.3 DIRECTORS. The persons named in the Draft Registration Statement shall be appointed as directors and elected as officers of Pentacon, as and to the extent set forth in the Draft Registration Statement, promptly following the Consummation Date. 11. INDEMNIFICATION The Stockholder, Pentacon and Newco each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDER. Subject to the limitations set forth in Section 11.5, the Stockholder covenants and agrees that he will indemnify, defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date (provided that for purposes of Section 11.1(iii) below, the Expiration Date shall be the date on which the applicable statute of limitations expires), from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by Pentacon, Newco, the Company or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the Stockholder or the Company set forth herein or on the definitive, final schedules or certificates -42- delivered by them in connection herewith, (ii) any breach of any agreement on the part of the Stockholder or, prior to Closing, the Company under this Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to the Company or the Stockholder, and provided in writing to Pentacon or its counsel by the Company or the Stockholder for inclusion in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to the Company or the Stockholder required to be stated therein or necessary to make the statements therein not misleading, provided, however, that such indemnity shall not inure to the benefit of Pentacon, Newco, the Company or the Surviving Corporation to the extent that such untrue statement (or alleged untrue statement) was made in, or omission (or alleged omission) occurred in, any preliminary prospectus and the Stockholder provided, in writing, corrected information to Pentacon counsel and to Pentacon for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no Stockholder shall be liable for any indemnification obligation pursuant to this Section 11.1(iii) to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other Stockholder. Pentacon and Newco acknowledge and agree that other than the representations and warranties of Company or Stockholder specifically contained in this Agreement, there are no representations or warranties of Company or Stockholder, either express or implied, with respect to the transactions contemplated by this Agreement, the Company or its assets, liabilities and business. Pentacon, Newco and the Company further acknowledge and agree that, should the Closing occur, their sole and exclusive remedy with respect to any and all claims relating to this Agreement and the transactions contemplated in this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the Closing, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action they or any indemnified person may have against the Company or any Stockholder relating to this Agreement or the transactions contemplated hereby arising under or based upon any federal, state, local or foreign statute, law, rule, regulation or otherwise (and other than pursuant to the terms of this Agreement). 11.2 INDEMNIFICATION BY PENTACON. Subject to the limitations set forth in Section 11.5, Pentacon covenants and agrees that it will indemnify, defend, protect and hold harmless the Stockholder at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the Stockholder as a result of or arising from (i) any breach by Pentacon or Newco of their representations and warranties set forth herein or on the definitive, final schedules or certificates attached delivered by them pursuant hereto, (ii) any breach of any agreement on the part of Pentacon or Newco under this Agreement or any other agreement delivered pursuant hereto, (iii) any liabilities which the Stockholder may incur due to Pentacon's or Newco's -43- or the Surviving Corporation's failure to pay, perform or discharge when due any of the liabilities and obligations of the Company for which Pentacon, Newco or the Surviving Corporation is responsible pursuant to this Agreement (except to the extent that Pentacon or Newco has bona fide claims hereunder against the Stockholder by reason of such liabilities); or (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to Pentacon, Newco or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to Pentacon or Newco or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading. 11.3 THIRD PERSON CLAIMS. Subject to the limitations set forth in Section 11.5, promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has actual knowledge of any claim by a Person (including a governmental agency) not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, with respect to which the Indemnified Person would be entitled to receive indemnification pursuant to Section 11, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the reasonable expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense through appropriate proceedings, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires -44- to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person. Upon agreement as to such settlement between said Third Person and the Indemnifying Party, the Indemnifying Party shall, in exchange for a complete release from the Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in such settlement and the Indemnified Party shall, from that moment on, bear full responsibility for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case pursuant to Section 14.3 or otherwise, to seek injunctive or other equitable relief (except for rescission which shall not be available) for a breach or threatened breach of this Agreement. Any indemnity payment under this Section 11 shall, to the extent permitted by law and if not adverse to the Company or Pentacon, be treated as a recomputation of or an adjustment to the exchange consideration for tax purposes unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the indemnified party or any of its affiliate causes any such payment not to be treated as an adjustment to the exchange consideration for U.S. Federal Income Tax purposes. (b) Nothing in this Article 11 shall restrict the Stockholder from subrogation or seeking reimbursement from third parties other than the Company. 11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 or 11.2 shall not assert any claim for indemnification hereunder against the Stockholder after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against the Stockholder shall exceed the greater of 1% of the value of the total consideration (including stock and cash) received by the Stockholder from the Merger or $100,000 -45- (the "Indemnification Threshold"), and then only to the extent of the excess over the Indemnification Threshold. Stockholder shall not assert any claim for indemnification hereunder against Pentacon or Newco after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which Stockholder may have against Pentacon or Newco shall exceed the Indemnification Threshold, and then only to the extent of the excess over the Indemnification Threshold. The Indemnification Threshold and the other limitations contained in this Section 11.5 shall not be applicable to any breach of covenants made by the Stockholders in this Agreement which require an action or inaction by such Stockholders from and after the Closing Date (i.e., Article 10, Article 11, Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall be entitled to indemnification under this Section 11 if, and only to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. The pursuit by Pentacon, the Surviving Corporation, Newco or the Company, of any claim for indemnification hereunder against a Stockholder shall require a majority vote of the board of directors of Pentacon excluding for the purposes of such acts any directors who was previously a stockholder of the Company or is a representative of the stockholders of the Company as existing prior to the closing of the transactions contemplated at this Agreement. Notwithstanding any other term of this Agreement, no Stockholder shall be liable (in the aggregate from time to time taking into account all indemnification payments made hereunder) under this Section 11 (i) for any amount which is less than or equal to the Indemnification Threshold (and then only to the extent of the excess over the Indemnification Threshold) or (ii) for any amount which exceeds the amount of proceeds (including cash and stock) received by such Stockholder in connection with the Merger. Each Stockholder shall have the option of satisfying his indemnity obligation in cash and/or by returning shares of Pentacon Stock to Pentacon or any other Indemnified Party which shall, to the extent permitted by law and if not adverse to the Company or Pentacon, be considered as a recomputation of the purchase consideration. For purposes of calculating the value of the Pentacon Stock received by a Stockholder and satisfying any indemnity claim by returning or transferring Pentacon Stock, Pentacon Stock shall be valued at its initial public offering price as set forth in the Registration Statement. Notwithstanding any of the foregoing provisions of this Section 11 that might be read to the contrary, it is the agreement of the parties that the Indemnification Threshold be given full effect under all circumstances. Accordingly, insofar as any of the foregoing provisions of this Section 11 may hold harmless an Indemnified Party before the Indemnification Threshold has been met, then Pentacon and the Stockholder shall cooperate in good faith to establish an equitable procedure pursuant to which Pentacon reimburses or causes the reimbursement to the affected Stockholder(s) of all expenditures and payments by Stockholder that are intended to be absorbed and borne by any Indemnified Parties as a result of the prior application of the Indemnification Threshold or otherwise takes such action as may be reasonably necessary to give effect to the Indemnification Threshold. -46- 11.6 SPECIAL INDEMNITY ISSUES. (a) Stockholder covenants and agrees that he will pay, indemnify, defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving Corporation at all times, from and after the date of this Agreement, from the following: (i) any interest payable, or alleged to be payable, by any such indemnified parties to the Internal Revenue Service or any other federal, state or other governmental or regulatory authority for the period of October 1, 1996 through September 30, 1997 as a result of or in connection with the filing of amended and restated tax returns for 1995 and 1996 to reflect the addition of certain inventories which were not included in such Tax Returns, (ii) any penalties, assessments, charges or other punitive amounts imposed by the Internal Revenue Service upon any of the indemnified parties as a result of or in connection with the filing of amended and restated tax returns for 1995 and 1996 to reflect the addition of certain inventories which were not included in such financial reports, (iii) any Taxes or Tax liability incurred by any of the indemnified parties as a result of or in connection with any expenses of the Company being reclassified by the Internal Revenue Service or other federal, state or other governmental or regulatory authority as a dividend or constructive dividend to Don List or any of his affiliates for tax years 1995 and 1996, and (iv) any damages, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses of investigation) arising out of or in connection with the matters set forth in subsections (i) through (iii) above. The indemnification obligations contained in this Section 11.6 shall not be subject to the limitations contained in Section 11.5. 12. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Consummation Date solely: (i) by mutual consent of the boards of directors of Pentacon and the Company; (ii) by the Stockholder or the Company (acting through its board of directors), on the one hand, or by Pentacon (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by February 28, 1998, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Consummation Date; (iii) by the Stockholder or Company, on the one hand, or by Pentacon, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants or agreements contained herein, and the curing of such default shall not have been made on or before the Consummation Date or by the Stockholder or the Company, if the conditions set forth in Section 8 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as -47- applicable, or by Pentacon, if the conditions set forth in Section 9 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable; (iv) pursuant to Section 7.8 hereof; (v) pursuant to the termination provisions contained in Section 4 hereof; or (vi) pursuant to the other express terms of this Agreement. 12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section 7.8 hereof, the termination of this Agreement will in no way limit any obligation or liability of any party based on or arising from a breach or default by such party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement including, but not limited to, legal and audit costs and out of pocket expenses. 13. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The Stockholder will not, for a period of five (5) years following the Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) except as disclosed in Schedule 13.1, engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any fastener business or operation or related services business in direct competition with Pentacon or any of the subsidiaries thereof, within 100 miles of where the Company or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) except with the prior written consent of Pentacon, call upon any person who is, at that time, within the Territory, an employee of Pentacon or any subsidiary thereof for the purpose or with the intent of enticing such employee away from or out of the employ of Pentacon or any subsidiary thereof; (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Consummation Date, a customer of Pentacon or any subsidiary thereof, of the Company or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services that are in direct competition with Pentacon within the Territory; (iv) call upon any prospective acquisition candidate, on any Stockholder's own behalf or on behalf of any competitor in the fastener business, which candidate, to the actual -48- knowledge of such Stockholder after due inquiry, was called upon by Pentacon or any subsidiary thereof or for which, to the actual knowledge of such Stockholder after due inquiry, Pentacon or any subsidiary thereof made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the Company to any person, firm, partnership, corporation or business for any reason or purpose relating to the fastener business except to the extent that the Company has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any Stockholder from acquiring as a passive investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to Pentacon as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to Pentacon for which it would have no other adequate remedy, each Stockholder agrees that the foregoing covenant may be enforced by Pentacon in the event of breach by such Stockholder, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the Stockholder in light of the activities and business of Pentacon and the subsidiaries thereof on the date of the execution of this Agreement and the current plans of Pentacon; but it is also the intent of Pentacon and the Stockholder that such covenants be construed and enforced in accordance with the changing activities; business and locations of Pentacon and its subsidiaries throughout the term of this covenant. During the term of this covenant, if Pentacon or one of its subsidiaries engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business it is currently conducting in the locations currently established therefor, then the Stockholder will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new activities or business within 100 miles of its then-established operating location(s) through the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. -49- 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any Stockholder against Pentacon or any subsidiary thereof, whether predicated on this Agreement or otherwise (except for a claim or cause of action based upon Pentacon's failure to pay or otherwise tender any of the consideration due to the Stockholder hereunder), shall not constitute a defense to the enforcement by Pentacon of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each Stockholder made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such Stockholder is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The Company and the Stockholder hereby agree that this covenant is a material and substantial part of this transaction. 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDER. The Stockholder recognizes and acknowledges that he has in the past, currently has, and in the future may possibly have, access to certain confidential information of the Company, the Other Founding Companies, and/or Pentacon, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's, the Other Founding Companies' and/or Pentacon's respective businesses. The Stockholder agrees that he will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of Pentacon, (b) following the Closing, such information may be disclosed by the Stockholder as is required in the course of performing his duties for Pentacon or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the Stockholder, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the Stockholder shall, if possible, give prior written notice thereof to Pentacon and provide Pentacon with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the Stockholder of the provisions of this Section, Pentacon shall be entitled to an injunction restraining such Stockholder from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Pentacon from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, Stockholder shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the Company. -50- 14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that they had in the past and currently have access to certain confidential information of the Company, including, but not limited to, customer and prospect lists, financial information, operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's business. Pentacon and Newco agree that, prior to the Consummation Date, or if the transactions contemplated by this Agreement are not consummated, they will not, appropriate or make use of any such information, whether for its own benefit or the benefit of any other person or entity, for any purpose whatsoever (except pending the Consummation Date, effecting the transactions contemplated hereby) disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the Company, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.2, (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of Pentacon or Newco, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), Pentacon and Newco shall, if possible, give prior written notice thereof to the Company and the Stockholder and provide the Company and the Stockholder with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, and (d) to the public to the extent necessary or advisable in connection with the filing of the Registration Statement and the IPO and the securities laws applicable thereto and to the operation of Pentacon as a publicly held entity after the IPO. In the event of a breach or threatened breach by Pentacon or Newco of the provisions of this Section, the Company and the Stockholder shall be entitled to an injunction restraining Pentacon and Newco from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the Company and the Stockholder from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. The foregoing shall not be construed as restricting the last sentence of Section 5 of the Founders Employment Agreement to be entered into between the Stockholder and the Company effective as of the IPO. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach or threatened breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders or other appropriate equitable relief, without posting any bond or other security or having to prove irreparable harm or injury. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Consummation Date, or without limitation if the transactions contemplated hereby are not consummated. -51- 15. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts or partnerships for the benefit of charities, the Stockholder, family members, the trustees or partners of which so agree), for a period of one year from the Closing, except pursuant to Section 17 hereof, none of the Stockholder shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any shares of Pentacon Stock received by the Stockholder in the Merger. The certificates evidencing the Pentacon Stock delivered to the Stockholder pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as Pentacon may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 16. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 COMPLIANCE WITH LAW. The Stockholder acknowledge that the shares of Pentacon Stock to be delivered to the Stockholder pursuant to this Agreement have not been and will not be registered under the 1933 Act (except as provided in Section 17 hereof) and therefore may not be resold without compliance with the 1933 Act. The Pentacon Stock to be acquired by such Stockholder pursuant to this Agreement is being acquired solely for his own respective account, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. The Stockholder covenants, warrants and represents that none of the shares of Pentacon Stock issued to such Stockholder will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the Pentacon Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. -52- 16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholder is able to bear the economic risk of an investment in the Pentacon Stock to be acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the Pentacon Stock. The Stockholder has had an adequate opportunity to ask questions and receive answers from the officers of Pentacon concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of Pentacon, the plans for the operations of the business of Pentacon, the business, operations and financial condition of the Founding Companies other than the Company, and any plans for additional acquisitions and the like. The Stockholder has asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 17. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever Pentacon proposes to register any Pentacon Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf or other registration of shares to be used as consideration for acquisitions of additional businesses by Pentacon and (ii) registrations relating to employee benefit plans, Pentacon shall give each of the Stockholder prompt written notice of its intent to do so. Upon the written request of any of the Stockholder given within 30 days after receipt of such notice, Pentacon shall cause to be included in such registration all of the Pentacon Stock issued to the Stockholder pursuant to this Agreement (including any stock issued as (or issuable upon the conversion or exchange of any convertible security, warrant, right or other security which is issued by Pentacon as) a dividend or other distribution with respect to, or in exchange for, or in replacement of such Pentacon Stock) which any such Stockholder requests, provided that Pentacon shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares would, in the written opinion of tax counsel to Pentacon or its independent auditors, reasonably be likely to jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free organization under Section 351 of the Code. In addition, if Pentacon is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than Pentacon is greater than the number of such shares which can be offered without adversely affecting the offering, Pentacon may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter, provided, that, for each such offering made by Pentacon after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than Pentacon, the Stockholder and the Stockholder of the Other Founding Companies (collectively, the Stockholder and the Stockholder of the other Founding Companies being referred to herein as the "Founding Stockholder"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholder. -53- 17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as expeditiously as possible: (i) Prepare and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements or term sheets thereto, Pentacon will furnish a representative of the Stockholder with copies of all such documents proposed to be filed) as promptly as practical; (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days; (iii) Furnish to each Stockholder who so requests such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus and any term sheet associated therewith), and such other documents as such Stockholder may reasonably request in order to facilitate the disposition of the relevant shares; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Stockholder, and to keep such registration or qualification effective during the period such registration statement is to be kept effective, provided that Pentacon shall not be required to become subject to taxation, to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) Cause all such shares of Pentacon Stock to be listed or included on any securities exchanges or trading systems on which similar securities issued by Pentacon are then listed or included; (vi) Notify each Stockholder at any time when a prospectus relating thereto is required to be delivered under the 1933 Act within the period that Pentacon is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement, together with any associated term sheet, contains an untrue statement of a material fact or omits any fact necessary to make the statement therein not misleading, and, at the request of such Stockholder, Pentacon will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the covered shares, such prospectus will not contain an untrue statement of material fact or omit to state any fact necessary to make the statements therein not misleading. -54- All expenses incurred in connection with the registration under this Article 17 (including all registration, filing, qualification, legal, printer and accounting fees, but excluding underwriting commissions and discounts), shall be borne by Pentacon. 17.3 INDEMNIFICATION. (a) In connection with any registration hereunder, Pentacon shall indemnify, to the extent permitted by law, each Stockholder against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or associated term sheet or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same are caused by or contained in or omitted from any information furnished in writing to Pentacon by such indemnified party expressly for use therein or by any indemnified parties' failure to deliver a copy of the registration statement or prospectus or any amendment or supplements thereto after Pentacon has furnished such Indemnified Party with a sufficient number of copies of the same. (b) In connection with any registration hereunder, each Stockholder shall furnish to Pentacon in writing such information as is reasonably requested by Pentacon for use in any such registration statement or prospectus and will indemnify, to the extent permitted by law, Pentacon, its directors and officers and each person who controls Pentacon (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement or material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in information so furnished in writing by such Stockholder specifically for use in preparing the registration statement. Notwithstanding the foregoing, the liability of a Stockholder under this Section 17.3 shall be limited to an amount equal to the net proceeds actually received by such Stockholder from the sale of the relevant shares covered by the registration statement. (c) Any person entitled to indemnification under this Section will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified parties' reasonable judgment, a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Any failure to give prompt notice shall deprive a party of its right to indemnification hereunder only to the extent that such failure shall have adversely affected the indemnifying party. If the defense of any claim is assumed, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled or elects not to assume the defense of a claim, will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the -55- reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant to Section 17.1 covering an underwritten registered offering, Pentacon and each participating holder agree to enter into a written agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between such managing underwriters and companies of Pentacon's size and investment stature, including indemnification. 17.5 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC that may permit the sale of Pentacon stock to the public without registration, Pentacon agrees to use its commercially reasonable efforts to: (i) make and keep public information regarding Pentacon available as those terms are understood and defined in Rule 144 under the 1933 Act for a period of four years beginning 90 days following the effective date of the Registration Statement; (ii) file with the SEC in a timely manner all reports and other documents required of Pentacon under the 1933 Act and the 1934 Act at any time after it has become subject to such reporting requirements; and (iii) so long as a Stockholder owns any restricted Pentacon Common Stock, furnish to each Stockholder forthwith upon written request a written statement by Pentacon as to its compliance with the reporting requirements of Rule 144 (at any time from and after 90 days following the effective date of the Registration Statement, and of the 1933 Act and the 1934 Act (any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Pentacon, and such other reports and documents so filed as a Stockholder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Stockholder to sell any such shares without registration. 18. GENERAL 18.1 COOPERATION. The Company, Stockholder, Pentacon and Newco shall each deliver or cause to be delivered to the other on the Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The Company will cooperate and use its reasonable efforts to have the present officers, directors and employees of the Company cooperate with Pentacon on and after the Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Consummation Date. -56- 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of Pentacon, and the heirs and legal representatives of the Stockholder. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents and letters delivered pursuant hereto constitute the entire agreement and understanding among the Stockholder, the Company, Newco and Pentacon and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only (i) pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a written instrument executed by the Stockholder, the Company, Newco and Pentacon, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby, provided that the Company shall make a good faith effort to cross reference disclosure, as necessary or advisable, between related Schedules, and provided further that the failure to do so will not affect the validity of such disclosure. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, Pentacon will pay the fees, expenses and disbursements of Pentacon and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto, including all costs and expenses incurred in the performance and compliance with all conditions to be performed by Pentacon under this Agreement, including the fees and expenses of Ernst & Young, L.L.P., Andrews & Kurth L.L.P., a $50,000 payment to McGladdrey & Pullen and any other person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures II, L.C., and the costs of preparing the Registration Statement. Except as otherwise agreed in writing by Pentacon, each Stockholder shall pay their respective fees, expenses and disbursements of counsel and other professionals in connection with this transaction and shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware. Each Stockholder shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each -57- Stockholder acknowledges that he, and not the Company or Pentacon, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof. The Stockholder acknowledge that the risks of the transactions contemplated hereby include tax risks, with respect to which the Stockholder are relying solely on the opinion contemplated by Section 8.12 hereof. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party, and if hand delivered to an individual obtaining a receipt. (a) If to Pentacon, or Newco, addressed to them at: Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 with copies to: Bruce M. Taten, Esquire Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 and Christopher S. Collins, Esquire Andrews & Kurth, L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 (b) If to the Stockholder, addressed to them at their addresses set forth on Annex II, with copies to: Robert Rosenstein 27450 Ynez Road, Suite 222 Temecula, California 92591 (c) If to the Company, addressed to it at: Don List, President Alatec Products, Inc. 21123 Nordhoff Street -58- Chatsworth, California 91311 or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the applicable Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4, no right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. -59- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PENTACON, INC. By: /s/ MARK E. BALDWIN Mark E. Baldwin Chief Executive Officer ALATEC PRODUCTS ACQUISITION COMPANY By: /s/ MARK E. BALDWIN Name: Mark E. Baldwin Title: President ALATEC PRODUCTS, INC. By: /s/ DONALD LIST Name: Donald List Title: President /s/ DONALD LIST DONALD LIST, INDIVIDUALLY STOCKHOLDER -60- ANNEX I (Alatec Products, Inc.) CONSIDERATION TO BE PAID TO THE STOCKHOLDERS Stockholder Shares of Common Stock of Merger Cash PENTACON, INC. - ----------------------- -------------------------- ----------------- Donald List 2,969,493 $12,665,581 -------------------------- ----------------- 2,969,493 $12,665,581 ========================== ================= MINIMUM VALUE: $ 43,043,484 ANNEX II Alatec Products, Inc. Stock Ownership Don List 93,650 shares For address of Stockholder, see attached hereto. EX-10.2 3 EXHIBIT 10.2 AGREEMENT AND PLAN OF ORGANIZATION dated as of the 1st day of December 1997 by and among PENTACON, INC. AXS SOLUTIONS ACQUISITION COMPANY (a subsidiary of Pentacon, Inc.) AXS SOLUTIONS, INC. and the STOCKHOLDERS named herein TABLE OF CONTENTS Page RECITALS ......................................................................1 1. THE MERGER............................................................5 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER....................5 1.2 EFFECTIVE TIME OF THE MERGER.................................5 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION...........................6 1.4 EFFECT OF MERGER.............................................6 2. CONVERSION OF STOCK...................................................7 2.1 MANNER OF CONVERSION.........................................7 3. DELIVERY OF MERGER CONSIDERATION......................................8 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.................8 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED....................8 4. CLOSING...............................................................8 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS..................................................9 5.1 DUE ORGANIZATION.............................................9 5.2 AUTHORIZATION...............................................10 5.3 CAPITAL STOCK OF THE COMPANY................................10 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING......10 5.5 NO BONUS SHARES.............................................10 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES...................10 5.7 PREDECESSOR STATUS; ETC.....................................11 5.8 SPIN-OFF BY THE COMPANY.....................................11 5.9 FINANCIAL STATEMENTS........................................11 5.10 LIABILITIES AND OBLIGATIONS.................................11 5.11 ACCOUNTS AND NOTES RECEIVABLE...............................12 5.12 PERMITS AND INTANGIBLES.....................................12 5.13 ENVIRONMENTAL MATTERS.......................................13 5.14 PERSONAL PROPERTY...........................................14 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS...15 5.16 REAL PROPERTY...............................................15 5.17 INSURANCE...................................................16 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..........16 -i- 5.19 EMPLOYEE PLANS..............................................17 5.20 COMPLIANCE WITH ERISA.......................................18 5.21 CONFORMITY WITH LAW; LITIGATION.............................19 5.22 TAXES.......................................................19 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.....................20 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..............21 5.25 ABSENCE OF CHANGES..........................................21 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY........................22 5.27 VALIDITY OF OBLIGATIONS.....................................23 5.28 RELATIONS WITH GOVERNMENTS..................................23 5.29 DISCLOSURE..................................................23 5.30 PROHIBITED ACTIVITIES.......................................24 5.31 NO WARRANTIES OR INSURANCE..................................24 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS................................................24 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...............24 5.34 PREEMPTIVE RIGHTS...........................................24 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK...................24 6. REPRESENTATIONS OF PENTACON AND NEWCO................................25 6.1 DUE ORGANIZATION............................................25 6.2 AUTHORIZATION...............................................25 6.3 CAPITAL STOCK OF PENTACON AND NEWCO.........................25 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING......26 6.5 SUBSIDIARIES................................................26 6.6 FINANCIAL STATEMENTS........................................26 6.7 LIABILITIES AND OBLIGATIONS.................................26 6.8 CONFORMITY WITH LAW; LITIGATION.............................26 6.9 NO VIOLATIONS...............................................27 6.10 VALIDITY OF OBLIGATIONS.....................................28 6.11 PENTACON STOCK..............................................28 6.12 NO SIDE AGREEMENTS..........................................28 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS................28 6.14 DISCLOSURE..................................................28 7. COVENANTS PRIOR TO CLOSING...........................................29 7.1 ACCESS AND COOPERATION; DUE DILIGENCE.......................29 7.2 CONDUCT OF BUSINESS PENDING CLOSING.........................29 7.3 PROHIBITED ACTIVITIES.......................................30 7.4 NO SHOP.....................................................32 7.5 NOTICE TO BARGAINING AGENTS.................................32 7.6 AGREEMENTS..................................................32 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.............................................32 7.8 AMENDMENT OF SCHEDULES......................................33 -ii- 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT........34 7.10 FINAL FINANCIAL STATEMENTS..................................34 7.11 FURTHER ASSURANCES..........................................35 7.12 AUTHORIZED CAPITAL..........................................35 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")......35 7.14 PRE-CLOSING NOTIFICATIONS...................................35 7.15 PAYMENT OF INDEBTEDNESS.....................................36 7.16 MINIMUM VALUE...............................................36 7.17 DIRECTORS. ................................................36 7.18 TRANSACTION REPORTING.......................................36 7.19 PERMITS.....................................................36 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY..........................................................36 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS..37 8.2 SATISFACTION................................................37 8.3 NO LITIGATION...............................................37 8.4 OPINION OF COUNSEL..........................................37 8.5 REGISTRATION STATEMENT......................................37 8.6 CONSENTS AND APPROVALS......................................37 8.7 GOOD STANDING CERTIFICATES..................................38 8.8 NO MATERIAL ADVERSE CHANGE..................................38 8.9 CLOSING OF IPO..............................................38 8.10 SECRETARY'S CERTIFICATE.....................................38 8.11 EMPLOYMENT AGREEMENTS.......................................38 8.12 TAX MATTERS.................................................38 8.13 EXCHANGE LISTING............................................38 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO............................................................38 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.39 9.2 NO LITIGATION...............................................39 9.3 SECRETARY'S CERTIFICATE.....................................39 9.4 NO MATERIAL ADVERSE EFFECT..................................39 9.5 STOCKHOLDERS' RELEASE.......................................39 9.6 SATISFACTION................................................40 9.7 TERMINATION OF RELATED PARTY AGREEMENTS.....................40 9.8 OPINION OF COUNSEL..........................................40 9.9 CONSENTS AND APPROVALS......................................40 9.10 GOOD STANDING CERTIFICATES..................................40 9.11 REGISTRATION STATEMENT......................................40 9.12 EMPLOYMENT AGREEMENTS.......................................40 -iii- 9.13 CLOSING OF IPO..............................................40 9.14 FIRPTA CERTIFICATE..........................................41 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............................................................41 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT................41 10.2 PREPARATION AND FILING OF TAX RETURNS.......................41 10.3 DIRECTORS...................................................42 11. INDEMNIFICATION......................................................42 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.................42 11.2 INDEMNIFICATION BY PENTACON.................................43 11.3 THIRD PERSON CLAIMS.........................................44 11.4 EXCLUSIVE REMEDY............................................45 11.5 LIMITATIONS ON INDEMNIFICATION..............................45 12. TERMINATION OF AGREEMENT.............................................46 12.1 TERMINATION.................................................46 12.2 LIABILITIES IN EVENT OF TERMINATION.........................47 13. NONCOMPETITION.......................................................47 13.1 PROHIBITED ACTIVITIES.......................................47 13.2 DAMAGES.....................................................48 13.3 REASONABLE RESTRAINT........................................48 13.4 SEVERABILITY; REFORMATION...................................49 13.5 INDEPENDENT COVENANT........................................49 13.6 MATERIALITY.................................................49 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION............................49 14.1 STOCKHOLDERS................................................49 14.2 PENTACON AND NEWCO..........................................50 14.3 DAMAGES.....................................................50 14.4 SURVIVAL....................................................51 15. TRANSFER RESTRICTIONS................................................51 15.1 TRANSFER RESTRICTIONS.......................................51 16. FEDERAL SECURITIES ACT REPRESENTATIONS...............................51 16.1 COMPLIANCE WITH LAW.........................................51 16.2 ECONOMIC RISK; SOPHISTICATION...............................52 17. REGISTRATION RIGHTS..................................................52 17.1 PIGGYBACK REGISTRATION RIGHTS...............................52 -iv- 17.2 REGISTRATION PROCEDURES.....................................53 17.3 INDEMNIFICATION.............................................54 17.4 UNDERWRITING AGREEMENT......................................55 17.5 RULE 144 REPORTING..........................................55 18. GENERAL..............................................................55 18.1 COOPERATION.................................................55 18.2 SUCCESSORS AND ASSIGNS......................................56 18.3 ENTIRE AGREEMENT............................................56 18.4 COUNTERPARTS................................................56 18.5 BROKERS AND AGENTS..........................................56 18.6 EXPENSES....................................................56 18.7 NOTICES.....................................................57 18.8 GOVERNING LAW...............................................58 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES..................58 18.10 EXERCISE OF RIGHTS AND REMEDIES.............................58 18.11 TIME........................................................58 18.12 REFORMATION AND SEVERABILITY................................58 18.13 REMEDIES CUMULATIVE.........................................58 18.14 CAPTIONS....................................................58 -v- ANNEXES Annex I - Consideration to Be Paid to Stockholders Annex II - Stockholders and Stock Ownership of the Company Annex III - Certificate of Incorporation and By-Laws of Pentacon and Newco Annex IV - Form of Opinion of Counsel to Pentacon and Newco Annex V - Form of Opinion of Counsel to Company and Stockholders Annex VI - Form of Founder Employment Agreement -vi- SCHEDULES 5.1 Due Organization 5.2 Authorization 5.3 Capital Stock of the Company 5.4 Transactions in Capital Stock, Organization Accounting 5.5 No Bonus Shares 5.6 Subsidiaries 5.7 Predecessor Status; etc 5.8 Spin-off by the Company 5.9 Financial Statements 5.10 Liabilities and Obligations 5.11 Accounts and Notes Receivable 5.12 Permits and Intangibles 5.13 Environmental Matters 5.14 Personal Property 5.15 Significant Customers; Material Contracts and Commitments 5.16 Real Property 5.17 Insurance 5.18 Compensation; Employment Agreements; Labor Matters 5.19 Employee Plans 5.20 Compliance with ERISA 5.21 Conformity with Law; Litigation 5.22 Taxes 5.23 No Violations, Consents, etc. 5.24 Government Contracts 5.25 Absence of Changes 5.26 Deposit Accounts; Powers of Attorney 5.30 Prohibited Activities 5.31 No Warranties or Insurance 5.32 Related Party Transactions 6.3 Capital Stock of Pentacon and Newco 6.4 Options, Warrants and Rights 6.8 Litigation 6.9 No Violations 6.12 Side Agreements 7.2 Conduct of Business Pending Closing 7.3 Prohibited Activities 7.5 Notice to Bargaining Agents 7.6 Termination Agreements 7.15 Obligations to be Paid At Closing 9.7 Continuing Related Party Agreements 9.12 Employment Agreements 13.1 Prohibited Activities 18.5 Brokers and Agents -vii- AGREEMENT AND PLAN OF ORGANIZATION THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of the 1st day of December, 1997, by and among PENTACON, INC., a Delaware corporation ("Pentacon"), AXS SOLUTIONS ACQUISITION COMPANY, a Delaware corporation ("Newco"), AXS SOLUTIONS, INC., a Delaware corporation (the "Company"), and JACK FATICA, JEFFREY P. FATICA, ROBERT HOYT, NATALIE L. RANUS, JACK C. FATICA TRUST, JUSTIN P. FATICA TRUST, JASON P. FATICA TRUST, RYAN A. FATICA TRUST, and OAKRIDGE TRUST (the "Stockholders"), who are all the stockholders of the Company, who herein agree as follows: RECITALS WHEREAS, Newco is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on November 26, 1997, solely for the purpose of completing the transactions set forth herein, and is a wholly owned subsidiary of Pentacon, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective boards of directors of Newco and the Company (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that Newco merge with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and the State of Incorporation (as hereinafter defined); WHEREAS, Pentacon is entering into other separate agreements substantially similar to this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Organization," with each of the Other Founding Companies (as defined herein) and their respective stockholders in order to acquire additional fasteners companies; WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon Plan of Organization;" WHEREAS, the Stockholders and the boards of directors and the stockholders of Pentacon, each of the Other Founding Companies and each of the subsidiaries of Pentacon that are parties to the Other Agreements have approved and adopted the Pentacon Plan of Organization as an integrated plan pursuant to which the Stockholders and the stockholders of each of the other Founding Companies will transfer the capital stock of each of the Founding Companies to Pentacon and the Stockholders of each of the other Founding Companies will acquire the stock of Pentacon (but not cash or other property) as a tax-free transfer of property under Section 351 of the Code; WHEREAS, the Board of Directors of the Company has approved this Agreement as part of the Pentacon Plan of Organization in order to transfer the capital stock of the Company to Pentacon; -1- WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 ACT" means the Securities Act of 1933, as amended. "1934 ACT" means the Securities Exchange Act of 1934, as amended. "ACQUIRED PARTY" means the Company, any subsidiary and any member of a Relevant Group. "ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware companies wholly-owned by Pentacon prior to the Consummation Date. "AFFILIATES" shall mean with respect to any person or entity, any other person or entity that directly or indirectly, controls, is controlled, or is under common control with such person or entity. For purposes hereof, control shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger with respect to the Merger in such forms as may be required by the laws of the State of Delaware and the State of Incorporation. "BALANCE SHEET DATE" has means September 30, 1997. "CHARTER DOCUMENTS" has the meaning set forth in Section 5.1. "CLOSING" has the meaning set forth in Section 4. "CLOSING DATE" has the meaning set forth in Section 4. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY STOCK" has the meaning set forth in Section 2.1. "CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital of this Agreement. "CONSUMMATION DATE" has the meaning set forth in Section 4. "DELAWARE GCL" has the meaning set forth in Section 1.4. -2- "DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of the Registration Statement, and any corrections thereto and supplemental information delivered by Pentacon to the Company for delivery to the Stockholders prior to the time this Agreement is delivered by the Company and the Stockholders to Pentacon. "EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger becomes effective, which shall occur on the Consummation Date. "ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13. "ERISA" has the meaning set forth in Section 5.19. "EXPIRATION DATE" has the meaning set forth in Section 5(A). "FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "FOUNDING COMPANIES" means: Alatec Products, Inc., a California corporation; AXS Solutions, Inc., a Delaware corporation; Capitol Bolt & Supply, Inc., a Texas corporation; Maumee Industries, Inc., an Indiana corporation; and Sales Systems, Limited, a Pennsylvania corporation. "HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13. "HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c). "INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "IPO" means the initial public offering of Pentacon Stock pursuant to the Registration Statement described herein. "LICENSES" has the meaning set forth in Section 5.12. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise), of the subject entity and its subsidiaries taken as a whole. -3- "MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a). "MERGER" means the merger of Newco with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and the laws of the State of Incorporation. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.0l per share, of Newco. "OTHER AGREEMENTS" has the meaning set forth in the third recital hereof. "OTHER FOUNDING COMPANIES" means all of the Founding Companies other than the Company. "PBGC" has the meaning set forth in Section 5.19. "PENTACON" has the meaning set forth in the first paragraph of this Agreement. "PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1 "PENTACON STOCK" means the common stock, par value $.01 per share, of Pentacon. "PERSON" means an individual, partnership, joint venture, corporation, bank, trust, unincorporated organization or other entity. "PRICING" means the date of determination by Pentacon and the Underwriters of the public offering price of the shares of Pentacon Stock in the IPO; the parties hereto contemplate that the Pricing shall take place on the Closing Date. "PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30. "QUALIFIED PLANS" has the meaning set forth in Section 5.20. "REGISTRATION STATEMENT" means that certain registration statement on Form S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued in the IPO and all amendments thereto. "RELEVANT GROUP" means the Company and any affiliated, combined, consolidated, unitary or similar group of which the Company is or was a member. -4- "RETURNS" means any returns, reports or statements (including any information returns) required to be filed for purposes of reporting, computing or otherwise required in connection with a particular Tax. "SCHEDULE" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STATE OF INCORPORATION" means the State of Delaware. "STOCKHOLDERS" has the meaning set forth in the first paragraph of this Agreement. "SUBSIDIARIES" means with respect to a person or entity, any corporation or other entity in which such person or entity owns a 5% or greater ownership interest. "SURVIVING CORPORATION" has the meaning set forth in Section 1.2. "TAX" OR "TAXES" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, withholding, employment, excise, property, deed, stamp, alternative or add on minimum, or other taxes, assessments, duties, fees, levies or other governmental charges, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "UNDERWRITERS" means the prospective underwriters identified in the Draft Registration Statement. "YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(i). 1. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause the Articles of Merger to be signed, verified and delivered to Pentacon to be held for filing with the Secretary of State of the State of Delaware and the Secretary of State (or other appropriate authority) of the State of Incorporation on or effective as of the Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, Newco shall be merged with and into the Company in accordance with the Articles of Merger and the separate existence of Newco shall cease. The Company shall be the surviving party in the Merger and the Company is sometimes hereinafter referred to as the "Surviving Corporation". As a result of the Merger, the outstanding shares of capital stock of Newco and the Company shall be converted or canceled in the manner provided in Section 2. -5- 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the Company then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of Newco then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended (and such By-laws shall be amended, if necessary, to comply with applicable state law); (iii) the Board of Directors of the Surviving Corporation shall consist of the persons who are on the Board of Directors of the Company immediately prior to the Effective Time of the Merger, provided that Bruce Taten shall become an additional director of the Surviving Corporation effective as of the Effective Time of the Merger, and the number of directors constituting the entire Board of Directors of the Company shall be increased, if necessary, to accommodate the addition of such additional director; the Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Incorporation and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the Company immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Brian Fontana shall become an additional Vice President and Bruce Taten will become the Secretary of the Surviving Corporation, such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until their respective successors are duly elected and qualified. 1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of the State of Incorporation. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the Company shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of Newco shall be merged with and into the Company, and the Company, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of Newco shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the Company or Newco shall be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and -6- franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Company and Newco; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the State of Incorporation vested in the Company or Newco, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the Company and Newco and any claim existing, or action or proceeding pending, by or against the Company or Newco may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the Company or Newco shall be impaired by the Merger, and all debts, liabilities and duties of the Company and Newco shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. 2. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the Company ("Company Stock") into shares of Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of Company Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) the right to receive the number of shares of Pentacon Stock set forth on Annex I hereto with respect to such holder and (2) the right to receive the amount of cash set forth on Annex I hereto with respect to such holder; (ii) all shares of Company Stock that are held by the Company as treasury stock or which are otherwise issued but not outstanding shall be canceled and retired and shall cease to exist and no shares of Pentacon Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of Newco Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of Pentacon, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All Pentacon Stock received by the Stockholders pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as -7- all the other shares of outstanding Pentacon Stock by reason of the provisions of the Certificate of Incorporation of Pentacon or as otherwise provided by the Delaware GCL. All Pentacon Stock received by the Stockholders shall be issued and delivered to the Stockholders free and clear of any liens, claims or encumbrances of any kind or nature. All voting rights of such Pentacon Stock received by the Stockholders shall be fully exercisable by the Stockholders and the Stockholders shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, Pentacon shall have no class of capital stock issued and outstanding other than the Pentacon Stock. 3. DELIVERY OF MERGER CONSIDERATION 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date the Stockholders, who are the holders of all of the outstanding capital stock of the Company, shall, upon surrender of their certificates, receive the respective number of shares of Pentacon Stock and the amount of cash described on Annex I hereto, said cash to be payable by certified check, or if hereafter agreed by the Stockholder and Pentacon, by wire transfer. 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders shall deliver to Pentacon at the Closing the certificates representing Company Stock, duly endorsed in blank by the Stockholders, or accompanied by blank stock powers, and with all necessary transfer tax and other revenue stamps, acquired at the Stockholders' expense, affixed and canceled. The Stockholders agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such Company Stock or with respect to the stock powers accompanying any Company Stock. 4. CLOSING At or prior to the Pricing, the parties shall take all actions reasonably necessary to prepare to (i) effect the Merger (including the execution of the Articles of Merger which shall be placed in escrow with Pentacon for filing with the appropriate authorities effective on the Consummation Date, subject, however, to satisfaction or waiver of all conditions precedent) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) (or wire transfers) referred to in Section 3 hereof, each of which actions shall only be taken upon the Consummation Date as herein provided. In the event that there is no Consummation Date and this Agreement automatically terminates as provided in this Section 4 the Articles of Merger shall not be filed and shall be promptly returned to the Stockholders. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between the Stockholders and Pentacon. On the Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities so that they shall be, as early as practicable on the Consummation Date, effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check or checks (or wire -8- transfers) in an amount equal to the cash portion of the consideration which the Stockholders shall be entitled to receive pursuant to Section 3 hereof shall occur and be completed and (z) the closing with respect to the IPO shall occur and be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date." During the period from the Closing Date to the Consummation Date, this Agreement shall be terminated by the parties only if the underwriting agreement in respect of the IPO is terminated pursuant to the terms of such underwriting agreement. This Agreement shall also in any event automatically terminate if the Consummation Date has not occurred within 15 business days following the Closing Date. Time is of the essence. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS. Each of the Stockholders, jointly and severally, and the Company represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that the warranties and representations set forth in Sections 5.13 and 5.22 hereof shall survive until such time as the applicable statute of limitations period has run or for five (5) years if there is no applicable statute of limitations, which shall be deemed to be the Expiration Date for Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall mean and refer to the Company and all of its Subsidiaries, if any. 5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the State of Incorporation, and has the requisite power and authority to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which failure to so qualify would reasonably be expected to have a Material Adverse Effect on the Company. Schedule 5.1 sets forth a list of all jurisdictions in which the Company is authorized or qualified to do business. True, complete and correct copies of (i) the Certificate of Incorporation and By-laws, each as amended, of the Company (the "Charter Documents"), and (ii) the stock records of the Company (including, without limitation, a copy of the Company's stock ledger), are all attached to Schedule 5.1. The Company has delivered complete and correct copies of all minutes of meetings, written consents and other written evidence, if any, of deliberations of or actions taken by the Company's Board of Directors, any Committees of the Board of Directors and stockholders during the last five years. -9- 5.2 AUTHORIZATION. (i) The officers or other representatives of the Company executing this Agreement have the authority to enter into and bind the Company to the terms of this Agreement and (ii) the Company has the full legal right, power and authority to enter into this Agreement and the Merger. The directors and Stockholders have approved this Agreement and the transactions contemplated hereby in all respects, and copies of all such resolutions, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, are attached hereto as Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company is as set forth on Schedule 5.3. All of the issued and outstanding shares of the capital stock of the Company are owned by the Stockholders in the amounts set forth in Annex II. Each Stockholder, severally, represents and warrants that except as set forth on Schedule 5.3, the shares of capital stock of the Company owned by such Stockholder are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the Stockholders and further, such shares were offered, issued, sold and delivered by the Company in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of any preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the Company has not acquired or redeemed any Company Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the Company to issue any of its authorized but unissued capital stock; (ii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the Company nor the relative ownership of shares among any of its respective Stockholders has been altered or changed in contemplation of the Merger and/or the Pentacon Plan of Organization. Except as set forth in Schedule 5.4, there are no voting trusts, proxies or other agreements or understandings to which the Company or any of the Stockholders is a party or is bound with respect to the voting of any shares of capital stock of the Company. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of Company Stock was issued pursuant to awards, grants or bonuses in contemplation of the Merger or the Pentacon Plan of Organization. 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule 5.6, the Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business -10- entity nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all predecessor companies of the Company, including the names of any entities acquired by the Company (by stock purchase, merger or otherwise) or owned by the Company or from whom the Company previously acquired material assets, in any case, from the earliest date upon which any Stockholder acquired his or her stock in any Company. Except as disclosed on Schedule 5.7, the Company has not been, within such period of time, a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the Company or any other person or entity that is an Affiliate of the Company since January 1, 1995. 5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following financial statements are attached hereto as Schedule 5.9: (i) the balance sheets of the Company as of December 31, 1995 and 1996 and the related statements of operations, stockholder's equity and cash flows for the two-year period ended December 31, 1996, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Year-end Financial Statements"); and (ii) the balance sheet of the Company as of September 30, 1997, (the "Interim Balance Sheet") and the related statements of operations, stockholder's equity and cash flows for the nine-month periods ended September 30, 1997, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Interim Financial Statements"). The Year-end Financial Statements and the Interim Financial Statements are collectively called the "Financial Statements". 5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate list as of the Balance Sheet Date of (i) all liabilities of the Company which are not reflected on the Interim Balance Sheet of the Company at the Balance Sheet Date or otherwise reflected in the Interim Financial Statements at the Balance Sheet Date except for those liabilities not required to be reflected or disclosed under generally accepted accounting principles or F.A.S.B. 5 and which were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other security agreements to which the Company is a party or by which its properties may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet Date, the Company has not incurred any liabilities or obligations of any kind, character or description, whether accrued, absolute, secured or unsecured, contingent or otherwise, -11- other than liabilities incurred in the ordinary course of business and consistent with past practices. The Company has also delivered to Pentacon on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, a good faith and reasonable estimate (to the extent the Company can reasonably make an estimate) of the maximum amount which the Company reasonably expects may be payable and the amount, if any, accrued or reserved for each such potential liability on the Company's Financial Statements. If no estimate is provided, the estimate shall for purposes of this Agreement be deemed to be zero. For each such contingent liability or liability for which the amount is not fixed or is contested, the Company has provided to Pentacon the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding; (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date (if any) on which such claim, suit or proceeding was instituted or the date (period) to which such claim relates. 5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate list of the accounts and notes receivable of the Company, as of the Balance Sheet Date, including any such amounts which are not reflected in the Interim Balance Sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the Stockholders, which are identified as such. Except to the extent reflected on Schedule 5.11, such accounts, notes and other receivables are collectible in the amounts shown on Schedule 5.11, net of reserves reflected in the Interim Balance Sheet of the Balance Sheet Date. 5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses, franchises, permits and other governmental authorizations ("Licenses") necessary to conduct the business of the Company and the Company has delivered to Pentacon an accurate list and summary description (which is set forth on Schedule 5.12) of all such material Licenses, including any material trademarks, trade names, patents, patent applications and copyrights owned or held by the Company or any of its employees (including interests in software or other technology systems, programs and intellectual property). At or prior to the Closing, all rights to such trademarks, trade names, patents, patent applications, copyrights and other intellectual property held by the Stockholders or their Affiliates will be assigned or licensed to the Company for no additional consideration. The Licenses and other rights listed on Schedule 5.12 are valid, and the Company has not received any notice that any person intends to cancel, terminate or not renew any such License or other right. The Company has conducted and is conducting its business in compliance with the requirements, standards, criteria -12- and conditions set forth in the Licenses and other rights listed on Schedule 5.12 and is not in violation of any of the foregoing. Except as specifically provided in Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the Company by, any such Licenses or other rights. 5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached hereto, (i) the Company has conducted its businesses in compliance with all applicable Environmental Laws, including, without limitation, having all environmental permits, licenses and other approvals and authorizations necessary for the operation of its business as presently conducted, (ii) none of the properties owned by the Company contain any Hazardous Substance as a result of any activity of the Company in amounts exceeding the levels permitted by applicable Environmental Laws, (iii) the Company has not received any notices, demand letters or requests for information from any Federal, state, local or foreign governmental entity or third party indicating that the Company may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of its business, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or to the knowledge of the Stockholders threatened, against the Company relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law, (vi) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law from any properties owned by the Company as a result of any activity of the Company during the time such properties were owned, leased or operated by the Company, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analysis regarding compliance or non-compliance with any applicable Environmental Law conducted by or which are in the possession of or readily available to the Company relating to the activities of the Company which are not listed on Schedule 5.13 attached hereto prior to the date hereof, (viii) there are no underground storage tanks on, in or under any properties owned by the Company and no underground storage tanks have been closed or removed from any of such properties during the time such properties were owned, leased or operated by the Company, (ix) there is no asbestos or asbestos containing material present in any of the properties owned by the Company, and no asbestos has been removed from any of such properties during the time such properties were owned, leased or operated by the Company, and (x) neither the Company nor any of its respective properties are subject to any material liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law. (b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity which is applicable where the Company conducts or conducted business or owns or owned property or is applicable to any disposal, transportation or release of Hazardous Substances by or for the Company and, in each case, relates to (x) the protection, preservation or restoration of the -13- environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as in effect on the Closing Date. The term Environmental Law includes, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as in effect on the Closing Date, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. (c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any government authority or any Environmental Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. 5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.14) of (x) all personal property material to the operations of the Company included in "plant, property and equipment" on the Interim Balance Sheet of the Company, (y) all other personal property owned by the Company with an individual fair market value in excess of $5,000 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all material leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases and (2) an indication as to which assets are currently owned, or were formerly owned, by Stockholders, relatives of Stockholders, or Affiliates of the Company. Except as set forth on Schedule 5.14, (i) all material personal property used by the Company in its business is either owned by the Company or leased by the Company pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in working order and condition sufficient for the operation of the Company's business, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. -14- 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.15) of all customers (persons or entities) representing 5% or more of the Company's annual revenues for the period covered by any of the most current Year-End Financial Statements. Except to the extent set forth on Schedule 5.15, none of such customers have canceled or substantially reduced or, to the knowledge of the Company and the Stockholders, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the Company. (b) The Company has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the Company is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances and options to purchase land), other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered (or, in the case of supplier and distributor contracts and customer contracts on standard purchase forms, has made available) true, complete and correct copies of such agreements to Pentacon. The Company has also indicated on Schedule 5.15 a summary description of all plans or projects commenced or approved in the last six (6) months and involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $20,000 by the Company during any 12-month period. (c) Except as set forth on Schedule 5.15, since January 1, 1995, the Company has not experienced any difficulties in obtaining any inventory items necessary to the operation of its business, and, to the knowledge of the Company and the Stockholders, no such shortage of supply of inventory items is threatened or pending. To the knowledge of the Company and the Stockholders, no customer or supplier of the Company will cease to do business with, or substantially reduce its purchases from, the Company after the consummation of the transactions contemplated hereby. (d) The Company is not required to provide any bonding or other financial security arrangements in any material amount in connection with any transactions with any of its customers or suppliers. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the Company at the date hereof and all other real property, if any, used by the Company in the conduct of its business. The Company has good and insurable title to any real property owned by it that is shown on Schedule 5.16, other than property intended to be sold or distributed prior to the Closing Date, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: -15- (i) liens reflected on Schedules 5.10 or 5.16 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title which do not adversely affect the current use of the property. True, complete and correct copies of all leases and agreements in respect of such real property leased by the Company are attached to Schedule 5.16, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by Stockholders or Affiliates of the Company or Stockholders is included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the Balance Sheet Date of all insurance policies carried by the Company, (ii) an accurate list of all insurance loss runs (to the extent available) or workers compensation claims received for the past three policy years. True, complete and correct copies of all insurance policies currently in effect have been delivered or made available to Pentacon. Such insurance policies evidence all of the insurance that the Company is required to carry pursuant to all of its contracts and other agreements and pursuant to all applicable laws, and, in the reasonable judgment of the Company's management, provide adequate coverage against the risks involved in the Company's business. All of such insurance policies are currently in full force and effect and are scheduled to remain in full force and effect through the Consummation Date. Since January 1, 1995, no insurance carried by the Company has been canceled by the insurer and the Company has not been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS. (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.18) showing all officers, directors and key employees of the Company, listing all employment agreements with such officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided to Pentacon true, complete and correct copies of any existing employment agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and except as described in Schedule 5.18, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices and bonuses, as described in Schedule 5.18. -16- (b) Except as set forth on Schedule 5.18, (i) the Company is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the Company are represented by any labor union or covered by any collective bargaining agreement, (iii) to the best knowledge of the Company, no campaign to establish such representation is in progress and (iv) there is no pending or, to the knowledge of the Company and the Stockholders, threatened labor dispute involving the Company and any group of its employees nor has the Company experienced any labor interruptions over the past three years. (c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no significant controversies pending or, to the knowledge of the Company and the Stockholders, threatened between the Company and any of its employees, (ii) the Company has complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, and (iii) to the knowledge of the Company and the Stockholders, no person has asserted that the Company is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee benefit plans of the Company, including all employment agreements and other agreements or arrangements containing "golden parachute" or other similar provisions, and deferred compensation agreements, together with true, complete and correct copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Balance Sheet Date. Except for the employee benefit plans, if any, described on Schedule 5.19, the Company does not sponsor, maintain or contribute to any plan program, fund or arrangement that constitutes an "employee pension benefit plan", and neither the Company nor any subsidiary has any obligation to contribute to or accrue or pay any benefits under any deferred compensation or retirement funding arrangement on behalf of any employee or employees (such as, for example, and without limitation, any individual retirement account or annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred compensation arrangement). For the purposes of this Agreement, the term "employee pension benefit plan" shall have the same meaning as is given that term in Section 3(2) of ERISA. The Company has not sponsored, maintained or contributed to any employee pension benefit plan other than the plans set forth on Schedule 5.19, and the Company is not or could not be required to contribute to any retirement plan pursuant to the provisions of any collective bargaining agreement establishing the terms and conditions or employment of any of the Company's employees. Except as set forth on Schedule 5.19, the Company is not now, or will not as a result of its past activities become, liable to the Pension Benefit Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit plan under the provisions of Title IV of ERISA. All employee benefit plans listed on Schedule 5.19 and the administration thereof are in compliance with their terms and all applicable provisions of ERISA and the regulations issued -17- thereunder, as well as with all other applicable federal, state and local statutes, ordinances and regulations. All accrued contribution obligations of the Company with respect to any plan listed on Schedule 5.19 as of the Balance Sheet Date have either been fulfilled in their entirety or are fully reflected on the Interim Balance Sheet as of the Balance Sheet Date. 5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, All such plans listed on Schedule 5.19 that are intended to qualify (the "Qualified Plans") under Section 401 (a) of the Code are, and have been so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the most recent determination letters with respect thereto are attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies of the most recent reports and filing relating thereto are included as part of Schedule 5.19 hereof. Neither Stockholders, any such plan listed in Schedule 5.19, nor the Company has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the Company has not incurred any liability for excise tax or penalty due to the Internal Revenue Service nor any liability to the PBGC. The Stockholders further represent that except as set forth on Schedule 5.19 hereto: (i) there have been no terminations, partial terminations or discontinuations of contributions to any Qualified Plan intended to qualify under Section 401(a) of the Code without notice to and approval by the Internal Revenue Service; (ii) no plan listed in Schedule 5.19 subject to the provisions of Title IV of ERISA has been terminated; (iii) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any such plan listed in Schedule 5.19; (iv) the Company (including any subsidiaries) has not incurred liability under Section 4062 of ERISA; and (v) to the knowledge of the Company and the Stockholders, no circumstances exist pursuant to which the Company would be reasonably likely to have any direct or indirect liability whatsoever (including, but not limited to, any liability to any multiemployer plan or the PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty, or being subject to any statutory lien to secure payment of any such liability) with respect to any plan now or heretofore maintained or contributed to by any entity other -18- than the Company that is, or at any time was, a member of a "controlled group" (as defined in Section 412(n)(6)(B) of the Code) that includes the Company. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it; and except to the extent set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or proceedings, pending or, to the knowledge of the Company and the Stockholders, threatened against or affecting, the Company, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Company, and, to the knowledge of the Company and the Stockholders, there is no basis for any such claim, action, suit or proceeding. The Company has conducted and is now conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, orders, approvals, variances, rules and regulations. 5.22 TAXES. (a) Except as set forth in Schedule 5.22, the Company has timely filed all requisite Federal, state and other Tax Returns or extension requests for all fiscal periods ended on or before the Balance Sheet Date; and except as set forth on Schedule 5.22, the Company has no notice that any examinations are in progress or that any claims are pending against it for federal, state and other Taxes (including penalties and interest) for any period or periods prior to and including the Balance Sheet Date and no notice of any claim for Taxes, whether pending or threatened, has been received. Except as set forth in Schedule 5.22, all Tax, including interest and penalties (whether or not shown on any Tax Return) owed by the Company has been paid or accrued in its financial accounts. The amounts shown as accruals for Taxes on the Company Financial Statements are sufficient for the payment of all Taxes of the kinds indicated (including penalties and interest) for all fiscal periods ended on or before that date. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal and local income Tax Returns and franchise Tax Returns of Company for their last three (3) fiscal years, or such shorter period of time as any of them shall have existed, are attached hereto as Schedule 5.22 or have otherwise been delivered to Pentacon. The Company has a taxable year ended December 31. Except as set forth on Schedule 5.22, Company uses the accrual method of accounting for income tax purposes, and the Company's methods of accounting have not changed in the past five years. The Company is not an investment Company as defined in Section 351(e)(1) of the Code. Except as set forth in Schedule 5.22, the Company is not and has not during the last five years been a party to any tax sharing agreement or agreement of similar effect. The Company is not and has not during the last five years been a member of any consolidated group. Except as set forth on Schedule 5.22, the Company has not received, been denied, or applied for any private letter ruling during the last ten years. -19- (b) The Stockholders made a valid election under the provisions of Subchapter S of the Code and the Company has not, within the past twelve (12) months, been taxed under the provisions of Subchapter C of the Code. The Stockholders shall pay all income taxes with respect to the Company payable for all periods through and including the Closing Date which are not reflected on the Company's financial statements as being obligations owing by the Company. 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC. (a) The Company is not in violation of any Charter Document. Except as set forth in Schedule 5.23, neither the Company nor, to the best knowledge of the Company and the Stockholders, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"). (b) Except as set forth in Schedule 5.23, the execution and delivery of this Agreement by each of the Company and the Stockholders do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the Charter Documents (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any Material Document or other material instrument, obligation or agreement of any kind to which the Company or any of the Stockholders is now a party or by which any of the Stockholders or the Company or any of its properties or assets may be bound or affected. The consummation by the Company and the Stockholders of the transactions contemplated hereby will not result in any violation, conflict, breach, right of termination or acceleration or creation of liens under any of the terms, conditions or provisions of the items described in clauses (i) through (iii) of the preceding sentence, subject, in the case of the terms, conditions or provisions of the items described in clause (iii) above, to obtaining (prior to the Effective Time of the Merger) such consents as may be required from commercial lenders, lessors or other third parties. (c) Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect, and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any material right or benefit. (d) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (iv) for filings in -20- connection with listing on the NASDAQ National Market System or New York Stock Exchange or other nationally recognized securities exchange; (v) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13 and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholders are required to make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by the Company and the Stockholders or the consummation by the Company and the Stockholders of the transactions contemplated hereby. (e) Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the Company, Pentacon or Newco of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the Company from freely providing services or selling products to any other customer or potential customer of the Company, Pentacon, Newco or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth on Schedule 5.24, the Company is not now a party to any governmental contract that, by its express terms, is subject to price redetermination or renegotiation or that is customarily subject to price redetermination or renegotiations in the ordinary course of business. Except as set forth on Schedule 5.24, the Company is not now a party to any material contract based on minority ownership which would be canceled or otherwise materially adversely impacted by completion of the Pentacon Plan of Organization. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25 or as otherwise contemplated hereby, there has not been: (i) any Material Adverse Effect with respect to the Company; (ii) any damage, destruction or loss (whether or not covered by insurance), alone or in the aggregate, materially adversely affecting the properties or business of the Company; (iii) any change in the authorized capital of the Company or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the Company except for distributions that would have been permitted after the date hereof under Section 7.3(iii) hereof, (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the Company to any of its officers, directors, Stockholders, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; -21- (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business or future prospects of the Company; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of Company outside of the ordinary course of business to any person, including, without limitation, the Stockholders and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the Company, including without limitation any indebtedness or obligation of any Stockholders or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the Company or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the Company's business; (xi) any waiver of any material rights or claims of the Company; (xii) any amendment or termination of any Material Document; (xiii) any transaction by the Company outside the ordinary course of its business; (xiv) any cancellation or termination of a Material Document or material customer contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the Company other than in the ordinary course of business and other than distributions of real estate and other assets as permitted by this Agreement. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an accurate schedule as of the date of the Agreement of: (i) the name of each financial institution in which the Company has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; -22- (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the Company and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the Company and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the Company and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the Stockholders, or any Affiliate of any of them has given or offered anything of value to any governmental official, political party or candidate for government office in violation of any applicable laws, rules or regulations, nor has it or any of them otherwise taken any action which would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any applicable law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules hereto, furnished to Pentacon by the Company and the Stockholders in connection herewith, do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements herein and therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by Pentacon or Newco. (b) The Company and the Stockholders acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither Pentacon or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the Company, the Stockholders or any other person affiliated or associated with the Company for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of Stockholders to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to Pentacon or the prospective IPO. -23- 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the Company has not, between the Balance Sheet Date and the date hereof, taken any of the actions which are prohibited ("Prohibited Activities") in Section 7.3. 5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to the knowledge of the Company or the Stockholders, the Company has no liability or potential liability to any person under any product or service warranty and the Company does not offer or sell insurance or consumer protection plans or other similar arrangements that could result in the Company being required to make any material payment to or perform any material service for any person thereunder. 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS. Except as described on Schedule 5.32, no Stockholder, officer, director or Affiliate of the Company (i) possesses, directly or indirectly, any financial interest in, or is a director, officer, employee or affiliate of, any corporation, firm, association or business organization that is a client, supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a party to an agreement or relationship, that involves the receipt by such person of compensation or property from the Company other than through a customary employment relationship. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS. Each Stockholder severally, but not jointly, represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement as they relate to such Stockholder and that the representations and warranties set forth in this Sections 5(B) shall survive the Consummation Date. 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Such Stockholder has the full legal right, power and authority to enter into this Agreement. Such Stockholder owns beneficially and of record all of the shares of the Company stock identified on Annex II as being owned by such Stockholder, and, such Company Stock is owned free and clear of all liens, encumbrances and claims of every kind. This Agreement is a legal, valid, and binding obligation of each Stockholder. 5.34 PREEMPTIVE RIGHTS. Such Stockholder does not have, or hereby waives, any preemptive or other right to acquire shares of Company Stock or Pentacon Stock that such Stockholder has or may have had. Nothing herein, however, shall limit or restrict the rights of any Stockholder to acquire Pentacon Stock pursuant to (i) this Agreement or (ii) any option granted by Pentacon. 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. No Stockholder is under any binding commitment or contract to sell, exchange or otherwise dispose of shares of Pentacon Stock received as described in Section 3.1. -24- 6. REPRESENTATIONS OF PENTACON AND NEWCO Pentacon and Newco, jointly and severally, represent and warrant to the Stockholders that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Consummation Date, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of determining whether a claim for indemnification under Section 11.2(iv) hereof has been made on a timely basis, and solely to the extent that in connection with the IPO, any of the Stockholders actually incurs liability under the 1933 Act, the 1934 Act, or any other Federal or state securities laws, the representations and warranties of Pentacon and Newco set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly incorporated and organized, validly existing and in good standing under the laws of the State of Delaware, and each has the requisite power and authority to carry on its business as it is now being conducted. Pentacon and Newco are each qualified to do business and are each in good standing in each jurisdiction in which the nature of its business makes such qualification necessary. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter Documents") are all attached hereto as Annex III. 6.2 AUTHORIZATION. (i) The respective officers or other representatives of Pentacon and Newco executing this Agreement have the authority to enter into and bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and Newco have the full legal right, power and authority to enter into this Agreement and the Other Agreements and consummate the Merger. All corporate acts and other proceedings required to have been taken by Pentacon and Newco to authorize the execution, delivery and performance of this Agreement and the consummation of the Merger have been duly and properly taken. 6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration Statement. All of the issued and outstanding shares of the capital stock of Newco are owned by Pentacon and all of the issued and outstanding shares of the capital stock of Pentacon are owned by the persons set forth on Schedule 6.3 hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of Pentacon and Newco have been duly authorized and validly issued, are fully paid and nonassessable, and further, such shares were offered, issued, sold and delivered by Pentacon and Newco in compliance with all applicable state and Federal laws concerning the issuance of -25- securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of Pentacon or Newco. 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the Other Agreements and except as set forth in the Draft Registration Statement or in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates Pentacon or Newco to issue any of their respective authorized but unissued capital stock; (ii) no voting trust, voting agreement, proxy or other agreements or understandings exist with respect to the voting of any shares of capital stock of Pentacon; and (iii) neither Pentacon nor Newco has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes a list of all outstanding options, warrants or other rights to acquire shares of the stock of Pentacon. 6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries except for Newco and each of the companies identified as "Newco" in each of the Other Agreements. Except as set forth in the preceding sentence, neither Pentacon nor Newco presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, and neither Pentacon nor Newco, directly or indirectly, is a participant in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in the Draft Registration Statement (the "Pentacon Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon), and the balance sheet included therein presents fairly the financial position of Pentacon as of its date. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft Registration Statement, Pentacon and Newco have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees generally described in Part II of the Draft Registration Statement and incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the Draft Registration Statement, neither Pentacon nor Newco is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of Pentacon or Newco, threatened against or affecting, Pentacon or Newco, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. -26- Pentacon and Newco have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation, in any material respect, of any of the foregoing. 6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of Pentacon and Newco, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which Pentacon or Newco is a party, or by which Pentacon or Newco, or any of their respective properties, are bound (collectively, the "Pentacon Documents"); and (a) the rights and benefits of Pentacon and Newco under the Pentacon Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of their obligations hereunder and thereunder do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof will not, conflict with, or result in any violation or default (with or without notice or lapse of time, or both), under or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any lien upon any of the assets of Pentacon or Newco under, any provision of (i) the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the comparable governing instruments of Newco, (ii) any note, bond, mortgage, indenture or deed of trust or any license, lease, contract, commitment, agreement or arrangement to which Pentacon or Newco is a party or by which any of their respective properties or assets are bound or (iii) any judgment, order, decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or their respective properties or assets. (b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the Pentacon Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. (c) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) filings with blue sky authorities in connection with the transactions contemplated by this Agreement, (iv) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (v) for filings in consideration for listing on the NASDAQ National Market System or the New York Stock Exchange or other nationally recognized securities exchange; and (vi) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not required make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the transactions contemplated hereby. -27- 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the respective Boards of Directors and stockholders of Pentacon and Newco and this Agreement and the Other Agreements have been duly and validly authorized by all necessary corporate action and are legal, valid and binding obligations of Pentacon and Newco, enforceable against them in accordance with their respective terms. 6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the Stockholders, the Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement will constitute valid and legally issued shares of Pentacon, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all substantive respects (which do not include the form of certificate upon which it is printed or the presence or absence of a CUSIP number on any such certificate) to the Pentacon Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the Stockholders shall at the time of such issuance and delivery be free and clear of any liens, claims or encumbrances of any kind or character. The shares of Pentacon Stock to be issued to the Stockholders pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither Pentacon nor Newco has entered or will enter into any agreement with any of the Founding Companies or any of the Stockholders of the Founding Companies or Pentacon other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements and real property leases referred to herein or entered into in connection with the transactions contemplated hereby and thereby. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on March 20, 1997 and has conducted only limited operations since that time. Neither Pentacon nor Newco has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Except as described in the Draft Registration Statement, neither Pentacon nor Newco owns or has at any time owned any real property or any material personal property or is a party to any other material agreement other than the Other Agreements, the agreements contemplated thereby and such agreements as will be filed as Exhibits to the Registration Statement. 6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company and the Stockholders, together with this Agreement and the information furnished to the Company and the Stockholders in connection herewith, does not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by the Company or the Stockholders or information pertaining to the Company or a Stockholder which is confirmed in writing by the Company or such Stockholder. -28- 7. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Consummation Date, the Company will afford to the officers and authorized representatives of Pentacon and the Other Founding Companies access to all of the Company's sites, properties, books and records and will furnish Pentacon with such additional financial and operating data and other information as to the business and properties of the Company as Pentacon or the Other Founding Companies may from time to time reasonably request; provided, however, that the Company shall not prior to the Closing Date be required to disclose to the Other Founding Companies, and Pentacon shall not without first obtaining the written approval of the Company disclose to the Other Founding Companies, information relating to pricing or profitability on an account-by-account basis or any pricing information relating to the Company's suppliers on a supplier-by-supplier basis. The Company will cooperate with Pentacon, its representatives, auditors and counsel and the Other Founding Companies in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. Pentacon, Newco, the Stockholders and the Company will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, Pentacon will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1(a) requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Consummation Date, Pentacon will afford to the officers and authorized representatives of the Company and the Stockholders access to all of Pentacon's and Newco's sites, properties, books and records and will furnish the Company with such additional financial and operating data and other information as to the business and properties of Pentacon and Newco as the Company may from time to time reasonably request. Pentacon and Newco will cooperate with the Company, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The Company will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Consummation Date, the Company will, except as set forth on Schedule 7.2 or as otherwise expressly contemplated by this Agreement: (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; -29- (ii) use commercially reasonable efforts to maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform in all material respects all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) use commercially reasonable efforts to keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use commercially reasonable efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with material suppliers, customers and others having business relations with the Company; (vi) use commercially reasonable efforts to maintain compliance with all material permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments without the knowledge and consent of Pentacon (which consent shall not be unreasonably withheld, delayed or conditioned), provided that debt and/or lease instruments may be replaced without the consent of Pentacon if such replacement instruments are on terms at least as favorable to the Company as the instruments being replaced; and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents except for ordinary and customary bonus and salary increases for employees in accordance with the Company's past practices. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3 or as otherwise expressly contemplated by this Agreement, between the date hereof and the Consummation Date, the Company will not, without prior written consent of Pentacon: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options, warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for -30- value any shares of its stock except for (1) dividends paid in respect of the Company's Accumulated Adjustment Accounts provided that any such dividends shall reduce, dollar-for-dollar, the amount of cash consideration to be received by the Stockholder on the Consummation Date and (2) dividends paid to cover tax payments required to be made by the Stockholders for fiscal 1997 and subsequent periods ending on or prior to the Consummation Date; (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $25,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $25,000 necessary or desirable for the conduct of the businesses of the Company, (2) (A) liens for Taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested Taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business and other than distributions of real estate and other assets as permitted in this Agreement (including the Schedules hereto); (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the Company, provided that the Company may negotiate and adjust bills and accounts in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 to the extent they exceed the reserves, if any, established therefor, or unless specifically listed thereon; (x) amend or terminate any material agreement, permit, license or other right of the Company provided that the Company may continue to administer vendor and supplier contracts in the ordinary course of business provided written notice of any such material amendments or terminations is provided to Pentacon as soon as possible following such action and in any event prior to the Closing; or -31- (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder. 7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the Company, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than Pentacon, Newco or their authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the Company or a merger, consolidation or business combination of the Company. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide Pentacon on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The Stockholders and the Company shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the Company and any employee listed on Schedule 9.12 hereto and (ii) any existing agreement between the Company and any Stockholder, on or prior to the Consummation Date provided that nothing herein shall prohibit or prevent the Company from paying (either prior to or on the Closing Date) notes or other obligations from the Company to the Stockholders in accordance with the terms thereof, which terms have been disclosed to Pentacon. Such termination agreements are listed on Schedule 7.6 and copies thereof shall be attached thereto. 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY. The Stockholders and the Company shall give prompt notice to Pentacon of (i) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the Company or the Stockholders contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any Stockholder or the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. Pentacon and Newco shall give prompt notice to the Company of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of Pentacon or Newco contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) -32- any material failure of Pentacon or Newco to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery or deemed delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. If, prior to the Closing Date, the Chief Executive Officer, the Chief Financial Officer or the General Counsel of Pentacon shall determine that any of Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder for indemnification against any Stockholder(s) (whether or not such claim might exceed the Indemnification Threshold), then Pentacon shall promptly advise the affected Stockholder(s), in writing, of such potential claim and provide information supporting the basis and potential amount of such claim (a "Potential Claim Notice"). This procedure with respect to Potential Claim Notices is intended to afford the affected Stockholder(s) notice so that it may attempt to cure or otherwise address the claim prior to Closing; provided, however, that (i) this procedure shall not affect or delay Closing and (ii) neither the failure or delay by Pentacon to give a Potential Claim Notice nor the information included or omitted from a Potential Claim Notice shall constitute a waiver of, or shall otherwise adversely affect the right to receive indemnification for, any such claim paid by Pentacon, Newco, the Surviving Corporation or the Company hereunder after the Closing Date. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until 24 hours prior to the anticipated effectiveness of the Registration Statement to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date, unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the Company that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to the Company may be made unless Pentacon and a majority of the Founding Companies other than the Company consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by Pentacon or Newco that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to Pentacon or Newco may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, Pentacon shall give the -33- Company written notice promptly after it has knowledge thereof. If Pentacon and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given by Pentacon or any Founding Company if no response is received within 24 hours following receipt of written notice of such amendment or supplement (or sooner if reasonable and if required by the circumstances under which such consent is requested), but the Company does not give its consent, the Company may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the Company seeks to amend or supplement a Schedule pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that Pentacon or Newco seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and Stockholders shall furnish or cause to be furnished to Pentacon and the Underwriters all of the information concerning the Company and the Stockholders reasonably required for inclusion in, and will cooperate with Pentacon and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement, except that the cost of the preparation of any such audited and unaudited Financial Statements shall be borne by Pentacon). The Company and the Stockholders agree promptly to advise Pentacon if at any time during the period in which a prospectus relating to the IPO is required to be delivered under the Securities Act, any information contained in the prospectus concerning the Company or the Stockholders becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the Company or the Stockholders, the Company represents and warrants as to such information with respect to itself, and each Stockholder represents and warrants, as to such information with respect to the Company and himself or herself, severally, but not jointly, that the information expressly provided for inclusion in the Registration Statement or otherwise confirmed in writing by such Stockholder will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the Consummation Date, and Pentacon shall have had sufficient time to review the unaudited consolidated balance sheets of the Company as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the Company for all fiscal quarters ended after the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a -34- consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the Company for the periods indicated therein. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall maintain its authorized capital stock as set forth in the Registration Statement filed with the SEC except for such changes in authorized capital stock as are made to respond to comments made by the SEC or requirements of any exchange or automated trading system for which application is made to register the Pentacon Stock and any changes necessary or advisable in order to permit the delivery of the opinion contemplated by Section 8.12 hereof. 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby recognize that one or more filings under the Hart-Scott-Rodino Act may be required in connection with the transactions contemplated herein. If it is determined by the parties to this Agreement that filings under the Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act, (ii) such compliance by the Stockholders and the Company shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 9 of this Agreement, and (iii) the parties agree to cooperate and use their best efforts to cause all filings required under the Hart-Scott-Rodino Act to be made. If filings under the Hart-Scott-Rodino Act are required, the costs and expenses thereof (including filing fees) shall be borne by Pentacon. The obligation of each party to consummate the transactions contemplated by this Agreement is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, if applicable. 7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date of the final prospectus of Pentacon utilized in connection with the IPO, the Company or the Stockholders become aware of any fact or circumstance which would materially affect the accuracy of a representation or warranty of Company or Stockholders in this Agreement, the Company and the Stockholders shall promptly give notice of such fact or circumstance to Pentacon. However, subject to the provisions of Section 7.8, such notification shall not relieve either the Company or the Stockholders of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of Pentacon, the truth and accuracy of any and all warranties and representations of the Company, or on behalf of the Company and of Stockholders at the date of this Agreement and on the Closing Date and on the Consummation Date, shall be a precondition to the consummation of this transaction. -35- 7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately following the Effective Time of the Merger, Pentacon will pay, or cause to be paid, all of the outstanding liabilities, obligations and indebtedness of Company to the lenders identified on Schedule 7.15 hereto. In connection with such repayment of indebtedness, all associated guaranties of Founder Stockholders shall be terminated and cancelled. 7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that one of the conditions to the Stockholders consummating the transactions contemplated herein is that the IPO shall be closed and the Stockholders (as a group) shall be entitled to receive consideration not less than the Minimum Value set forth on Annex I attached hereto. 7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon shall not exceed nine members immediately following the IPO unless the Founding Stockholder representatives to serve on such board agree in writing to a larger number of directors. 7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise required by applicable law, Pentacon will describe or report the transaction in any required tax reports of Pentacon as a tax-free transaction (insofar as its relates to the delivery of Pentacon Stock for Company Stock) in a manner consistent with the tax opinion referenced in Section 8.12. 7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain all material Licenses necessary for Pentacon to commence the conduct of business on the Consummation Date. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of Stockholders and the Company with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the Stockholders and the Company with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such conditions have not been satisfied, the Stockholders (acting in unison) shall have the right to terminate this Agreement, or in the alternative, waive any condition not so satisfied. The delivery of certificates representing Company Stock to Pentacon as of the Consummation Date shall constitute a waiver of any conditions not so satisfied. However, no such waiver shall be deemed to affect the survival of the representations and warranties of Pentacon and Newco contained in Section 6 hereof or the rights of the Stockholders pursuant to Section 11 hereof. -36- 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of Pentacon and Newco contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by Pentacon and Newco on or before the Closing Date and the Consummation Date shall have been duly complied with and performed in all material respects; and certificates to the foregoing effect dated the Closing Date and the Consummation Date, respectively, and signed by the President or any Vice President of Pentacon shall have been delivered to the Stockholders. 8.2 SATISFACTION. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall be reasonably satisfactory to the Company and its counsel. The Stockholders and the Company shall be satisfied that the Registration Statement and the prospectus forming a part thereof, including any amendments thereof or supplements thereto, shall not contain any untrue statement of a material fact, or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that, subject to the provisions set forth in the introductory paragraph of this Section 8, the condition contained in this sentence shall be deemed waived if the Company or Stockholders shall have failed to inform Pentacon in writing prior to the effectiveness of the Registration Statement of the existence of an untrue statement of a material fact or the omission of such a statement of a material fact. 8.3 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of the Company as a result of which the management of the Company deems it inadvisable to proceed with the transactions hereunder. 8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed hereto as Annex IV. 8.5 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of Pentacon Stock to be received by the Stockholders is not less than the Minimum Value set forth on Annex I. 8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency or any third party relating to the consummation of the transactions contemplated herein or set forth in Schedule 5.23 hereto shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Company as a result of which Company deems it inadvisable to proceed with the transactions hereunder. -37- 8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have delivered to the Company a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which Pentacon or Newco is authorized to do business, showing that each of Pentacon and Newco is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for Pentacon and Newco, respectively, for all periods prior to the Closing have been filed and paid. 8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to Pentacon or Newco which would constitute a Material Adverse Effect. 8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of Pentacon and of Newco, certifying the truth and correctness of attached copies of the Pentacon's and Newco's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the Stockholders of Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall have been afforded the opportunity to enter into an employment agreement substantially in the form of Annex VI hereto. 8.12 TAX MATTERS. The Stockholders shall have received an opinion of Ernst & Young LLP or other tax advisor of national recognition reasonably acceptable to the Stockholders that the Pentacon Plan of Organization will qualify as a tax-free transfer of property under Section 351 of the Code and that the Stockholders will not recognize gain to the extent the Stockholders exchange stock of the Company for Pentacon stock (but not cash or other property) pursuant to the Pentacon Plan of Organization. 8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for listing on the New York Stock Exchange, NASDAQ National Market System or the American Stock Exchange. 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO The obligations of Pentacon and Newco with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of Pentacon and Newco with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of the Consummation Date, if any such -38- conditions have not been satisfied, Pentacon and Newco shall have the right to terminate this Agreement, or waive any such condition, but no such waiver shall be deemed to affect the survival of the representations and warranties contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the representations and warranties of the Stockholders and the Company contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the Stockholders and the Company on or before the Closing Date or the Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the Stockholders shall have delivered to Pentacon certificates dated the Closing Date and the Consummation Date, respectively, and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which the management of Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate, dated the Closing Date and signed by the secretary of the Company, certifying the truth and correctness of attached copies of the Company's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and the Stockholders approving the Company's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the Company which would constitute a Material Adverse Effect, and the Company shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the Company to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The Stockholders shall have delivered to Pentacon an instrument dated the Closing Date, which shall be effective only upon the occurrence of the Consummation Date and shall relate only to matters accruing on or prior to the Consummation Date, releasing the Company and Pentacon from (i) any and all claims of the Stockholders against the Company and Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders, except for (w) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the Stockholders, (x) continuing obligations to Stockholders relating to their employment by the Company or Pentacon, (y) any obligations or liabilities arising under this Agreement or the transactions contemplated hereby and (z) real estate lease agreements between the Company and Stockholders, as amended which have been accepted or approved by Pentacon. In the -39- event that the Consummation Date does not occur, then the release instrument referenced herein shall be void and of no further force or effect. 9.6 SATISFACTION. All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or incidental hereto and all other related legal matters shall have been approved by counsel to Pentacon. 9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.7, all existing agreements between the Company and the Stockholders (and entities controlled by the Stockholders) shall have been canceled effective prior to or as of the Consummation Date. 9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from Counsel to the Company and the Stockholders, dated the Closing Date, substantially in the form annexed hereto as Annex V. 9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to Pentacon a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the Company's state of incorporation and, unless waived by Pentacon, in each state in which the Company is authorized to do business, showing the Company is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the Company for all periods prior to the Closing have been filed and paid. 9.11 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall enter into an employment agreement substantially in the form of Annex VI hereto. 9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. -40- 9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Consummation Date, Pentacon shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the organization, including without limitation: (a) the retirement or reacquisition, directly or indirectly, of all or part of the Pentacon Stock issued in connection with the transactions contemplated hereby; or (b) the entering into of financial arrangements for the benefit of the Stockholders. 10.2 PREPARATION AND FILING OF TAX RETURNS. (i) Subsequent to the approval of Jeff Fatica on behalf of the Stockholders, the Company, if possible, or otherwise the Stockholders shall file or cause to be filed all Tax Returns (federal, state, local or otherwise) of any Acquired Party for all taxable periods that end on or before the Consummation Date. Pentacon shall be given the opportunity to review all such Returns prior to such filings. Unless the Company is a C corporation, the Stockholders shall pay or cause to be paid all Tax liabilities (in excess of all amounts already paid with respect thereto or properly accrued or reserved with respect thereto on the Financial Statements) shown by such Returns to be due, subject to the provisions of 7.3(iii). (ii) Pentacon shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Consummation Date. (iii) Each party hereto shall, and shall cause its Subsidiaries and Affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies, at the expense of the requesting party, of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. -41- (iv) Each of the Company, Newco, Pentacon and each Stockholder shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free contribution under Section 351(a) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code. 10.3 DIRECTORS. The persons named in the Draft Registration Statement shall be appointed as directors and elected as officers of Pentacon, as and to the extent set forth in the Draft Registration Statement, promptly following the Consummation Date. 11. INDEMNIFICATION The Stockholders, Pentacon and Newco each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders covenant and agree that they, jointly and severally, will indemnify, defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date (provided that for purposes of Section 11.1(iii) below, the Expiration Date shall be the date on which the applicable statute of limitations expires), from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by Pentacon, Newco, the Company or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the Stockholders or the Company set forth herein or on the definitive, final schedules or certificates delivered by them in connection herewith, (ii) any breach of any agreement on the part of the Stockholders or, prior to Closing, the Company under this Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to the Company or the Stockholders, and provided in writing to Pentacon or its counsel by the Company or the Stockholders for inclusion in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to the Company or the Stockholders required to be stated therein or necessary to make the statements therein not misleading, provided, however, that such indemnity shall not inure to the benefit of Pentacon, Newco, the Company or the Surviving Corporation to the extent that such untrue statement (or alleged untrue statement) was made in, or omission (or alleged omission) occurred in, any preliminary prospectus and the Stockholders provided, in writing, corrected information to Pentacon counsel and to Pentacon for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no Stockholder shall be liable for any indemnification obligation pursuant to this -42- Section 11.1(iii) to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other Stockholder. Pentacon and Newco acknowledge and agree that other than the representations and warranties of Company or Stockholders specifically contained in this Agreement, there are no representations or warranties of Company or Stockholders, either express or implied, with respect to the transactions contemplated by this Agreement, the Company or its assets, liabilities and business. Pentacon, Newco and the Company further acknowledge and agree that, should the Closing occur, their sole and exclusive remedy with respect to any and all claims relating to this Agreement and the transactions contemplated in this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the Closing, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action they or any indemnified person may have against the Company or any Stockholder relating to this Agreement or the transactions contemplated hereby arising under or based upon any federal, state, local or foreign statute, law, rule, regulation or otherwise (and other than pursuant to the terms of this Agreement). 11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it will indemnify, defend, protect and hold harmless the Stockholders at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the Stockholders as a result of or arising from (i) any breach by Pentacon or Newco of their representations and warranties set forth herein or on the definitive, final schedules or certificates attached delivered by them pursuant hereto, (ii) any breach of any agreement on the part of Pentacon or Newco under this Agreement or any other agreement delivered pursuant hereto, (iii) any liabilities which the Stockholders may incur due to Pentacon's or Newco's or the Surviving Corporation's failure to pay, perform or discharge when due any of the liabilities and obligations of the Company for which Pentacon, Newco or the Surviving Corporation is responsible pursuant to this Agreement (except to the extent that Pentacon or Newco has bona fide claims hereunder against the Stockholders by reason of such liabilities); or (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to Pentacon, Newco or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to Pentacon or Newco or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading. -43- 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has actual knowledge of any claim by a Person (including any governmental agency) not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, with respect to which the Indemnified Person would be entitled to receive indemnification pursuant to Section 11, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the reasonable expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense through appropriate proceedings, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person. Upon agreement as to such settlement between said Third Person and the Indemnifying Party, the Indemnifying Party shall, in exchange for a complete release from the Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in such settlement and the Indemnified Party shall, from that moment on, bear full responsibility for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the -44- Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case pursuant to Section 14.3 or otherwise, to seek injunctive or other equitable relief (except for rescission which shall not be available) for a breach or threatened breach of this Agreement. Any indemnity payment under this Section 11 shall be treated as an adjustment to the exchange consideration for tax purposes unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the indemnified party or any of its affiliate causes any such payment not to be treated as an adjustment to the exchange consideration for U.S. Federal Income Tax purposes. (b) Nothing in this Article 11 shall restrict the Stockholders from subrogation or seeking reimbursement from third parties other than the Company. 11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 or 11.2 shall not assert any claim for indemnification hereunder against the Stockholders after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against the Stockholders shall exceed the greater of 1% of the value of the total consideration (including stock and cash) received by the Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and then only to the extent of the excess over the Indemnification Threshold. Stockholders shall not assert any claim for indemnification hereunder against Pentacon or Newco after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which Stockholders may have against Pentacon or Newco shall exceed the Indemnification Threshold, and then only to the extent of the excess over the Indemnification Threshold. The Indemnification Threshold shall not be applicable to any breach of covenants made by the Stockholders in this Agreement which require an action or inaction by such Stockholders from and after the Closing Date (I.E., Article 10, Article 11, Article 13, Article 14, Article 17 and Section 18.1). No person shall be entitled to indemnification under this Section 11 if, and only to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. -45- The pursuit by Pentacon, the Surviving Corporation, Newco or the Company, of any claim for indemnification hereunder against a Stockholder shall require a majority vote of the board of directors of Pentacon, excluding for the purposes of such vote any director who was previously a stockholder of the Company or is a representative of the stockholders of the Company as existing prior to the closing of the transaction contemplated in this Agreement. Notwithstanding any other term of this Agreement, no Stockholder shall be liable (in the aggregate from time to time taking into account all indemnification payments made hereunder) under this Section 11 (a) for any amount which is less than or equal to the Indemnification Threshold (and then only to the extent of the excess over the Indemnification Threshold) or (b) for any amount which exceeds the amount of proceeds (including cash and stock) received by such Stockholder in connection with the Merger. Each Stockholder shall have the option of satisfying his or her indemnity obligation in cash and/or by returning or transferring shares of Pentacon Stock to Pentacon or any other Indemnified Party. For purposes of calculating the value of the Pentacon Stock received by a Stockholder and satisfying any indemnity claim by returning or transferring Pentacon Stock, Pentacon Stock shall be valued at its initial public offering price as set forth in the Registration Statement. Notwithstanding any of the foregoing provisions of this Section 11 that might be read to the contrary, it is the agreement of the parties that the Indemnification Threshold be given full effect under all circumstances. Accordingly, insofar as any of the foregoing provisions of this Section 11 may hold harmless an Indemnified Party before the Indemnification Threshold has been met, then Pentacon and the Stockholders shall cooperate in good faith to establish an equitable procedure pursuant to which Pentacon reimburses or causes the reimbursement to the affected Stockholder(s) of all expenditures and payments by Stockholders that are intended to be absorbed and borne by any Indemnified Parties as a result of the prior application of the Indemnification Threshold or otherwise takes such action as may be reasonably necessary to give effect to the Indemnification Threshold. 12. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Consummation Date solely: (i) by mutual consent of the boards of directors of Pentacon and the Company; (ii) by the Stockholders or the Company (acting through its board of directors), on the one hand, or by Pentacon (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by February 28, 1998, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Consummation Date; -46- (iii) by the Stockholders or Company, on the one hand, or by Pentacon, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants or agreements contained herein, and the curing of such default shall not have been made on or before the Consummation Date or by the Stockholders or the Company, if the conditions set forth in Section 8 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable, or by Pentacon, if the conditions set forth in Section 9 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable; (iv) pursuant to Section 7.8 hereof; (v) pursuant to the termination provisions contained in Section 4 hereof; or (vi) pursuant to the other express terms of this Agreement. 12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section 7.8 hereof, the termination of this Agreement will in no way limit any obligation or liability of any party based on or arising from a breach or default by such party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement including, but not limited to, legal and audit costs and out of pocket expenses. 13. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of five (5) years following the Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) except as disclosed in Schedule 13.1, engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any fastener business or operation or related services business in direct competition with Pentacon or any of the subsidiaries thereof, within 100 miles of where the Company or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) except with the prior written consent of Pentacon, call upon any person who is, at that time, within the Territory, an employee of Pentacon or any subsidiary thereof for the purpose or with the intent of enticing such employee away from or out of the employ of Pentacon or any subsidiary thereof; (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Consummation Date, a customer of Pentacon or any subsidiary -47- thereof, of the Company or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services that are in direct competition with Pentacon within the Territory; (iv) call upon any prospective acquisition candidate, on any Stockholder's own behalf or on behalf of any competitor in the fastener business, which candidate, to the actual knowledge of such Stockholder after due inquiry, was called upon by Pentacon or any subsidiary thereof or for which, to the actual knowledge of such Stockholder after due inquiry, Pentacon or any subsidiary thereof made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the Company to any person, firm, partnership, corporation or business for any reason or purpose relating to the fastener business except to the extent that the Company has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any Stockholder from acquiring as a passive investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to Pentacon as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to Pentacon for which it would have no other adequate remedy, each Stockholder agrees that the foregoing covenant may be enforced by Pentacon in the event of breach by such Stockholder, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the Stockholders in light of the activities and business of Pentacon and the subsidiaries thereof on the date of the execution of this Agreement and the current plans of Pentacon; but it is also the intent of Pentacon and the Stockholders that such covenants be construed and enforced in accordance with the changing activities; business and locations of Pentacon and its subsidiaries throughout the term of this covenant. During the term of this covenant, if Pentacon or one of its subsidiaries engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business it is currently conducting in the locations currently established therefor, then the Stockholders will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new activities or business within 100 miles of its then-established operating location(s) through the term of this covenant. -48- 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any Stockholder against Pentacon or any subsidiary thereof, whether predicated on this Agreement or otherwise (except for a claim or cause of action based upon Pentacon's failure to pay or otherwise tender any of the consideration due to the Stockholders hereunder), shall not constitute a defense to the enforcement by Pentacon of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each Stockholder made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such Stockholder is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The Company and the Stockholders hereby agree that this covenant is a material and substantial part of this transaction. 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The Stockholders recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the Company, the Other Founding Companies, and/or Pentacon, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's, the Other Founding Companies' and/or Pentacon's respective businesses. The Stockholders agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of Pentacon, (b) following the Closing, such information may be disclosed by the Stockholders as is required in the course of performing their duties for Pentacon or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the Stockholders, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the Stockholders shall, if possible, give prior written notice thereof to Pentacon and provide Pentacon with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the Stockholders of the provisions of this Section, Pentacon shall be entitled to an injunction restraining such -49- Stockholders from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Pentacon from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, Stockholders shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the Company. 14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that they had in the past and currently have access to certain confidential information of the Company, including, but not limited to, customer and prospect lists, financial information, operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's business. Pentacon and Newco agree that, prior to the Consummation Date, or if the transactions contemplated by this Agreement are not consummated, they will not, appropriate or make use of any such information, whether for its own benefit or the benefit of any other person or entity, for any purpose whatsoever (except pending the Consummation Date, effecting the transactions contemplated hereby) disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the Company, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.2, (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of Pentacon or Newco, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), Pentacon and Newco shall, if possible, give prior written notice thereof to the Company and the Stockholders and provide the Company and the Stockholders with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, and (d) to the public to the extent necessary or advisable in connection with the filing of the Registration Statement and the IPO and the securities laws applicable thereto and to the operation of Pentacon as a publicly held entity after the IPO. In the event of a breach or threatened breach by Pentacon or Newco of the provisions of this Section, the Company and the Stockholders shall be entitled to an injunction restraining Pentacon and Newco from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the Company and the Stockholders from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach or threatened breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders or other appropriate equitable relief, without posting any bond or other security or having to prove irreparable harm or injury. -50- 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Consummation Date, or without limitation if the transactions contemplated hereby are not consummated. 15. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts or partnerships for the benefit of charities, the Stockholders, family members, the trustees or partners of which so agree), for a period of one year from the Closing, except pursuant to Section 17 hereof, none of the Stockholders shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any shares of Pentacon Stock received by the Stockholders in the Merger. The certificates evidencing the Pentacon Stock delivered to the Stockholders pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as Pentacon may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 16. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement have not been and will not be registered under the 1933 Act (except as provided in Section 17 hereof) and therefore may not be resold without compliance with the 1933 Act. The Pentacon Stock to be acquired by such Stockholders pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. The Stockholders covenant, warrant and represent that none of the shares of Pentacon Stock issued to such Stockholders will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the Pentacon Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: -51- THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the economic risk of an investment in the Pentacon Stock to be acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the Pentacon Stock. The Stockholders party hereto have had an adequate opportunity to ask questions and receive answers from the officers of Pentacon concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of Pentacon, the plans for the operations of the business of Pentacon, the business, operations and financial condition of the Founding Companies other than the Company, and any plans for additional acquisitions and the like. The Stockholders have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 17. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever Pentacon proposes to register any Pentacon Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf or other registration of shares to be used as consideration for acquisitions of additional businesses by Pentacon and (ii) registrations relating to employee benefit plans, Pentacon shall give each of the Stockholders prompt written notice of its intent to do so. Upon the written request of any of the Stockholders given within 30 days after receipt of such notice, Pentacon shall cause to be included in such registration all of the Pentacon Stock issued to the Stockholders pursuant to this Agreement (including any stock issued as (or issuable upon the conversion or exchange of any convertible security, warrant, right or other security which is issued by Pentacon as) a dividend or other distribution with respect to, or in exchange for, or in replacement of such Pentacon Stock) which any such Stockholder requests, provided that Pentacon shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares would, in the written opinion of tax counsel to Pentacon or its independent auditors, reasonably be likely to jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free organization under Section 351 of the Code. In addition, if Pentacon is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than Pentacon is greater than the number of such shares which can be offered without adversely affecting the offering, Pentacon may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter, provided, that, for each such offering made by Pentacon after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than Pentacon, the -52- Stockholders and the Stockholders of the Other Founding Companies (collectively, the Stockholders and the Stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. 17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as expeditiously as possible: (i) Prepare and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements or term sheets thereto, Pentacon will furnish a representative of the Stockholders with copies of all such documents proposed to be filed) as promptly as practical; (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days; (iii) Furnish to each Stockholder who so requests such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus and any term sheet associated therewith), and such other documents as such Stockholder may reasonably request in order to facilitate the disposition of the relevant shares; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Stockholders, and to keep such registration or qualification effective during the period such registration statement is to be kept effective, provided that Pentacon shall not be required to become subject to taxation, to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) Cause all such shares of Pentacon Stock to be listed or included on any securities exchanges or trading systems on which similar securities issued by Pentacon are then listed or included; (vi) Notify each Stockholder at any time when a prospectus relating thereto is required to be delivered under the 1933 Act within the period that Pentacon is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement, together with any associated term sheet, contains an untrue statement of a material fact or omits any fact necessary to make the statement therein not misleading, and, at the request of such Stockholder, Pentacon will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the -53- purchasers of the covered shares, such prospectus will not contain an untrue statement of material fact or omit to state any fact necessary to make the statements therein not misleading. All expenses incurred in connection with the registration under this Article 17 (including all registration, filing, qualification, legal, printer and accounting fees, but excluding underwriting commissions and discounts), shall be borne by Pentacon. 17.3 INDEMNIFICATION. (a) In connection with any registration hereunder, Pentacon shall indemnify, to the extent permitted by law, each Stockholder against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or associated term sheet or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same are caused by or contained in or omitted from any information furnished in writing to Pentacon by such indemnified party expressly for use therein or by any indemnified parties' failure to deliver a copy of the registration statement or prospectus or any amendment or supplements thereto after Pentacon has furnished such Indemnified Party with a sufficient number of copies of the same. (b) In connection with any registration hereunder, each Stockholder shall furnish to Pentacon in writing such information as is reasonably requested by Pentacon for use in any such registration statement or prospectus and will indemnify, to the extent permitted by law, Pentacon, its directors and officers and each person who controls Pentacon (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement or material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in information so furnished in writing by such Stockholder specifically for use in preparing the registration statement. Notwithstanding the foregoing, the liability of a Stockholder under this Section 17.3 shall be limited to an amount equal to the net proceeds actually received by such Stockholder from the sale of the relevant shares covered by the registration statement. (c) Any person entitled to indemnification under this Section will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified parties' reasonable judgment, a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Any failure to give prompt notice shall deprive a party of its right to indemnification hereunder only to the extent that such failure shall have adversely affected the indemnifying party. If the defense of any claim is assumed, the indemnifying party will not be -54- subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled or elects not to assume the defense of a claim, will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant to Section 17.1 covering an underwritten registered offering, Pentacon and each participating holder agree to enter into a written agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between such managing underwriters and companies of Pentacon's size and investment stature, including indemnification. 17.5 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC that may permit the sale of Pentacon stock to the public without registration, Pentacon agrees to use its commercially reasonable efforts to: (i) make and keep public information regarding Pentacon available as those terms are understood and defined in Rule 144 under the 1933 Act for a period of four years beginning 90 days following the effective date of the Registration Statement; (ii) file with the SEC in a timely manner all reports and other documents required of Pentacon under the 1933 Act and the 1934 Act at any time after it has become subject to such reporting requirements; and (iii) so long as a Stockholder owns any restricted Pentacon Common Stock, furnish to each Stockholder forthwith upon written request a written statement by Pentacon as to its compliance with the reporting requirements of Rule 144 (at any time from and after 90 days following the effective date of the Registration Statement, and of the 1933 Act and the 1934 Act (any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Pentacon, and such other reports and documents so filed as a Stockholder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Stockholder to sell any such shares without registration. 18. GENERAL 18.1 COOPERATION. The Company, Stockholders, Pentacon and Newco shall each deliver or cause to be delivered to the other on the Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The Company will cooperate and use its reasonable efforts to have the present officers, directors and employees of the Company cooperate with Pentacon on and after the Consummation Date in furnishing information, evidence, testimony and -55- other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of Pentacon, and the heirs and legal representatives of the Stockholders. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the Stockholders, the Company, Newco and Pentacon and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only (i) pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a written instrument executed by the Stockholders, the Company, Newco and Pentacon, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby, provided that the Company shall make a good faith effort to cross reference disclosure, as necessary or advisable, between related Schedules, and provided further that the failure to do so will not affect the validity of such disclosure. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, Pentacon will pay the fees, expenses and disbursements of Pentacon and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto, including all costs and expenses incurred in the performance and compliance with all conditions to be performed by Pentacon under this Agreement, including the fees and expenses of Ernst & Young LLP, Andrews & Kurth L.L.P., and any other person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures II, L.C., and the costs of preparing the Registration Statement. Except as otherwise agreed in writing by Pentacon, each Stockholder shall pay their respective fees, expenses and disbursements of counsel and other professionals in connection with this transaction and shall pay all sales, use, transfer, real property -56- transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware. Each Stockholder shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each Stockholder acknowledges that he, and not the Company or Pentacon, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof. The Stockholders acknowledge that the risks of the transactions contemplated hereby include tax risks, with respect to which the Stockholders are relying solely on the opinion contemplated by Section 8.12 hereof. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to Pentacon, or Newco, addressed to them at: Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 with copies to: Bruce Taten, Esquire Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 and Christopher S. Collins, Esquire Andrews & Kurth, L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 (b) If to the Stockholders, addressed to them at their addresses set forth on Annex II, with copies to: Matthew S. Brown Katten, Muchin & Zavis 525 West Monroe Street, Suite 1600 Chicago, Illinois 60661 (c) If to the Company, addressed to it at: -57- Jack L. Fatica AXS Solutions, Inc. 1926 Peach Street Erie, Pennsylvania 16502 or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the applicable Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4, no right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. -58- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PENTACON, INC. By:/s/ MARK E. BALDWIN Mark E. Baldwin Chief Executive Officer AXS SOLUTIONS ACQUISITION COMPANY By:/s/ MARK E. BALDWIN Name: Mark E. Baldwin Title: President AXS SOLUTIONS, INC. By:/s/ JACK L. FATICA Name: Jack L. Fatica Title: Chief Executive Officer STOCKHOLDERS: /s/ JACK L. FATICA JACK L. FATICA /s/ JEFFREY P. FATICA JEFFREY P. FATICA /s/ ROBERT HOYT ROBERT HOYT -59- /s/ NATALIE L. RANUS NATALIE L. RANUS JACK C. FATICA TRUST By: /s/ NATALIE L. RANUS Name: Natalie L. Ranus Title:____________________ JUSTIN P. FATICA TRUST By: /s/ JEFFREY P. FATICA Name: Jeffrey P. Fatica Title: Co-Trustee RYAN A. FATICA TRUST By: /s/ NATALIE L. RANUS Name: Natalie L. Ranus Title:____________________ OAK RIDGE TRUST By: /s/ ROBERT H. HOYT Name: Robert H. Hoyt Title: Co-Trustee -60- JASON P. FATICA TRUST By: /s/ NATALIE L. RANUS Name: Natalie L. Ranus Title: Co-Trustee -61- ANNEX I (AXS) CONSIDERATION TO BE PAID TO THE STOCKHOLDERS STOCKHOLDER SHARES OF COMMON STOCK OF PENTACON, INC. MERGER CASH ----------- ------------- Natalie L. Ranus ....................... 92,782 $ 395,737.61 Jack C. Fatica Trust ................... 54,578 $ 232,786.83 Justin P. Fatica Trust ................. 38,205 $ 162,950.78 Jason P. Fatica Trust .................. 92,782 $ 395,737.61 Ryan A. Fatica Trust ................... 92,782 $ 395,737.61 Oak Ridge Trust ........................ 327,466 $1,396,720.98 Jeffrey P. Fatica ...................... 281,621 $1,201,180.05 Jack L. Fatica ......................... 802,656 $3,423,518.31 Robert Hoyt ............................ 36,385 $ 155,191.22 ----------- ------------- 1,819,257 $7,759,561.00 =========== ============= MINIMUM VALUE: ......................... $26,370,560 ANNEX II AXS SOLUTIONS, INC. STOCK OWNERSHIP Natalie L. Ranus 500 Shares Jack C. Fatica Trust 300 Shares Justin P. Fatica Trust 220 Shares Jason P. Fatica Trust 510 Shares Ryan A. Fatica Trust 510 Shares Oak Ridge Trust 1800 Shares Jeffery P. Fatica 1548 Shares Jack L. Fatica 4412 Shares Robert Hoyt 200 Shares See attachment for stockholder addresses. -62- EX-10.3 4 EXHIBIT 10.3 AGREEMENT AND PLAN OF ORGANIZATION dated as of the 1st day of December 1997 by and among PENTACON, INC. CAPITOL BOLT & SUPPLY ACQUISITION COMPANY (a subsidiary of Pentacon, Inc.) CAPITOL BOLT & SUPPLY, INC. and the STOCKHOLDERS named herein TABLE OF CONTENTS Page RECITALS.....................................................................1 1. THE MERGER.............................................................6 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................6 1.2 EFFECTIVE TIME OF THE MERGER.....................................6 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION.........................................6 1.4 EFFECT OF MERGER.................................................7 2. CONVERSION OF STOCK....................................................7 2.1 MANNER OF CONVERSION.............................................7 3. DELIVERY OF MERGER CONSIDERATION.......................................8 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8 4. CLOSING................................................................9 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.....9 5.1 DUE ORGANIZATION................................................10 5.2 AUTHORIZATION...................................................10 5.3 CAPITAL STOCK OF THE COMPANY....................................10 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10 5.5 NO BONUS SHARES.................................................11 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................11 5.7 PREDECESSOR STATUS; ETC.........................................11 5.8 SPIN-OFF BY THE COMPANY.........................................11 5.9 FINANCIAL STATEMENTS............................................11 5.10 LIABILITIES AND OBLIGATIONS.....................................12 5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12 5.12 PERMITS AND INTANGIBLES.........................................13 5.13 ENVIRONMENTAL MATTERS...........................................13 5.14 PERSONAL PROPERTY...............................................14 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15 5.16 REAL PROPERTY...................................................16 5.17 INSURANCE.......................................................16 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............17 -i- 5.19 EMPLOYEE PLANS..................................................17 5.20 COMPLIANCE WITH ERISA...........................................18 5.21 CONFORMITY WITH LAW; LITIGATION.................................19 5.22 TAXES...........................................................19 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21 5.25 ABSENCE OF CHANGES..............................................21 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................23 5.27 VALIDITY OF OBLIGATIONS.........................................23 5.28 RELATIONS WITH GOVERNMENTS......................................23 5.29 DISCLOSURE......................................................23 5.30 PROHIBITED ACTIVITIES...........................................24 5.31 NO WARRANTIES OR INSURANCE......................................24 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS....................................................24 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................25 5.34 PREEMPTIVE RIGHTS...............................................25 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................25 6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25 6.1 DUE ORGANIZATION................................................25 6.2 AUTHORIZATION...................................................26 6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................26 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26 6.5 SUBSIDIARIES....................................................26 6.6 FINANCIAL STATEMENTS............................................27 6.7 LIABILITIES AND OBLIGATIONS.....................................27 6.8 CONFORMITY WITH LAW; LITIGATION.................................27 6.9 NO VIOLATIONS...................................................27 6.10 VALIDITY OF OBLIGATIONS.........................................28 6.11 PENTACON STOCK..................................................28 6.12 NO SIDE AGREEMENTS..............................................29 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................29 6.14 DISCLOSURE......................................................29 7. COVENANTS PRIOR TO CLOSING............................................29 7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29 7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................30 7.3 PROHIBITED ACTIVITIES...........................................31 7.4 NO SHOP.........................................................32 7.5 NOTICE TO BARGAINING AGENTS.....................................33 7.6 AGREEMENTS......................................................33 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.........................................................33 7.8 AMENDMENT OF SCHEDULES..........................................34 -ii- 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............35 7.10 FINAL FINANCIAL STATEMENTS......................................35 7.11 FURTHER ASSURANCES..............................................35 7.12 AUTHORIZED CAPITAL..............................................35 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........36 7.14 PRE-CLOSING NOTIFICATIONS.......................................36 7.15 PAYMENT OF INDEBTEDNESS.........................................36 7.16 MINIMUM VALUE...................................................36 7.17 DIRECTORS. ....................................................36 7.18 TRANSACTION REPORTING...........................................37 7.19 PERMITS.........................................................37 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.......37 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......37 8.2 SATISFACTION....................................................37 8.3 NO LITIGATION...................................................38 8.4 OPINION OF COUNSEL..............................................38 8.5 REGISTRATION STATEMENT..........................................38 8.6 CONSENTS AND APPROVALS..........................................38 8.7 GOOD STANDING CERTIFICATES......................................38 8.8 NO MATERIAL ADVERSE CHANGE......................................38 8.9 CLOSING OF IPO..................................................38 8.10 SECRETARY'S CERTIFICATE.........................................38 8.11 EMPLOYMENT AGREEMENTS...........................................39 8.12 TAX MATTERS.....................................................39 8.13 EXCHANGE LISTING................................................39 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO.............39 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....39 9.2 NO LITIGATION...................................................40 9.3 SECRETARY'S CERTIFICATE.........................................40 9.4 NO MATERIAL ADVERSE EFFECT......................................40 9.5 STOCKHOLDERS' RELEASE...........................................40 9.6 SATISFACTION....................................................40 9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................40 9.8 OPINION OF COUNSEL..............................................41 9.9 CONSENTS AND APPROVALS..........................................41 9.10 GOOD STANDING CERTIFICATES......................................41 9.11 REGISTRATION STATEMENT..........................................41 9.12 EMPLOYMENT AGREEMENTS...........................................41 -iii- 9.13 CLOSING OF IPO..................................................41 9.14 FIRPTA CERTIFICATE..............................................41 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............41 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................41 10.2 PREPARATION AND FILING OF TAX RETURNS...........................42 10.3 DIRECTORS.......................................................42 11. INDEMNIFICATION.......................................................43 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.....................43 11.2 INDEMNIFICATION BY PENTACON.....................................44 11.3 THIRD PERSON CLAIMS.............................................44 11.4 EXCLUSIVE REMEDY................................................45 11.5 LIMITATIONS ON INDEMNIFICATION..................................46 12. TERMINATION OF AGREEMENT..............................................47 12.1 TERMINATION.....................................................47 12.2 LIABILITIES IN EVENT OF TERMINATION.............................48 13. NONCOMPETITION........................................................48 13.1 PROHIBITED ACTIVITIES...........................................48 13.2 DAMAGES.........................................................49 13.3 REASONABLE RESTRAINT............................................49 13.4 SEVERABILITY; REFORMATION.......................................49 13.5 INDEPENDENT COVENANT............................................49 13.6 MATERIALITY.....................................................50 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................50 14.1 STOCKHOLDERS....................................................50 14.2 PENTACON AND NEWCO..............................................50 14.3 DAMAGES.........................................................51 14.4 SURVIVAL........................................................51 15. TRANSFER RESTRICTIONS.................................................51 15.1 TRANSFER RESTRICTIONS...........................................51 16. FEDERAL SECURITIES ACT REPRESENTATIONS................................52 16.1 COMPLIANCE WITH LAW.............................................52 16.2 ECONOMIC RISK; SOPHISTICATION...................................52 17. REGISTRATION RIGHTS...................................................53 17.1 PIGGYBACK REGISTRATION RIGHTS...................................53 -iv- 17.2 REGISTRATION PROCEDURES.........................................53 17.3 INDEMNIFICATION.................................................54 17.4 UNDERWRITING AGREEMENT..........................................55 17.5 RULE 144 REPORTING..............................................56 18. GENERAL...............................................................56 18.1 COOPERATION.....................................................56 18.2 SUCCESSORS AND ASSIGNS..........................................56 18.3 ENTIRE AGREEMENT................................................57 18.4 COUNTERPARTS....................................................57 18.5 BROKERS AND AGENTS..............................................57 18.6 EXPENSES........................................................57 18.7 NOTICES.........................................................58 18.8 GOVERNING LAW...................................................59 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................59 18.10 EXERCISE OF RIGHTS AND REMEDIES.................................59 18.11 TIME............................................................59 18.12 REFORMATION AND SEVERABILITY....................................59 18.13 REMEDIES CUMULATIVE.............................................59 18.14 CAPTIONS........................................................59 -v- ANNEXES Annex I - Consideration to Be Paid to Stockholders and Other Stockholders Annex II - Stockholders and Stock Ownership of the Company Annex III - Certificate of Incorporation and By-Laws of Pentacon and Newco Annex IV - Form of Opinion of Counsel to Pentacon and Newco Annex V - Form of Opinion of Counsel to Company and Stockholders Annex VI - Form of Founder Employment Agreement -vi- SCHEDULES 5.1 Due Organization 5.2 Authorization 5.3 Capital Stock of the Company 5.4 Transactions in Capital Stock, Organization Accounting 5.5 No Bonus Shares 5.6 Subsidiaries 5.7 Predecessor Status; etc. 5.8 Spin-off by the Company 5.9 Financial Statements 5.10 Liabilities and Obligations 5.11 Accounts and Notes Receivable 5.12 Permits and Intangibles 5.13 Environmental Matters 5.14 Personal Property 5.15 Significant Customers; Material Contracts and Commitments 5.16 Real Property 5.17 Insurance 5.18 Compensation; Employment Agreements; Labor Matters 5.19 Employee Plans 5.20 Compliance with ERISA 5.21 Conformity with Law; Litigation 5.22 Taxes 5.23 No Violations, Consents, etc. 5.24 Government Contracts 5.25 Absence of Changes 5.26 Deposit Accounts; Powers of Attorney 5.30 Prohibited Activities 5.31 No Warranties or Insurance 5.32 Related Party Transactions 5.35 No Intention to Dispose of Pentacon Stock 6.3 Capital Stock of Pentacon and Newco 6.4 Options, Warrants and Rights 6.8 Litigation 6.9 No Violations 6.12 Side Agreements 7.2 Conduct of Business Pending Closing 7.3 Prohibited Activities 7.5 Notice to Bargaining Agents 7.6 Termination Agreements 7.15 Obligations to be Paid at Closing 9.7 Continuing Related Party Agreements 9.12 Employment Agreements 18.5 Brokers and Agents -vii- AGREEMENT AND PLAN OF ORGANIZATION THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of the 1st day of December, 1997, by and among PENTACON, INC., a Delaware corporation ("Pentacon"), CAPITOL BOLT & SUPPLY ACQUISITION COMPANY, a Delaware corporation ("Newco"), CAPITOL BOLT & SUPPLY, INC., a Texas corporation (the "Company"), and MARY E. McCLURE, INDIVIDUALLY and as CO-TRUSTEE OF THE EARL MILTON McCLURE, JR. RESIDUARY TRUST (the "Stockholders"), who, together with the other stockholders of the Company who are not party to this Agreement (the "Other Stockholders"), are all the stockholders of the Company, who herein agree as follows: RECITALS WHEREAS, Newco is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on November 26, 1997, solely for the purpose of completing the transactions set forth herein, and is a wholly owned subsidiary of Pentacon, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective boards of directors of Newco and the Company (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that Newco merge with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and the State of Incorporation (as hereinafter defined); WHEREAS, Pentacon is entering into other separate agreements substantially similar to this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Organization," with each of the Other Founding Companies (as defined herein) and their respective stockholders in order to acquire additional fasteners companies; WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon Plan of Organization;" WHEREAS, the Stockholders and Other Stockholders and the boards of directors and the stockholders of Pentacon, each of the Other Founding Companies and each of the subsidiaries of Pentacon that are parties to the Other Agreements have approved and adopted or prior to the Closing Date will adopt and approve the Pentacon Plan of Organization as an integrated plan pursuant to which the Stockholders, the Other Stockholders and the stockholders of each of the other Founding Companies will transfer the capital stock of each of the Founding Companies to Pentacon and the stockholders of each of the other Founding Companies will acquire the stock of Pentacon (but not cash or other property) as a tax-free transfer of property under Section 351 of the Code; -1- WHEREAS, the Board of Directors of the Company has approved this Agreement as part of the Pentacon Plan of Organization in order to transfer the capital stock of the Company to Pentacon; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 ACT" means the Securities Act of 1933, as amended. "1934 ACT" means the Securities Exchange Act of 1934, as amended. "ACQUIRED PARTY" means the Company, any subsidiary and any member of a Relevant Group. "ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware companies wholly-owned by Pentacon prior to the Consummation Date. "AFFILIATES" shall mean with respect to any person or entity, any other person or entity that directly or indirectly, controls, is controlled, or is under common control with such person or entity. For purposes hereof, control shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger with respect to the Merger in such forms as may be required by the laws of the State of Delaware and the State of Incorporation. "BALANCE SHEET DATE" means August 31, 1997. "CHARTER DOCUMENTS" has the meaning set forth in Section 5.1. "CLOSING" has the meaning set forth in Section 4. "CLOSING DATE" has the meaning set forth in Section 4. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY STOCK" has the meaning set forth in Section 2.1. "CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital of this Agreement. -2- "CONSUMMATION DATE" has the meaning set forth in Section 4. "DELAWARE GCL" has the meaning set forth in Section 1.4. "DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of the Registration Statement, and any corrections thereto and supplemental information delivered by Pentacon to the Company for delivery to the Stockholders prior to the time this Agreement is delivered by the Company and the Stockholders to Pentacon. "EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger becomes effective, which shall occur on the Consummation Date. "ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13. "ERISA" has the meaning set forth in Section 5.19. "EXPIRATION DATE" has the meaning set forth in Section 5(A). "FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "FOUNDING COMPANIES" means: Alatec Products, Inc., a California corporation; AXS Solutions, Inc., a Delaware corporation; Capitol Bolt & Supply, Inc., a Texas corporation; Maumee Industries, Inc., an Indiana corporation; and Sales Systems, Limited, a Pennsylvania corporation. "HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13. "HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c). "INTERIM BALANCE SHEET" has the meaning set forth in Section 5.9(ii). "IPO" means the initial public offering of Pentacon Stock pursuant to the Registration Statement described herein. "LICENSES" has the meaning set forth in Section 5.12. -3- "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise), of the subject entity and its subsidiaries taken as a whole. "MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a). "MERGER" means the merger of Newco with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and the laws of the State of Incorporation. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.0l per share, of Newco. "OTHER AGREEMENTS" has the meaning set forth in the third recital hereof. "OTHER FOUNDING COMPANIES" means all of the Founding Companies other than the Company. "OTHER STOCKHOLDERS" means those persons or entities owning stock in the Company other than the Stockholders. "PBGC" has the meaning set forth in Section 5.19. "PENTACON" has the meaning set forth in the first paragraph of this Agreement. "PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1 "PENTACON STOCK" means the common stock, par value $.01 per share, of Pentacon. "PERSON" means an individual, partnership, joint venture, corporation, bank, trust, unincorporated organization or other entity. "PRICING" means the date of determination by Pentacon and the Underwriters of the public offering price of the shares of Pentacon Stock in the IPO; the parties hereto contemplate that the Pricing shall take place on the Closing Date. "PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30. "QUALIFIED PLANS" has the meaning set forth in Section 5.20. -4- "REGISTRATION STATEMENT" means that certain registration statement on Form S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued in the IPO and all amendments thereto. "RELEVANT GROUP" means the Company and any affiliated, combined, consolidated, unitary or similar group of which the Company is or was a member. "RETURNS" means any returns, reports or statements (including any information returns) required to be filed for purposes of reporting, computing or otherwise required in connection with a particular Tax. "SCHEDULE" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STATE OF INCORPORATION" means the State of Texas. "STOCKHOLDERS" has the meaning set forth in the first paragraph of this Agreement. "SUBSIDIARIES" means with respect to a person or entity, any corporation or other entity in which such person or entity owns a 5% or greater ownership interest. "SURVIVING CORPORATION" has the meaning set forth in Section 1.2. "TAX" OR "TAXES" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, withholding, employment, excise, property, deed, stamp, alternative or add on minimum, or other taxes, assessments, duties, fees, levies or other governmental charges, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "UNDERWRITERS" means the prospective underwriters identified in the Draft Registration Statement. "YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(i). -5- 1. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause the Articles of Merger to be signed, verified and delivered to Pentacon to be held for filing with the Secretary of State of the State of Delaware and the Secretary of State (or other appropriate authority) of the State of Incorporation on or effective as of the Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, Newco shall be merged with and into the Company in accordance with the Articles of Merger and the separate existence of Newco shall cease. The Company shall be the surviving party in the Merger and the Company is sometimes hereinafter referred to as the "Surviving Corporation". As a result of the Merger, the outstanding shares of capital stock of Newco and the Company shall be converted or canceled in the manner provided in Section 2. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the Company then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of Newco then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended (and such By-laws shall be amended, if necessary, to comply with applicable state law); (iii) the Board of Directors of the Surviving Corporation shall consist of the persons who are on the Board of Directors of the Company immediately prior to the Effective Time of the Merger, provided that Bruce Taten shall become an additional director of the Surviving Corporation effective as of the Effective Time of the Merger, and the number of directors constituting the entire Board of Directors of the Company shall be increased, if necessary, to accommodate the addition of such additional director; the Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Incorporation and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the Company immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Brian Fontana shall become an additional Vice President and Bruce Taten will become the Secretary of the Surviving Corporation, such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until their respective successors are duly elected and qualified. -6- 1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of the State of Incorporation. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the Company shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of Newco shall be merged with and into the Company, and the Company, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of Newco shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the Company or Newco shall be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Company and Newco; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the State of Incorporation vested in the Company or Newco, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the Company and Newco and any claim existing, or action or proceeding pending, by or against the Company or Newco may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the Company or Newco shall be impaired by the Merger, and all debts, liabilities and duties of the Company and Newco shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. 2. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the Company ("Company Stock") into shares of Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of Company Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) the right to receive the number of shares of Pentacon Stock set forth on Annex I hereto with respect to such holder and (2) the right to receive the amount of cash set forth on Annex I hereto with respect to such holder; -7- (ii) all shares of Company Stock that are held by the Company as treasury stock or which are otherwise issued but not outstanding shall be canceled and retired and shall cease to exist and no shares of Pentacon Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of Newco Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of Pentacon, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All Pentacon Stock received by the Stockholders and Other Stockholders pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding Pentacon Stock by reason of the provisions of the Certificate of Incorporation of Pentacon or as otherwise provided by the Delaware GCL. All Pentacon Stock received by the Stockholders and Other Stockholders shall be issued and delivered to the Stockholders and Other Stockholders free and clear of any liens, claims or encumbrances of any kind or nature. All voting rights of such Pentacon Stock received by the Stockholders and Other Stockholders shall be fully exercisable by the Stockholders and Other Stockholders and the Stockholders and Other Stockholders shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, Pentacon shall have no class of capital stock issued and outstanding other than the Pentacon Stock. 3. DELIVERY OF MERGER CONSIDERATION 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date the Stockholders and Other Stockholders, who are the holders of all of the outstanding capital stock of the Company, shall, upon surrender of their certificates, receive the respective number of shares of Pentacon Stock and the amount of cash described on Annex I hereto, said cash to be payable by certified check, or if hereafter agreed by the Stockholder or Other Stockholder and Pentacon, by wire transfer. 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders and Other Stockholders shall deliver to Pentacon at the Closing the certificates representing Company Stock, duly endorsed in blank by the Stockholders and Other Stockholders, or accompanied by blank stock powers, and with all necessary transfer tax and other revenue stamps, acquired at the Stockholders' and Other Stockholders' expense, affixed and canceled. The Stockholders and Other Stockholders agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such Company Stock or with respect to the stock powers accompanying any Company Stock. -8- 4. CLOSING At or prior to the Pricing, the parties shall take all actions reasonably necessary to prepare to (i) effect the Merger (including the execution of the Articles of Merger which shall be placed in escrow with Pentacon for filing with the appropriate authorities effective on the Consummation Date, subject, however, to satisfaction or waiver of all conditions precedent) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) (or wire transfers) referred to in Section 3 hereof, each of which actions shall only be taken upon the Consummation Date as herein provided. In the event that there is no Consummation Date and this Agreement automatically terminates as provided in this Section 4 the Articles of Merger shall not be filed and shall be promptly returned to the Stockholders. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between the Stockholders and Pentacon. On the Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities so that they shall be, as early as practicable on the Consummation Date, effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check or checks (or wire transfers) in an amount equal to the cash portion of the consideration which the Stockholders and the Other Stockholders shall be entitled to receive pursuant to Section 3 hereof shall occur and be completed and (z) the closing with respect to the IPO shall occur and be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date." During the period from the Closing Date to the Consummation Date, this Agreement may only be terminated by the parties if the underwriting agreement in respect of the IPO is terminated pursuant to the terms of such underwriting agreement. This Agreement shall also in any event automatically terminate if the Consummation Date has not occurred within 15 business days following the Closing Date. Time is of the essence. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS. Each of the Stockholders, jointly and severally, and the Company represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that the warranties and representations set forth in Sections 5.13 and 5.22 hereof shall survive until such time as the applicable statute of limitations period has run or for five (5) years if there is no applicable statute of limitations, which shall be deemed to be the Expiration Date for Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall mean and refer to the Company and all of its Subsidiaries, if any. -9- 5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the State of Incorporation, and has the requisite power and authority to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which failure to so qualify would reasonably be expected to have a Material Adverse Effect on the Company. Schedule 5.1 sets forth a list of all jurisdictions in which the Company is authorized or qualified to do business. True, complete and correct copies of (i) the Certificate of Incorporation and By-laws, each as amended, of the Company (the "Charter Documents"), and (ii) the stock records of the Company (including, without limitation, a copy of the Company's stock ledger), are all attached to Schedule 5.1. The Company has delivered complete and correct copies of all minutes of meetings, written consents and other written evidence, if any, of deliberations of or actions taken by the Company's Board of Directors, any Committees of the Board of Directors and stockholders of the Company during the last five years. 5.2 AUTHORIZATION. (i) The officers or other representatives of the Company executing this Agreement have the authority to enter into and bind the Company to the terms of this Agreement and (ii) the Company has the full legal right, power and authority to enter into this Agreement and the Merger. Prior to the Closing, the directors and the shareholders of each class of stock will approve this Agreement and the transactions contemplated hereby in all respects, and copies of all such resolutions, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, are attached hereto as Schedule 5.2. Mary E. McClure and the trustee of the profit sharing plan have given their agreement to vote in favor of this Agreement at the time of the meeting of the shareholders of the corporation called for the purposes of voting on such Agreement. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company is as set forth on Schedule 5.3. All of the issued and outstanding shares of the capital stock of the Company are owned by the Stockholders and Other Stockholders in the amounts set forth in Annex II. The Stockholders represent and warrant that except as set forth on Schedule 5.3, the shares of capital stock of the Company owned by each Stockholder and the Other Stockholders are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the Stockholders and the Other Stockholders and further, such shares were offered, issued, sold and delivered by the Company in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of any preemptive rights of any past or present stockholder of the Company. 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the Company has not acquired or redeemed any Company Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the Company to issue any of its authorized but unissued capital stock; (ii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise -10- acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the Company nor the relative ownership of shares among any of its respective stockholders has been altered or changed in contemplation of the Merger and/or the Pentacon Plan of Organization. Except as set forth in Schedule 5.4, there are no voting trusts, proxies or other agreements or understandings to which the Company or any of its stockholders is a party or is bound with respect to the voting of any shares of capital stock of the Company. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of Company Stock was issued pursuant to awards, grants or bonuses in contemplation of the Merger or the Pentacon Plan of Organization. 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule 5.6, the Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all predecessor companies of the Company, including the names of any entities acquired by the Company (by stock purchase, merger or otherwise) or owned by the Company or from whom the Company previously acquired material assets, in any case, from the earliest date upon which any Stockholder or Other Stockholder acquired his or her stock in any Company. Except as disclosed on Schedule 5.7, the Company has not been, within such period of time, a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the Company or any other person or entity that is an Affiliate of the Company since January 1, 1995. 5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following financial statements are attached hereto as Schedule 5.9: (i) the balance sheets of the Company as of October 31, 1995 and 1996 and the related statements of operations and retained earnings as well as the related supplemental schedule of selling, general and administrative expense for the two-year period ended October 31, 1996, (such balance sheets, the related statements of operations and retained earnings as well as the related supplemental schedule of selling, general and administrative expense are referred to herein as the "Year-end Financial Statements"); and -11- (ii) the balance sheet of the Company as of August 31, 1997, (the "Interim Balance Sheet"). The Year-end Financial Statements and the Interim Balance Sheet are collectively called the "Financial Statements". 5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate list as of the Balance Sheet Date of (i) all liabilities of the Company which are not reflected on the Interim Balance Sheet at the Balance Sheet Date except for those liabilities not required to be reflected or disclosed under generally accepted accounting principles or F.A.S.B. 5 and which were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other security agreements to which the Company is a party or by which its properties may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet Date, the Company has not incurred any liabilities or obligations of any kind, character or description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business and consistent with past practices. The Company has also delivered to Pentacon on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, a good faith and reasonable estimate (to the extent the Company can reasonably make an estimate) of the maximum amount which the Company reasonably expects may be payable and the amount, if any, accrued or reserved for each such potential liability on the Company's Financial Statements. If no estimate is provided, the estimate shall for purposes of this Agreement be deemed to be zero. For each such contingent liability or liability for which the amount is not fixed or is contested, the Company has provided to Pentacon the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding; (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date (if any) on which such claim, suit or proceeding was instituted or the date (period) to which such claim relates. 5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate list of the accounts and notes receivable of the Company, as of the Balance Sheet Date, including any such amounts which are not reflected in the Interim Balance Sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the Stockholders or Other Stockholders, which are identified as such. Except to the extent reflected on Schedule 5.11, such accounts, notes and other receivables are collectible in the amounts shown on Schedule 5.11, net of reserves reflected in the Interim Balance Sheet of the Balance Sheet Date. -12- 5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses, franchises, permits and other governmental authorizations ("Licenses") necessary to conduct the business of the Company and the Company has delivered to Pentacon an accurate list and summary description (which is set forth on Schedule 5.12) of all such material Licenses, including any material trademarks, trade names, patents, patent applications and copyrights owned or held by the Company or any of its employees (including interests in software or other technology systems, programs and intellectual property). At or prior to the Closing, all rights to such trademarks, trade names, patents, patent applications, copyrights and other intellectual property held by the Stockholders, or their Affiliates will be assigned or licensed to the Company for no additional consideration. The Licenses and other rights listed on Schedule 5.12 are valid, and the Company has not received any notice that any person intends to cancel, terminate or not renew any such License or other right. The Company has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in the Licenses and other rights listed on Schedule 5.12 and is not in violation of any of the foregoing. Except as specifically provided in Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the Company by, any such Licenses or other rights. None of the Other Stockholders hold any Licenses used by the Company. 5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached hereto, (i) the Company has conducted its businesses in compliance with all applicable Environmental Laws, including, without limitation, having all environmental permits, licenses and other approvals and authorizations necessary for the operation of its business as presently conducted, (ii) none of the properties owned by the Company contain any Hazardous Substance as a result of any activity of the Company in amounts exceeding the levels permitted by applicable Environmental Laws, (iii) the Company has not received any notices, demand letters or requests for information from any Federal, state, local or foreign governmental entity or third party indicating that the Company may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of its business, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or to the knowledge of the Stockholders threatened, against the Company relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law, (vi) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law from any properties owned by the Company as a result of any activity of the Company during the time such properties were owned, leased or operated by the Company, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analysis regarding compliance or non-compliance with any applicable Environmental Law conducted by or which are in the possession of or readily available to the Company relating to the activities of the Company which are not listed on Schedule 5.13 attached hereto prior to the date hereof, (viii) there are no underground storage tanks on, in or under any properties owned by the Company and no underground storage tanks have been closed or removed from any of such properties during the time such properties were owned, leased or operated by the Company, (ix) there is no asbestos or asbestos containing material present in any of the properties owned by the Company, and no asbestos has -13- been removed from any of such properties during the time such properties were owned, leased or operated by the Company, and (x) neither the Company nor any of its respective properties are subject to any material liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law. (b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity which is applicable where the Company conducts or conducted business or owns or owned property or is applicable to any disposal, transportation or release of Hazardous Substances by or for the Company and, in each case, relates to (x) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as in effect on the Closing Date. The term Environmental Law includes, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as in effect on the Closing Date, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. (c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any government authority or any Environmental Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. 5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.14) of (x) all personal property material to the operations of the Company included in "plant, property and equipment" on the Interim Balance Sheet of the Company, (y) all other personal property owned by the Company with an individual fair market value in excess of $5,000 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all -14- material leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases and (2) an indication as to which assets are currently owned, or were formerly owned, by Stockholders or Other Stockholders, relatives of Stockholders or Other Stockholders, or Affiliates of the Company. Except as set forth on Schedule 5.14, (i) all material personal property used by the Company in its business is either owned by the Company or leased by the Company pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in working order and condition sufficient for the operation of the Company's business, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.15) of all customers (persons or entities) representing 5% or more of the Company's annual revenues for the period covered by any of the most current Year-End Financial Statements. Except to the extent set forth on Schedule 5.15, none of such customers have canceled or substantially reduced or, to the knowledge of the Company and the Stockholders, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the Company. (b) The Company has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the Company is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances and options to purchase land), other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered (or, in the case of supplier and distributor contracts and customer contracts on standard purchase forms, has made available) true, complete and correct copies of such agreements to Pentacon. The Company has also indicated on Schedule 5.15 a summary description of all plans or projects commenced or approved in the last six (6) months and involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $20,000 by the Company during any 12-month period. (c) Except as set forth on Schedule 5.15, since January 1, 1995, the Company has not experienced any difficulties in obtaining any inventory items necessary to the operation of its business, and, to the knowledge of the Company and the Stockholders, no such shortage of supply of inventory items is threatened or pending. To the knowledge of the Company and the Stockholders, no customer or supplier of the Company will cease to do business with, or substantially reduce its purchases from, the Company after the consummation of the transactions contemplated hereby. -15- (d) The Company is not required to provide any bonding or other financial security arrangements in any material amount in connection with any transactions with any of its customers or suppliers. (e) Except as disclosed in the schedules hereto, none of the Other Stockholders are parties to agreements with the Company or any of its Affiliates, have pending claims against or have threatened claims against the Company or any of its Affiliates. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the Company at the date hereof and all other real property, if any, used by the Company in the conduct of its business. Except as set forth on Schedule 5.16, any such real property owned by the Company will be sold or distributed by the Company on terms acceptable to Pentacon and leased back by the Company on terms no less favorable to the Company than those available from an unaffiliated party and otherwise reasonably acceptable to Pentacon at or prior to the Closing Date. The Company has good and insurable title to any real property owned by it that is shown on Schedule 5.16, other than property intended to be sold or distributed prior to the Closing Date, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.16 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title which do not adversely affect the current use of the property. True, complete and correct copies of all leases and agreements in respect of such real property leased by the Company are attached to Schedule 5.16, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by Stockholders or Other Stockholders or Affiliates of the Company or Affiliates of Stockholders or Other Stockholders is included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the Balance Sheet Date of all insurance policies carried by the Company, (ii) an accurate list of all insurance loss runs (to the extent available) or workers compensation claims received for the past three policy years. True, complete and correct copies of all insurance policies currently in effect have been delivered or made available to Pentacon. Such insurance policies evidence all of the insurance that the -16- Company is required to carry pursuant to all of its contracts and other agreements and pursuant to all applicable laws, and, in the reasonable judgment of the Company's management, provide adequate coverage against the risks involved in the Company's business. All of such insurance policies are currently in full force and effect and are scheduled to remain in full force and effect through the Consummation Date. Since January 1, 1995, no insurance carried by the Company has been canceled by the insurer and the Company has not been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS. (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.18) showing all officers, directors and key employees of the Company, listing all employment agreements with such officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided to Pentacon true, complete and correct copies of any existing employment agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and except as described in Schedule 5.18, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices and bonuses, as described in Schedule 5.18. (b) Except as set forth on Schedule 5.18, (i) the Company is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the Company are represented by any labor union or covered by any collective bargaining agreement, (iii) to the best knowledge of the Company, no campaign to establish such representation is in progress and (iv) there is no pending or, to the knowledge of the Company and the Stockholders, threatened labor dispute involving the Company and any group of its employees nor has the Company experienced any labor interruptions over the past three years. (c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no significant controversies pending or, to the knowledge of the Company and the Stockholders, threatened between the Company and any of its employees, (ii) the Company has complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, and (iii) to the knowledge of the Company and the Stockholders, no person has asserted that the Company is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee benefit plans of the Company, including all employment agreements and other agreements or arrangements containing "golden parachute" or other similar provisions, and deferred compensation agreements, together with true, complete and correct copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Balance Sheet Date. Except for the employee benefit plans, if any, described on Schedule 5.19, the Company does not sponsor, -17- maintain or contribute to any plan program, fund or arrangement that constitutes an "employee pension benefit plan", and neither the Company nor any subsidiary has any obligation to contribute to or accrue or pay any benefits under any deferred compensation or retirement funding arrangement on behalf of any employee or employees (such as, for example, and without limitation, any individual retirement account or annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred compensation arrangement). For the purposes of this Agreement, the term "employee pension benefit plan" shall have the same meaning as is given that term in Section 3(2) of ERISA. The Company has not sponsored, maintained or contributed to any employee pension benefit plan other than the plans set forth on Schedule 5.19, and the Company is not or could not be required to contribute to any retirement plan pursuant to the provisions of any collective bargaining agreement establishing the terms and conditions or employment of any of the Company's employees. Except as set forth on Schedule 5.19, the Company is not now, or will not as a result of its past activities become, liable to the Pension Benefit Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit plan under the provisions of Title IV of ERISA. All employee benefit plans listed on Schedule 5.19 and the administration thereof are in compliance with their terms and all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable federal, state and local statutes, ordinances and regulations. All accrued contribution obligations of the Company with respect to any plan listed on Schedule 5.19 as of the Balance Sheet Date have either been fulfilled in their entirety or are fully reflected on the Interim Balance Sheet as of the Balance Sheet Date. 5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, all such plans listed on Schedule 5.19 that are intended to qualify (the "Qualified Plans") under Section 401 (a) of the Code are, and have been so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the most recent determination letters with respect thereto are attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies of the most recent reports and filing relating thereto are included as part of Schedule 5.19 hereof. Neither the Stockholders, the Other Stockholders, any such plan listed in Schedule 5.19, nor the Company has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the Company has not incurred any liability for excise tax or penalty due to the Internal Revenue Service nor any liability to the PBGC. The Stockholders further represent that except as set forth on Schedule 5.19 hereto: -18- (i) there have been no terminations, partial terminations or discontinuations of contributions to any Qualified Plan intended to qualify under Section 401(a) of the Code without notice to and approval by the Internal Revenue Service; (ii) no plan listed in Schedule 5.19 subject to the provisions of Title IV of ERISA has been terminated; (iii) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any such plan listed in Schedule 5.19; (iv) the Company (including any subsidiaries) has not incurred liability under Section 4062 of ERISA; and (v) to the knowledge of the Company and the Stockholders, no circumstances exist pursuant to which the Company would be reasonably likely to have any direct or indirect liability whatsoever (including, but not limited to, any liability to any multiemployer plan or the PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty, or being subject to any statutory lien to secure payment of any such liability) with respect to any plan now or heretofore maintained or contributed to by any entity other than the Company that is, or at any time was, a member of a "controlled group" (as defined in Section 412(n)(6)(B) of the Code) that includes the Company. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it; and except to the extent set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or proceedings, pending or, to the knowledge of the Company and the Stockholders, threatened against or affecting, the Company, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Company, and, to the knowledge of the Company and the Stockholders, there is no basis for any such claim, action, suit or proceeding. The Company has conducted and is now conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, orders, approvals, variances, rules and regulations. 5.22 TAXES. (a) Except as set forth in Schedule 5.22, the Company has timely filed all requisite Federal, state and other Tax Returns or extension requests for all fiscal periods ended on or before the Balance Sheet Date; and except as set forth on Schedule 5.22, the Company has no notice that any examinations are in progress or that any claims are pending against it for federal, state and other -19- Taxes (including penalties and interest) for any period or periods prior to and including the Balance Sheet Date and no notice of any claim for Taxes, whether pending or threatened, has been received. Except as set forth in Schedule 5.22, all Tax, including interest and penalties (whether or not shown on any Tax Return) owed by the Company has been paid or accrued in its financial accounts. The amounts shown as accruals for Taxes on the Company Financial Statements are sufficient for the payment of all Taxes of the kinds indicated (including penalties and interest) for all fiscal periods ended on or before that date. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal and local income Tax Returns and franchise Tax Returns of Company for their last three (3) fiscal years, or such shorter period of time as any of them shall have existed, are attached hereto as Schedule 5.22 or have otherwise been delivered to Pentacon. The Company has a taxable year ended October 31. Except as set forth on Schedule 5.22, Company uses the accrual method of accounting for income tax purposes, and the Company's methods of accounting have not changed in the past five years. The Company is not an investment Company as defined in Section 351(e)(1) of the Code. Except as set forth in Schedule 5.22, the Company is not and has not during the last five years been a party to any tax sharing agreement or agreement of similar effect. The Company is not and has not during the last five years been a member of any consolidated group. Except as set forth on Schedule 5.22, the Company has not received, been denied, or applied for any private letter ruling during the last ten years. 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC. (a) The Company is not in violation of any Charter Document. Except as set forth in Schedule 5.23, neither the Company nor, to the best knowledge of the Company and the Stockholders, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"). (b) Except as set forth in Schedule 5.23, the execution and delivery of this Agreement by each of the Company and the Stockholders do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the Charter Documents (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any Material Document or other material instrument, obligation or agreement of any kind to which the Company or any of the Stockholders is now a party or by which any of the Stockholders or the Company or any of its properties or assets may be bound or affected. The consummation by the Company and the Stockholders of the transactions contemplated hereby will not result in any violation, conflict, breach, right of termination or acceleration or creation of liens under any of the terms, conditions or provisions of the items described in clauses (i) through (iii) of the preceding sentence, subject, in the case of the terms, conditions or provisions of the items described in -20- clause (iii) above, to obtaining (prior to the Effective Time of the Merger) such consents as may be required from commercial lenders, lessors or other third parties. (c) Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect, and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any material right or benefit. (d) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (iv) for filings in connection with listing on the NASDAQ National Market System or New York Stock Exchange or other nationally recognized securities exchange; (v) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13 and (vi) as set forth in Schedule 5.23, neither the Company, the Stockholders nor Other Stockholders are required to make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by the Company and the Stockholders or the consummation by the Company and the Stockholders or Other Stockholders of the transactions contemplated hereby. (e) Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the Company, Pentacon or Newco of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the Company from freely providing services or selling products to any other customer or potential customer of the Company, Pentacon, Newco or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth on Schedule 5.24, the Company is not now a party to any governmental contract that, by its express terms, is subject to price redetermination or renegotiation or that is customarily subject to price redetermination or renegotiations in the ordinary course of business. Except as set forth on Schedule 5.24, the Company is not now a party to any material contract based on minority ownership which would be canceled or otherwise materially adversely impacted by completion of the Pentacon Plan of Organization. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25 or as otherwise contemplated hereby, there has not been: (i) any Material Adverse Effect with respect to the Company; (ii) any damage, destruction or loss (whether or not covered by insurance), alone or in the aggregate, materially adversely affecting the properties or business of the Company; -21- (iii) any change in the authorized capital of the Company or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the Company except for distributions that would have been permitted after the date hereof under Section 7.3(iii) hereof, (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the Company to any of its officers, directors, Stockholders, Other Stockholders, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business or future prospects of the Company; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of Company outside of the ordinary course of business to any person, including, without limitation, the Stockholders or Other Stockholders and their respective affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the Company, including without limitation any indebtedness or obligation of any Stockholders, Other Stockholders or any respective affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the Company or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the Company's business; (xi) any waiver of any material rights or claims of the Company; (xii) any amendment or termination of any Material Document; (xiii) any transaction by the Company outside the ordinary course of its business; -22- (xiv) any cancellation or termination of a Material Document or material customer contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the Company other than in the ordinary course of business and other than distributions of real estate and other assets as permitted by this Agreement. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an accurate schedule as of the date of the Agreement of: (i) the name of each financial institution in which the Company has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the Company and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the Company and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the Company and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the Stockholders, or any Affiliate of any of them has given or offered anything of value to any governmental official, political party or candidate for government office in violation of any applicable laws, rules or regulations, nor has it or any of them otherwise taken any action which would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any applicable law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules hereto, furnished to Pentacon by the Company and the Stockholders in connection herewith, do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements herein and therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by Pentacon or Newco. -23- (b) The Company and the Stockholders acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither Pentacon or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the Company, the Stockholders or any other person affiliated or associated with the Company for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of Stockholders to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to Pentacon or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the Company has not, between the Balance Sheet Date and the date hereof, taken any of the actions which are prohibited ("Prohibited Activities") in Section 7.3. 5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to the knowledge of the Company or the Stockholders, the Company has no liability or potential liability to any person under any product or service warranty and the Company does not offer or sell insurance or consumer protection plans or other similar arrangements that could result in the Company being required to make any material payment to or perform any material service for any person thereunder. 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS. Except as described on Schedule 5.32, no Stockholder, Other Stockholder, officer, director or Affiliate of the Company (i) possesses, directly or indirectly, any financial interest in, or is a director, officer, employee or affiliate of, any corporation, firm, association or business organization that is a client, supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a party to an agreement or relationship, that involves the receipt by such person of compensation or property from the Company other than through a customary employment relationship. (B) REPRESENTATIONS AND WARRANTIES ON BEHALF OF STOCKHOLDERS AND OTHER STOCKHOLDERS. The Stockholders jointly represent and warrant that the representations and warranties set forth below are true as of the date of this Agreement as they relate to each and that the representations and warranties set forth in this Section 5(B) shall survive the Consummation Date. -24- 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Each Stockholder has the full legal right, power and authority to enter into this Agreement. Each Stockholder and Other Stockholder owns beneficially and of record all of the shares of the Company stock identified on Annex II as being owned by such Stockholder and Other Stockholder, and, such Company Stock is owned free and clear of all liens, encumbrances and claims of every kind. This Agreement is a legal, valid, and binding obligation of the Stockholder. 5.34 PREEMPTIVE RIGHTS. No Stockholder or Other Stockholder has any preemptive or other right to acquire shares of Company Stock or Pentacon Stock. Nothing herein, however, shall limit or restrict the rights of any Stockholder or Other Stockholder to acquire Pentacon Stock pursuant to (i) this Agreement or (ii) any option granted by Pentacon. 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. Except as set forth in Schedule 5.35, no Stockholder or Other Stockholder is under any binding commitment or contract to sell, exchange or otherwise dispose of shares of Pentacon Stock received as described in Section 3.1. 6. REPRESENTATIONS OF PENTACON AND NEWCO Pentacon and Newco, jointly and severally, represent and warrant to the Stockholders that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Consummation Date, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of determining whether a claim for indemnification under Section 11.2(iv) hereof has been made on a timely basis, and solely to the extent that in connection with the IPO, any of the Stockholders actually incurs liability under the 1933 Act, the 1934 Act, or any other Federal or state securities laws, the representations and warranties of Pentacon and Newco set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly incorporated and organized, validly existing and in good standing under the laws of the State of Delaware, and each has the requisite power and authority to carry on its business as it is now being conducted. Pentacon and Newco are each qualified to do business and are each in good standing in each jurisdiction in which the nature of its business makes such qualification necessary. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter Documents") are all attached hereto as Annex III. -25- 6.2 AUTHORIZATION. (i) The respective officers or other representatives of Pentacon and Newco executing this Agreement have the authority to enter into and bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and Newco have the full legal right, power and authority to enter into this Agreement and the Other Agreements and consummate the Merger. All corporate acts and other proceedings required to have been taken by Pentacon and Newco to authorize the execution, delivery and performance of this Agreement and the consummation of the Merger have been duly and properly taken. 6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration Statement. All of the issued and outstanding shares of the capital stock of Newco are owned by Pentacon and all of the issued and outstanding shares of the capital stock of Pentacon are owned by the persons set forth on Schedule 6.3 hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of Pentacon and Newco have been duly authorized and validly issued, are fully paid and nonassessable, and further, such shares were offered, issued, sold and delivered by Pentacon and Newco in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of Pentacon or Newco. 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the Other Agreements and except as set forth in the Draft Registration Statement or in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates Pentacon or Newco to issue any of their respective authorized but unissued capital stock; (ii) no voting trust, voting agreement, proxy or other agreements or understandings exist with respect to the voting of any shares of capital stock of Pentacon; and (iii) neither Pentacon nor Newco has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes a list of all outstanding options, warrants or other rights to acquire shares of the stock of Pentacon. 6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries except for Newco and each of the companies identified as "Newco" in each of the Other Agreements. Except as set forth in the preceding sentence, neither Pentacon nor Newco presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, and neither Pentacon nor Newco, directly or indirectly, is a participant in any joint venture, partnership or other non-corporate entity. -26- 6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in the Draft Registration Statement (the "Pentacon Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon), and the balance sheet included therein presents fairly the financial position of Pentacon as of its date. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft Registration Statement, Pentacon and Newco have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees generally described in Part II of the Draft Registration Statement and incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the Draft Registration Statement, neither Pentacon nor Newco is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of Pentacon or Newco, threatened against or affecting, Pentacon or Newco, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. Pentacon and Newco have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation, in any material respect, of any of the foregoing. 6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of Pentacon and Newco, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which Pentacon or Newco is a party, or by which Pentacon or Newco, or any of their respective properties, are bound (collectively, the "Pentacon Documents"); and (a) the rights and benefits of Pentacon and Newco under the Pentacon Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of their obligations hereunder and thereunder do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof will not, conflict with, or result in any violation or default (with or without notice or lapse of time, or both), under or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any lien upon any of the assets of Pentacon or Newco under, any provision of (i) the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the comparable governing instruments of Newco, (ii) any note, bond, mortgage, indenture or deed of trust or any license, lease, contract, commitment, agreement or arrangement to which Pentacon or Newco is a party or by which any of -27- their respective properties or assets are bound or (iii) any judgment, order, decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or their respective properties or assets. (b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the Pentacon Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. (c) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) filings with blue sky authorities in connection with the transactions contemplated by this Agreement, (iv) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (v) for filings in consideration for listing on the NASDAQ National Market System or the New York Stock Exchange or other nationally recognized securities exchange; and (vi) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not required make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by Newco or Pentacon or the consummation by the Newco and Pentacon of the transactions contemplated hereby. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the respective Boards of Directors and stockholders of Pentacon and Newco and this Agreement and the Other Agreements have been duly and validly authorized by all necessary corporate action and are legal, valid and binding obligations of Pentacon and Newco, enforceable against them in accordance with their respective terms. 6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the Stockholders and Other Stockholders, the Pentacon Stock to be delivered to the Stockholders and Other Stockholders pursuant to this Agreement will constitute valid and legally issued shares of Pentacon, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all substantive respects (which do not include the form of certificate upon which it is printed or the presence or absence of a CUSIP number on any such certificate) to the Pentacon Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the Stockholders and Other Stockholders shall at the time of such issuance and delivery be free and clear of any liens, claims or encumbrances of any kind or character. The shares of Pentacon Stock to be issued to the Stockholders and Other Stockholders pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. -28- 6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither Pentacon nor Newco has entered or will enter into any agreement with any of the Founding Companies or any of the Stockholders and Other Stockholders of the Founding Companies or Pentacon other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements and real property leases referred to herein or entered into in connection with the transactions contemplated hereby and thereby. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on March 20, 1997 and has conducted only limited operations since that time. Neither Pentacon nor Newco has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Except as described in the Draft Registration Statement, neither Pentacon nor Newco owns or has at any time owned any real property or any material personal property or is a party to any other material agreement other than the Other Agreements, the agreements contemplated thereby and such agreements as will be filed as Exhibits to the Registration Statement. 6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company and the Stockholders, together with this Agreement and the information furnished to the Company and the Stockholders in connection herewith, does not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by the Company or the Stockholders or information pertaining to the Company or a Stockholder which is confirmed in writing by the Company or such Stockholder. 7. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Consummation Date, the Company will afford to the officers and authorized representatives of Pentacon and the Other Founding Companies access to all of the Company's sites, properties, books and records and will furnish Pentacon with such additional financial and operating data and other information as to the business and properties of the Company as Pentacon or the Other Founding Companies may from time to time reasonably request; provided, however, that the Company shall not prior to the Closing Date be required to disclose to the Other Founding Companies, and Pentacon shall not without first obtaining the written approval of the Company disclose to the Other Founding Companies, information relating to pricing or profitability on an account-by-account basis or any pricing information relating to the Company's suppliers on a supplier-by-supplier basis. The Company will cooperate with Pentacon, its representatives, auditors and counsel and the Other Founding Companies in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. Pentacon, Newco, the Stockholders and the Company will treat all information obtained in connection with the negotiation and performance of this Agreement or the -29- due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, Pentacon will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1(a) requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Consummation Date, Pentacon will afford to the officers and authorized representatives of the Company and the Stockholders access to all of Pentacon's and Newco's sites, properties, books and records and will furnish the Company with such additional financial and operating data and other information as to the business and properties of Pentacon and Newco as the Company may from time to time reasonably request. Pentacon and Newco will cooperate with the Company, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The Company will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Consummation Date, the Company will, except as set forth on Sales Systems, Limited 7.2 or as otherwise expressly contemplated by this Agreement: (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) use commercially reasonable efforts to maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform in all material respects all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) use commercially reasonable efforts to keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use commercially reasonable efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with material suppliers, customers and others having business relations with the Company; -30- (vi) use commercially reasonable efforts to maintain compliance with all material permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments without the knowledge and consent of Pentacon (which consent shall not be unreasonably withheld, delayed or conditioned), provided that debt and/or lease instruments may be replaced without the consent of Pentacon if such replacement instruments are on terms at least as favorable to the Company as the instruments being replaced; and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents except for ordinary and customary bonus and salary increases for employees in accordance with the Company's past practices. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Sales Systems, Limited 7.3 or as otherwise expressly contemplated by this Agreement, between the date hereof and the Consummation Date, the Company will not, without prior written consent of Pentacon: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options, warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock; (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $25,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $25,000 necessary or desirable for the conduct of the businesses of the Company, (2) (A) liens for Taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested Taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16 hereto; -31- (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business and other than distributions of real estate and other assets as permitted in this Agreement (including the Schedules hereto); (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the Company, provided that the Company may negotiate and adjust bills and accounts in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 to the extent they exceed the reserves, if any, established therefor, or unless specifically listed thereon; (x) amend or terminate any material agreement, permit, license or other right of the Company provided that the Company may continue to administer vendor and supplier contracts in the ordinary course of business provided written notice of any such material amendments or terminations is provided to Pentacon as soon as possible following such action and in any event prior to the Closing; or (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder. 7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the Company, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than Pentacon, Newco or their authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the Company or a merger, consolidation or business combination of the Company. -32- 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide Pentacon on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The Stockholders and the Company shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the Company and any employee listed on Schedule 9.12 hereto and (ii) any existing agreement between the Company and any Stockholder on or prior to the Consummation Date provided that nothing herein shall prohibit or prevent the Company from paying (either prior to or on the Closing Date) notes or other obligations from the Company to the Stockholders in accordance with the terms thereof, which terms have been disclosed to Pentacon. Such termination agreements are listed on Schedule 7.6 and copies thereof shall be attached thereto. 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY. The Stockholders and the Company shall give prompt notice to Pentacon of (i) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the Company or the Stockholders contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any Stockholder or the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. Pentacon and Newco shall give prompt notice to the Company of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of Pentacon or Newco contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of Pentacon or Newco to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery or deemed delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. If, prior to the Closing Date, the Chief Executive Officer, the Chief Financial Officer or the General Counsel of Pentacon shall determine that any of Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder for indemnification against any Stockholder(s) (whether or not such claim might exceed the Indemnification Threshold), then Pentacon shall promptly advise the affected Stockholder(s), in writing, of such potential claim and provide information supporting the basis and potential amount of such claim (a "Potential Claim Notice"). This procedure with respect to Potential Claim Notices is intended to afford the affected Stockholder(s) notice so that it may attempt to cure or otherwise address the claim prior to Closing; provided, however, that (i) this procedure shall not affect or delay Closing and (ii) neither the failure or delay by Pentacon to give a Potential Claim Notice nor the information included or omitted from a Potential Claim Notice shall constitute a waiver of, or shall otherwise adversely affect the right to -33- receive indemnification for, any such claim paid by Pentacon, Newco, the Surviving Corporation or the Company hereunder after the Closing Date. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until 24 hours prior to the anticipated effectiveness of the Registration Statement to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date, unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the Company that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to the Company may be made unless Pentacon and a majority of the Founding Companies other than the Company consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by Pentacon or Newco that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to Pentacon or Newco may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, Pentacon shall give the Company written notice promptly after it has knowledge thereof. If Pentacon and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given by Pentacon or any Founding Company if no response is received within 24 hours following receipt of written notice of such amendment or supplement (or sooner if reasonable and if required by the circumstances under which such consent is requested), but the Company does not give its consent, the Company may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the Company seeks to amend or supplement a Schedule pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that Pentacon or Newco seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. -34- 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and Stockholders shall furnish or cause to be furnished to Pentacon and the Underwriters all of the information concerning the Company and the Stockholders reasonably required for inclusion in, and will cooperate with Pentacon and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement, except that the cost of the preparation of any such audited and unaudited Financial Statements shall be borne by Pentacon). The Company and the Stockholders agree promptly to advise Pentacon if at any time during the period in which a prospectus relating to the IPO is required to be delivered under the Securities Act, any information contained in the prospectus concerning the Company or the Stockholders becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the Company or the Stockholders, the Company represents and warrants as to such information with respect to itself, and each Stockholder represents and warrants, as to such information with respect to the Company and himself or herself, severally, but not jointly, that the information expressly provided for inclusion in the Registration Statement or otherwise confirmed in writing by such Stockholder will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the Consummation Date, and Pentacon shall have had sufficient time to review the unaudited consolidated balance sheets of the Company as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the Company for all fiscal quarters ended after the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the Company for the periods indicated therein. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall maintain its authorized capital stock as set forth in the Registration Statement filed with the SEC except for such changes in authorized capital stock as are made to respond to comments made by the SEC or requirements of any exchange or automated trading system for which application is made to register the Pentacon Stock and any changes necessary or advisable in order to permit the delivery of the opinion contemplated by Section 8.12 hereof. -35- 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby recognize that one or more filings under the Hart-Scott-Rodino Act may be required in connection with the transactions contemplated herein. If it is determined by the parties to this Agreement that filings under the Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act, (ii) such compliance by the Stockholders and the Company shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 9 of this Agreement, and (iii) the parties agree to cooperate and use their best efforts to cause all filings required under the Hart-Scott-Rodino Act to be made. If filings under the Hart-Scott-Rodino Act are required, the costs and expenses thereof (including filing fees) shall be borne by Pentacon. The obligation of each party to consummate the transactions contemplated by this Agreement is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, if applicable. 7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date of the final prospectus of Pentacon utilized in connection with the IPO, the Company or the Stockholders become aware of any fact or circumstance which would materially affect the accuracy of a representation or warranty of Company or Stockholders in this Agreement, the Company and the Stockholders shall promptly give notice of such fact or circumstance to Pentacon. However, subject to the provisions of Section 7.8, such notification shall not relieve either the Company or the Stockholders of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of Pentacon, the truth and accuracy of any and all warranties and representations of the Company, or on behalf of the Company and of Stockholders at the date of this Agreement and on the Closing Date and on the Consummation Date, shall be a precondition to the consummation of this transaction. 7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately following the Effective Time of the Merger, Pentacon will pay, or cause to be paid, all of the outstanding liabilities, obligations and indebtedness of Company to the lenders identified on Schedule 7.15 hereto. In connection with such repayment of indebtedness, all associated guaranties of Stockholders shall be terminated and canceled. 7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that one of the conditions to the Stockholders consummating the transactions contemplated herein is that the IPO shall be closed and the Stockholders and Other Stockholders (as a group) shall be entitled to receive consideration not less than the Minimum Value set forth on Annex I attached hereto. 7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon shall not exceed nine members immediately following the IPO unless the Founding Stockholder representatives to serve on such board agree in writing to a larger number of directors. -36- 7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise required by applicable law, Pentacon will describe or report the transaction in any required tax reports of Pentacon as a tax-free transaction (insofar as its relates to the delivery of Pentacon Stock for Company Stock) in a manner consistent with the tax opinion referenced in Section 8.12. 7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain all material Licenses necessary for Pentacon to commence the conduct of business on the Consummation Date. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of Stockholders and the Company with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the Stockholders and the Company with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such conditions have not been satisfied, the Stockholders (acting in unison) shall have the right to terminate this Agreement, or in the alternative, waive any condition not so satisfied. The delivery of certificates representing Company Stock to Pentacon as of the Consummation Date shall constitute a waiver of any conditions not so satisfied. However, no such waiver shall be deemed to affect the survival of the representations and warranties of Pentacon and Newco contained in Section 6 hereof or the rights of the Stockholders pursuant to Section 11 hereof. 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of Pentacon and Newco contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by Pentacon and Newco on or before the Closing Date and the Consummation Date shall have been duly complied with and performed in all material respects; and certificates to the foregoing effect dated the Closing Date and the Consummation Date, respectively, and signed by the President or any Vice President of Pentacon shall have been delivered to the Stockholders. 8.2 SATISFACTION. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall be reasonably satisfactory to the Company and its counsel. The Stockholders and the Company shall be satisfied that the Registration Statement and the prospectus forming a part thereof, including any amendments thereof or supplements thereto, shall not contain any untrue statement of a material fact, or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that, subject to the provisions set forth in the introductory paragraph of this Section 8, the condition contained in this sentence shall be deemed waived if the Company or Stockholders shall have failed to inform Pentacon in writing prior to the effectiveness of the -37- Registration Statement of the existence of an untrue statement of a material fact or the omission of such a statement of a material fact. 8.3 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of the Company as a result of which the management of the Company deems it inadvisable to proceed with the transactions hereunder. 8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed hereto as Annex IV. 8.5 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of Pentacon Stock to be received by the Stockholders and Other Stockholders is not less than the Minimum Value set forth on Annex I. 8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency or any third party relating to the consummation of the transactions contemplated herein or set forth in Schedule 5.23 hereto shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Company as a result of which Company deems it inadvisable to proceed with the transactions hereunder. 8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have delivered to the Company a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which Pentacon or Newco is authorized to do business, showing that each of Pentacon and Newco is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for Pentacon and Newco, respectively, for all periods prior to the Closing have been filed and paid. 8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to Pentacon or Newco which would constitute a Material Adverse Effect. 8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of Pentacon and of Newco, certifying the truth and correctness of attached copies of the Pentacon's and Newco's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the Stockholders of Pentacon and Newco -38- approving Pentacon's and Newco's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall have been afforded the opportunity to enter into an employment agreement substantially in the form of Annex VI hereto. 8.12 TAX MATTERS. The Stockholders and Other Stockholders shall have received an opinion of Ernst & Young LLP or other tax advisor of national recognition reasonably acceptable to the Stockholders that the Pentacon Plan of Organization will qualify as a tax-free transfer of property under Section 351 of the Code and that the Stockholders and Other Stockholders will not recognize gain to the extent the Stockholders and Other Stockholders exchange stock of the Company for Pentacon stock (but not cash or other property) pursuant to the Pentacon Plan of Organization. 8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for listing on the New York Stock Exchange, NASDAQ National Market System or the American Stock Exchange. 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO The obligations of Pentacon and Newco with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of Pentacon and Newco with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of the Consummation Date, if any such conditions have not been satisfied, Pentacon and Newco shall have the right to terminate this Agreement, or waive any such condition, but no such waiver shall be deemed to affect the survival of the representations and warranties contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the representations and warranties of the Stockholders and the Company contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the Stockholders and the Company on or before the Closing Date or the Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the Stockholders shall have delivered to Pentacon certificates dated the Closing Date and the Consummation Date, respectively, and signed by them to such effect. -39- 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which the management of Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate, dated the Closing Date and signed by the secretary of the Company, certifying the truth and correctness of attached copies of the Company's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and the Stockholders and Other Stockholders approving the Company's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the Company which would constitute a Material Adverse Effect, and the Company shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the Company to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The Stockholders shall have delivered to Pentacon an instrument dated the Closing Date, which shall be effective only upon the occurrence of the Consummation Date and shall relate only to matters accruing on or prior to the Consummation Date, releasing the Company and Pentacon from (i) any and all claims of the Stockholders against the Company and Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders, except for (w) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the Stockholders, (x) continuing obligations to Stockholders relating to their employment by the Company or Pentacon, (y) any obligations or liabilities arising under this Agreement or the transactions contemplated hereby and (z) real estate lease agreements between the Company and Stockholders, as amended which have been accepted or approved by Pentacon. In the event that the Consummation Date does not occur, then the release instrument referenced herein shall be void and of no further force or effect. 9.6 SATISFACTION. All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or incidental hereto and all other related legal matters shall have been approved by counsel to Pentacon. 9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.7, all existing agreements between the Company and the Stockholders (and entities controlled by the Stockholders) shall have been canceled effective prior to or as of the Consummation Date. -40- 9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from Counsel to the Company and the Stockholders, dated the Closing Date, substantially in the form annexed hereto as Annex V. 9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to Pentacon a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the Company's state of incorporation and, unless waived by Pentacon, in each state in which the Company is authorized to do business, showing the Company is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the Company for all periods prior to the Closing have been filed and paid. 9.11 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall enter into an employment agreement substantially in the form of Annex VI hereto. 9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Consummation Date, Pentacon shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the organization, including without limitation: (a) the retirement or reacquisition, directly or indirectly, of all or part of the Pentacon Stock issued in connection with the transactions contemplated hereby; or -41- (b) the entering into of financial arrangements for the benefit of the Stockholders or Other Stockholders. 10.2 PREPARATION AND FILING OF TAX RETURNS. (i) The Company, if possible, or otherwise the Stockholders shall file or cause to be filed all Tax Returns (federal, state, local or otherwise) of any Acquired Party for all taxable periods that end on or before the Consummation Date, and shall permit Pentacon to review all such Returns prior to such filings. Unless the Company is a C corporation, the Stockholders shall pay or cause to be paid all Tax liabilities (in excess of all amounts already paid with respect thereto or properly accrued or reserved with respect thereto on the Financial Statements) shown by such Returns to be due. (ii) Pentacon shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Consummation Date. (iii) Each party hereto shall, and shall cause its Subsidiaries and Affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies, at the expense of the requesting party, of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the Company, Newco, Pentacon and each Stockholder shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free contribution under Section 351(a) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code. 10.3 DIRECTORS. The persons named in the Draft Registration Statement shall be appointed as directors and elected as officers of Pentacon, as and to the extent set forth in the Draft Registration Statement, promptly following the Consummation Date. -42- 11. INDEMNIFICATION The Stockholders, Pentacon and Newco each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders covenant and agree that they, jointly and severally, will indemnify, defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date (provided that for purposes of Section 11.1(iii) below, the Expiration Date shall be the date on which the applicable statute of limitations expires), from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by Pentacon, Newco, the Company or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the Stockholders or the Company set forth herein or on the definitive, final schedules or certificates delivered by them in connection herewith, (ii) any breach of any agreement on the part of the Stockholders or, prior to Closing, the Company under this Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to the Company or the Stockholders, and provided in writing to Pentacon or its counsel by the Company or the Stockholders for inclusion in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to the Company or the Stockholders required to be stated therein or necessary to make the statements therein not misleading, provided, however, that such indemnity shall not inure to the benefit of Pentacon, Newco, the Company or the Surviving Corporation to the extent that such untrue statement (or alleged untrue statement) was made in, or omission (or alleged omission) occurred in, any preliminary prospectus and the Stockholders provided, in writing, corrected information to Pentacon counsel and to Pentacon for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that, except as herein otherwise provided, no Stockholder shall be liable for any indemnification obligation pursuant to this Section 11.1(iii) to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other Stockholder. Pentacon and Newco acknowledge and agree that other than the representations and warranties of Company or Stockholders specifically contained in this Agreement, there are no representations or warranties of Company or Stockholders, either express or implied, with respect to the transactions contemplated by this Agreement, the Company or its assets, liabilities and business. Pentacon, Newco and the Company further acknowledge and agree that, should the Closing occur, their sole and exclusive remedy with respect to any and all claims relating to this Agreement and the transactions contemplated in this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 11.1. Pentacon, Newco and the Company hereby waive, from -43- and after the Closing, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action they or any indemnified person may have against the Company or any Stockholder relating to this Agreement or the transactions contemplated hereby arising under or based upon any federal, state, local or foreign statute, law, rule, regulation or otherwise (and other than pursuant to the terms of this Agreement). 11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it will indemnify, defend, protect and hold harmless the Stockholders at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the Stockholders as a result of or arising from (i) any breach by Pentacon or Newco of their representations and warranties set forth herein or on the definitive, final schedules or certificates attached delivered by them pursuant hereto, (ii) any breach of any agreement on the part of Pentacon or Newco under this Agreement or any other agreement delivered pursuant hereto, (iii) any liabilities which the Stockholders may incur due to Pentacon's or Newco's or the Surviving Corporation's failure to pay, perform or discharge when due any of the liabilities and obligations of the Company for which Pentacon, Newco or the Surviving Corporation is responsible pursuant to this Agreement (except to the extent that Pentacon or Newco has bona fide claims hereunder against the Stockholders by reason of such liabilities); or (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to Pentacon, Newco or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to Pentacon or Newco or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading. 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has actual knowledge of any claim by a Person (including a governmental agency) not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, with respect to which the Indemnified Person would be entitled to receive indemnification pursuant to Section 11, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the -44- defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the reasonable expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense through appropriate proceedings, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person. Upon agreement as to such settlement between said Third Person and the Indemnifying Party, the Indemnifying Party shall, in exchange for a complete release from the Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in such settlement and the Indemnified Party shall, from that moment on, bear full responsibility for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case pursuant to Section 14.3 or otherwise, to seek injunctive or other equitable relief (except for rescission which shall not be available) for a breach or threatened breach of this Agreement. Any indemnity payment -45- under this Section 11 shall be treated as an adjustment to the exchange consideration for tax purposes unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the indemnified party or any of its affiliate causes any such payment not to be treated as an adjustment to the exchange consideration for U.S. Federal Income Tax purposes. (b) Nothing in this Article 11 shall restrict the Stockholders from subrogation or seeking reimbursement from third parties other than the Company. 11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 or 11.2 shall not assert any claim for indemnification hereunder against the Stockholders after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against the Stockholders shall exceed the greater of 1% of the sum of the value of the total consideration (including stock and cash) received by the Stockholders and Other Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and then only to the extent of the excess over the Indemnification Threshold. Stockholders shall not assert any claim for indemnification hereunder against Pentacon or Newco after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which Stockholders may have against Pentacon or Newco shall exceed the Indemnification Threshold, and then only to the extent of the excess over the Indemnification Threshold. The Indemnification Threshold and the other limitations contained in this Section 11.5 shall not be applicable to any breach of covenants made by the Stockholders in this Agreement which require an action or inaction by such Stockholders from and after the Closing Date (i.e., Article 10, Article 11, Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall be entitled to indemnification under this Section 11 if, and only to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. The pursuit by Pentacon, the Surviving Corporation, Newco or the Company, of any claim for indemnification hereunder against a Stockholder shall require a majority vote of the board of directors of Pentacon excluding for the purposes of such acts any directors who was previously a stockholder of the Company or is a representative of the stockholders of the Company as existing prior to the closing of the transactions contemplated at this Agreement. Notwithstanding any other term of this Agreement, no Stockholder shall be liable (in the aggregate from time to time taking into account all indemnification payments made hereunder) under this Section 11 (i) for any amount which is less than or equal to the Indemnification Threshold (and then only to the extent of the excess over the Indemnification Threshold) or (ii) for any amount which exceeds the sum of the amount of proceeds (including cash and stock) received by the Stockholders and Other Stockholders in connection with the Merger. Each Stockholder shall have the option of satisfying his or her indemnity obligation in cash and/or by returning or transferring shares of Pentacon Stock to Pentacon or any other Indemnified Party. For purposes of calculating -46- the value of the Pentacon Stock received by a Stockholder and satisfying any indemnity claim by returning or transferring Pentacon Stock, Pentacon Stock shall be valued at its initial public offering price as set forth in the Registration Statement. Notwithstanding any of the foregoing provisions of this Section 11 that might be read to the contrary, it is the agreement of the parties that the Indemnification Threshold be given full effect under all circumstances. Accordingly, insofar as any of the foregoing provisions of this Section 11 may hold harmless an Indemnified Party before the Indemnification Threshold has been met, then Pentacon and the Stockholders shall cooperate in good faith to establish an equitable procedure pursuant to which Pentacon reimburses or causes the reimbursement to the affected Stockholder(s) of all expenditures and payments by Stockholders that are intended to be absorbed and borne by any Indemnified Parties as a result of the prior application of the Indemnification Threshold or otherwise takes such action as may be reasonably necessary to give effect to the Indemnification Threshold. 12. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Consummation Date solely: (i) by mutual consent of the boards of directors of Pentacon and the Company; (ii) by the Stockholders or the Company (acting through its board of directors), on the one hand, or by Pentacon (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by February 28, 1998, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Consummation Date; (iii) by the Stockholders or Company, on the one hand, or by Pentacon, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants or agreements contained herein, and the curing of such default shall not have been made on or before the Consummation Date or by the Stockholders or the Company, if the conditions set forth in Section 8 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable, or by Pentacon, if the conditions set forth in Section 9 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable; (iv) pursuant to Section 7.8 hereof; (v) pursuant to the termination provisions contained in Section 4 hereof; or (vi) pursuant to the other express terms of this Agreement. -47- 12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section 7.8 hereof, the termination of this Agreement will in no way limit any obligation or liability of any party based on or arising from a breach or default by such party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement including, but not limited to, legal and audit costs and out of pocket expenses. 13. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of five (5) years following the Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) except as disclosed in Section 13.1, engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any fastener business or operation or related services business in direct competition with Pentacon or any of the subsidiaries thereof, within 100 miles of where the Company or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) except with the prior written consent of Pentacon, call upon any person who is, at that time, within the Territory, an employee of Pentacon or any subsidiary thereof for the purpose or with the intent of enticing such employee away from or out of the employ of Pentacon or any subsidiary thereof; (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Consummation Date, a customer of Pentacon or any subsidiary thereof, of the Company or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services that are in direct competition with Pentacon within the Territory; (iv) call upon any prospective acquisition candidate, on any Stockholder's own behalf or on behalf of any competitor in the fastener business, which candidate, to the actual knowledge of such Stockholder after due inquiry, was called upon by Pentacon or any subsidiary thereof or for which, to the actual knowledge of such Stockholder after due inquiry, Pentacon or any subsidiary thereof made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the Company to any person, firm, partnership, corporation or business for any reason or purpose relating to the -48- fastener business except to the extent that the Company has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any Stockholder from acquiring as a passive investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to Pentacon as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to Pentacon for which it would have no other adequate remedy, each Stockholder agrees that the foregoing covenant may be enforced by Pentacon in the event of breach by such Stockholder, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the Stockholders in light of the activities and business of Pentacon and the subsidiaries thereof on the date of the execution of this Agreement and the current plans of Pentacon; but it is also the intent of Pentacon and the Stockholders that such covenants be construed and enforced in accordance with the changing activities; business and locations of Pentacon and its subsidiaries throughout the term of this covenant. During the term of this covenant, if Pentacon or one of its subsidiaries engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business it is currently conducting in the locations currently established therefor, then the Stockholders will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new activities or business within 100 miles of its then-established operating location(s) through the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any Stockholder against Pentacon or any subsidiary thereof, whether predicated on this Agreement or otherwise (except for a claim or cause of action based upon Pentacon's failure to pay or otherwise tender any of the consideration due to the Stockholders hereunder), shall not constitute a defense to the enforcement by Pentacon of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each Stockholder made in this Section 13 shall be effective, -49- shall be computed by excluding from such computation any time during which such Stockholder is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The Company and the Stockholders hereby agree that this covenant is a material and substantial part of this transaction. 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The Stockholders recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the Company, the Other Founding Companies, and/or Pentacon, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's, the Other Founding Companies' and/or Pentacon's respective businesses. The Stockholders agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of Pentacon, (b) following the Closing, such information may be disclosed by the Stockholders as is required in the course of performing their duties for Pentacon or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the Stockholders, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the Stockholders shall, if possible, give prior written notice thereof to Pentacon and provide Pentacon with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the Stockholders of the provisions of this Section, Pentacon shall be entitled to an injunction restraining such Stockholders from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Pentacon from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, Stockholders shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the Company. 14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that they had in the past and currently have access to certain confidential information of the Company, including, but not limited to, customer and prospect lists, financial information, operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's business. Pentacon and Newco agree that, prior to the Consummation Date, or if the transactions contemplated by this Agreement are not consummated, they will not, appropriate or make use of any such information, whether for its own benefit or the benefit of any other person or entity, for any purpose whatsoever (except pending the Consummation Date, effecting the transactions contemplated hereby) disclose such confidential information to any person, firm, corporation, association or other entity -50- for any purpose or reason whatsoever, except (a) to authorized representatives of the Company, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.2, (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of Pentacon or Newco, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), Pentacon and Newco shall, if possible, give prior written notice thereof to the Company and the Stockholders and provide the Company and the Stockholders with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, and (d) to the public to the extent necessary or advisable in connection with the filing of the Registration Statement and the IPO and the securities laws applicable thereto and to the operation of Pentacon as a publicly held entity after the IPO. In the event of a breach or threatened breach by Pentacon or Newco of the provisions of this Section, the Company and the Stockholders shall be entitled to an injunction restraining Pentacon and Newco from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the Company and the Stockholders from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach or threatened breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders or other appropriate equitable relief, without posting any bond or other security or having to prove irreparable harm or injury. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Consummation Date, or without limitation if the transactions contemplated hereby are not consummated. 15. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts or partnerships for the benefit of charities, the Stockholders or Other Stockholders, family members, the trustees or partners of which so agree), for a period of one year from the Closing, except pursuant to Section 17 hereof, none of the Stockholders or Other Stockholders shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any shares of Pentacon Stock received by the Stockholders or Other Stockholders in the Merger. The certificates evidencing the Pentacon Stock delivered to the Stockholders or Other Stockholders pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as Pentacon may deem necessary or appropriate: -51- THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 16. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of Pentacon Stock to be delivered to the Stockholders and Other Stockholders pursuant to this Agreement have not been and will not be registered under the 1933 Act (except as provided in Section 17 hereof) and therefore may not be resold without compliance with the 1933 Act. The Pentacon Stock to be acquired by such Stockholders and Other Stockholders pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. The Stockholders covenant, warrant and represent that none of the shares of Pentacon Stock issued to such Stockholders and Other Stockholders will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the Pentacon Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the economic risk of an investment in the Pentacon Stock to be acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the Pentacon Stock. The Stockholders party hereto have had an adequate opportunity to ask questions and receive answers from the officers of Pentacon concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of Pentacon, the plans for the operations of the business of Pentacon, the business, operations and financial condition of the Founding Companies other than the Company, and any plans for additional acquisitions and the like. The Stockholders have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. -52- 17. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever Pentacon proposes to register any Pentacon Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf or other registration of shares to be used as consideration for acquisitions of additional businesses by Pentacon and (ii) registrations relating to employee benefit plans, Pentacon shall give each of the Stockholders and Other Stockholders prompt written notice of its intent to do so. Upon the written request of any of the Stockholders or Other Stockholders given within 30 days after receipt of such notice, Pentacon shall cause to be included in such registration all of the Pentacon Stock issued to the Stockholders or Other Stockholders pursuant to this Agreement (including any stock issued as (or issuable upon the conversion or exchange of any convertible security, warrant, right or other security which is issued by Pentacon as) a dividend or other distribution with respect to, or in exchange for, or in replacement of such Pentacon Stock) which any such Stockholder or Other Stockholder requests, provided that Pentacon shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares would, in the written opinion of tax counsel to Pentacon or its independent auditors, reasonably be likely to jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free organization under Section 351 of the Code. In addition, if Pentacon is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than Pentacon is greater than the number of such shares which can be offered without adversely affecting the offering, Pentacon may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter, provided, that, for each such offering made by Pentacon after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than Pentacon, the Stockholders or Other Stockholders and the Stockholders of the Other Founding Companies (collectively, the Stockholders, Other Stockholders and the Stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. 17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as expeditiously as possible: (i) Prepare and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements or term sheets thereto, Pentacon will furnish a representative of the Stockholders or Other Stockholders with copies of all such documents proposed to be filed) as promptly as practical; -53- (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days; (iii) Furnish to each Stockholder or Other Stockholder who so requests such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus and any term sheet associated therewith), and such other documents as such Stockholder or Other Stockholder may reasonably request in order to facilitate the disposition of the relevant shares; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Stockholders or Other Stockholders, and to keep such registration or qualification effective during the period such registration statement is to be kept effective, provided that Pentacon shall not be required to become subject to taxation, to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) Cause all such shares of Pentacon Stock to be listed or included on any securities exchanges or trading systems on which similar securities issued by Pentacon are then listed or included; (vi) Notify each Stockholder or Other Stockholder at any time when a prospectus relating thereto is required to be delivered under the 1933 Act within the period that Pentacon is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement, together with any associated term sheet, contains an untrue statement of a material fact or omits any fact necessary to make the statement therein not misleading, and, at the request of such Stockholder or Other Stockholder, Pentacon will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the covered shares, such prospectus will not contain an untrue statement of material fact or omit to state any fact necessary to make the statements therein not misleading. All expenses incurred in connection with the registration under this Article 17 (including all registration, filing, qualification, legal, printer and accounting fees, but excluding underwriting commissions and discounts), shall be borne by Pentacon. 17.3 INDEMNIFICATION. (a) In connection with any registration hereunder, Pentacon shall indemnify, to the extent permitted by law, each Stockholder and Other Stockholders against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue -54- statement of material fact contained in any registration statement, prospectus or preliminary prospectus or associated term sheet or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same are caused by or contained in or omitted from any information furnished in writing to Pentacon by such indemnified party expressly for use therein or by any indemnified parties' failure to deliver a copy of the registration statement or prospectus or any amendment or supplements thereto after Pentacon has furnished such Indemnified Party with a sufficient number of copies of the same. (b) In connection with any registration hereunder, each Stockholder shall furnish to Pentacon in writing such information as is reasonably requested by Pentacon for use in any such registration statement or prospectus and will indemnify, to the extent permitted by law, Pentacon, its directors and officers and each person who controls Pentacon (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement or material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in information so furnished in writing by such Stockholder specifically for use in preparing the registration statement. Notwithstanding the foregoing, the liability of a Stockholder under this Section 17.3 shall be limited to an amount equal to the net proceeds actually received by such Stockholder from the sale of the relevant shares covered by the registration statement. (c) Any person entitled to indemnification under this Section will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified parties' reasonable judgment, a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Any failure to give prompt notice shall deprive a party of its right to indemnification hereunder only to the extent that such failure shall have adversely affected the indemnifying party. If the defense of any claim is assumed, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled or elects not to assume the defense of a claim, will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant to Section 17.1 covering an underwritten registered offering, Pentacon and each participating holder agree to enter into a written agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between such -55- managing underwriters and companies of Pentacon's size and investment stature, including indemnification. 17.5 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC that may permit the sale of Pentacon stock to the public without registration, Pentacon agrees to use its commercially reasonable efforts to: (i) make and keep public information regarding Pentacon available as those terms are understood and defined in Rule 144 under the 1933 Act for a period of four years beginning 90 days following the effective date of the Registration Statement; (ii) file with the SEC in a timely manner all reports and other documents required of Pentacon under the 1933 Act and the 1934 Act at any time after it has become subject to such reporting requirements; and (iii) so long as a Stockholder or Other Stockholder owns any restricted Pentacon Common Stock, furnish to each Stockholder or Other Stockholder forthwith upon written request a written statement by Pentacon as to its compliance with the reporting requirements of Rule 144 (at any time from and after 90 days following the effective date of the Registration Statement, and of the 1933 Act and the 1934 Act (any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Pentacon, and such other reports and documents so filed as a Stockholder or Other Stockholder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Stockholder or Other Stockholder to sell any such shares without registration. 18. GENERAL 18.1 COOPERATION. The Company, Stockholders, Pentacon and Newco shall each deliver or cause to be delivered to the other on the Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The Company will cooperate and use its reasonable efforts to have the present officers, directors and employees of the Company cooperate with Pentacon on and after the Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of Pentacon, and the heirs and legal representatives of the Stockholders. -56- 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the Stockholders, the Company, Newco and Pentacon and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only (i) pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a written instrument executed by the Stockholders, the Company, Newco and Pentacon, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby, provided that the Company shall make a good faith effort to cross reference disclosure, as necessary or advisable, between related Schedules, and provided further that the failure to do so will not affect the validity of such disclosure. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, Pentacon will pay the fees, expenses and disbursements of Pentacon and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto, including all costs and expenses incurred in the performance and compliance with all conditions to be performed by Pentacon under this Agreement, including the fees and expenses of Ernst & Young LLP, Andrews & Kurth L.L.P., and any other person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures II, L.C., and the costs of preparing the Registration Statement. Except as agreed in writing by Pentacon, each Stockholder shall pay their respective fees, expenses and disbursements of counsel and other professionals in connection with this transaction and shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware. Each Stockholder shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each Stockholder acknowledges that he, and not the Company or Pentacon, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof. The Stockholders acknowledge that the risks of the transactions contemplated hereby include tax risks, with respect to which the Stockholders are relying solely on the opinion contemplated by Section 8.12 hereof. -57- 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to Pentacon, or Newco, addressed to them at: Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 with copies to: Bruce Taten, Esquire Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 and Christopher S. Collins, Esquire Andrews & Kurth, L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 (b) If to the Stockholders and Other Stockholders, addressed to them at their addresses set forth on Annex II, with copies to: David I. Kuperman Kuperman, Orr, Mouer & Albers 100 Congress Avenue, Suite 1400 Austin, Texas 78701 (c) If to the Company, addressed to it at: Michelyn McClure Read Capital Bolt & Supply, Inc. 850 NW Broad Street Lyons, Georgia 30436 and -58- Rory McClure Capitol Bolt & Supply, Inc. 6015 Dillard Circle P.O. Box 140029 Austin, Texas 78714 or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the applicable Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4, no right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. -59- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PENTACON, INC. By:/s/ MARK E. BALDWIN Mark E. Baldwin Chief Executive Officer CAPITOL BOLT & SUPPLY ACQUISITION COMPANY By:/s/ MARK E. BALDWIN Mark E. Baldwin President CAPITOL BOLT & SUPPLY, INC. By:/s/ MARY E. McCLURE Mary E. McClure President STOCKHOLDERS: /s/ MARY E. McCLURE MARY E. McCLURE /s/ MARY E. McCLURE MARY E. McCLURE as Co-Trustee of the Earl Milton McClure, Jr. Residuary Trust -60- ANNEX I (Capitol Bolt & Supply, Inc.) CONSIDERATION TO BE PAID TO THE STOCKHOLDERS STOCKHOLDER SHARES OF COMMON STOCK OF PENTACON, INC. MERGER CASH ----------- ------------- Earl Milton McClure, Jr Residuary Trust ..................... 71,759 $306,067.32 Nancy Adami ............................... 11 $ 52.39 Mike Samuels .............................. 5 $ 22.88 Tommie Jalufka ............................ 1 $ 2.79 Jack Revell ............................... 4 $ 11.61 Rudy Ygnacio .............................. 18 $ 85.72 Rick Harkins .............................. 1 $ 4.02 John Downing .............................. 2 $ 5.80 Frost National CBS Profit Sharing Plan ........................ 24,582 $104,846.97 Michelyn J. McClure ....................... 1,412 $ 6,019.48 Mary E. McClure ........................... 83,139 $354,609.02 ---------- ----------- 180,934 $771,728.00 ========== =========== MINIMUM VALUE: ............................ $2,622,683 -- ANNEX II Capitol Bolt & Supply, Inc. Stock Ownership CLASS A Earl Milton McClure, Jr. Residuary Trust 250,000 shares Michelyn J. McClure 5,000 shares Mary E. McClure 245,000 shares CLASS B Earl Milton McClure, Jr. Residuary Trust 4,599.5 shares Nancy Adami 39 shares Mike Samuels 17 shares Tommie Jalufka 2 shares Jack Revell 8 shares Rudy Ygnacio 63 shares Rick Harkins 3 shares John Downing 4 shares Frost National CBS Profit Sharing Plan 87,215 shares Mary E. McClure 49,985.5 shares For addresses of Stockholders, see attachment hereto. EX-10.4 5 EXHIBIT 10.4 ------------------------------------------------------------------------------ AGREEMENT AND PLAN OF ORGANIZATION dated as of the 1st day of December 1997 by and among PENTACON, INC. MAUMEE INDUSTRIES ACQUISITION COMPANY (a subsidiary of Pentacon, Inc.) MAUMEE INDUSTRIES, INC. and the STOCKHOLDERS named herein ------------------------------------------------------------------------------ TABLE OF CONTENTS Page RECITALS.....................................................................1 1. THE MERGER.............................................................5 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................5 1.2 EFFECTIVE TIME OF THE MERGER.....................................5 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION............................................6 1.4 EFFECT OF MERGER.................................................6 2. CONVERSION OF STOCK....................................................7 2.1 MANNER OF CONVERSION.............................................7 3. DELIVERY OF MERGER CONSIDERATION.......................................8 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8 4. CLOSING................................................................8 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.......................................................9 5.1 DUE ORGANIZATION.................................................9 5.2 AUTHORIZATION...................................................10 5.3 CAPITAL STOCK OF THE COMPANY....................................10 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10 5.5 NO BONUS SHARES.................................................10 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................10 5.7 PREDECESSOR STATUS; ETC.........................................11 5.8 SPIN-OFF BY THE COMPANY.........................................11 5.9 FINANCIAL STATEMENTS............................................11 5.10 LIABILITIES AND OBLIGATIONS.....................................11 5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12 5.12 PERMITS AND INTANGIBLES.........................................12 5.13 ENVIRONMENTAL MATTERS...........................................13 5.14 PERSONAL PROPERTY...............................................14 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15 5.16 REAL PROPERTY...................................................15 5.17 INSURANCE.......................................................16 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............16 -i- 5.19 EMPLOYEE PLANS..................................................17 5.20 COMPLIANCE WITH ERISA...........................................18 5.21 CONFORMITY WITH LAW; LITIGATION.................................19 5.22 TAXES...........................................................19 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21 5.25 ABSENCE OF CHANGES..............................................21 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................22 5.27 VALIDITY OF OBLIGATIONS.........................................23 5.28 RELATIONS WITH GOVERNMENTS......................................23 5.29 DISCLOSURE......................................................23 5.30 PROHIBITED ACTIVITIES...........................................23 5.31 NO WARRANTIES OR INSURANCE......................................24 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS....................................................24 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................24 5.34 PREEMPTIVE RIGHTS...............................................24 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................24 6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25 6.1 DUE ORGANIZATION................................................25 6.2 AUTHORIZATION...................................................25 6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................25 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26 6.5 SUBSIDIARIES....................................................26 6.6 FINANCIAL STATEMENTS............................................26 6.7 LIABILITIES AND OBLIGATIONS.....................................26 6.8 CONFORMITY WITH LAW; LITIGATION.................................26 6.9 NO VIOLATIONS...................................................27 6.10 VALIDITY OF OBLIGATIONS.........................................28 6.11 PENTACON STOCK..................................................28 6.12 NO SIDE AGREEMENTS..............................................28 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................28 6.14 DISCLOSURE......................................................28 7. COVENANTS PRIOR TO CLOSING............................................29 7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29 7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................29 7.3 PROHIBITED ACTIVITIES...........................................30 7.4 NO SHOP.........................................................32 7.5 NOTICE TO BARGAINING AGENTS.....................................32 7.6 AGREEMENTS......................................................32 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.........................................................32 7.8 AMENDMENT OF SCHEDULES..........................................33 -ii- 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............34 7.10 FINAL FINANCIAL STATEMENTS......................................34 7.11 FURTHER ASSURANCES..............................................35 7.12 AUTHORIZED CAPITAL..............................................35 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........35 7.14 PRE-CLOSING NOTIFICATIONS.......................................35 7.15 PAYMENT OF INDEBTEDNESS.........................................35 7.16 MINIMUM VALUE...................................................36 7.17 DIRECTORS.......................................................36 7.18 TRANSACTION REPORTING...........................................36 7.19 PERMITS.........................................................36 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY...........................................................36 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......36 8.2 SATISFACTION....................................................37 8.3 NO LITIGATION...................................................37 8.4 OPINION OF COUNSEL..............................................37 8.5 REGISTRATION STATEMENT..........................................37 8.6 CONSENTS AND APPROVALS..........................................37 8.7 GOOD STANDING CERTIFICATES......................................37 8.8 NO MATERIAL ADVERSE CHANGE......................................38 8.9 CLOSING OF IPO..................................................38 8.10 SECRETARY'S CERTIFICATE.........................................38 8.11 EMPLOYMENT AGREEMENTS...........................................38 8.12 TAX MATTERS.....................................................38 8.13 EXCHANGE LISTING................................................38 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO.............38 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....39 9.2 NO LITIGATION...................................................39 9.3 SECRETARY'S CERTIFICATE.........................................39 9.4 NO MATERIAL ADVERSE EFFECT......................................39 9.5 STOCKHOLDERS' RELEASE...........................................39 9.6 SATISFACTION....................................................40 9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................40 9.8 OPINION OF COUNSEL..............................................40 9.9 CONSENTS AND APPROVALS..........................................40 9.10 GOOD STANDING CERTIFICATES......................................40 9.11 REGISTRATION STATEMENT..........................................40 9.12 EMPLOYMENT AGREEMENTS...........................................40 9.13 CLOSING OF IPO..................................................40 -iii- 9.14 FIRPTA CERTIFICATE..............................................40 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............41 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................41 10.2 PREPARATION AND FILING OF TAX RETURNS...........................41 10.3 DIRECTORS.......................................................42 11. INDEMNIFICATION.......................................................42 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.....................42 11.2 INDEMNIFICATION BY PENTACON.....................................43 11.3 THIRD PERSON CLAIMS.............................................43 11.4 EXCLUSIVE REMEDY................................................45 11.5 LIMITATIONS ON INDEMNIFICATION..................................45 12. TERMINATION OF AGREEMENT..............................................46 12.1 TERMINATION.....................................................46 12.2 LIABILITIES IN EVENT OF TERMINATION.............................47 13. NONCOMPETITION........................................................47 13.1 PROHIBITED ACTIVITIES...........................................47 13.2 DAMAGES.........................................................48 13.3 REASONABLE RESTRAINT............................................48 13.4 SEVERABILITY; REFORMATION.......................................48 13.5 INDEPENDENT COVENANT............................................48 13.6 MATERIALITY.....................................................49 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................49 14.1 STOCKHOLDERS....................................................49 14.2 PENTACON AND NEWCO..............................................49 14.3 DAMAGES.........................................................50 14.4 SURVIVAL........................................................50 15. TRANSFER RESTRICTIONS.................................................50 15.1 TRANSFER RESTRICTIONS...........................................50 16. FEDERAL SECURITIES ACT REPRESENTATIONS................................51 16.1 COMPLIANCE WITH LAW.............................................51 16.2 ECONOMIC RISK; SOPHISTICATION...................................51 17. REGISTRATION RIGHTS...................................................52 17.1 PIGGYBACK REGISTRATION RIGHTS...................................52 17.2 REGISTRATION PROCEDURES.........................................52 17.3 INDEMNIFICATION.................................................53 -iv- 17.4 UNDERWRITING AGREEMENT..........................................54 17.5 RULE 144 REPORTING..............................................55 18. GENERAL...............................................................55 18.1 COOPERATION.....................................................55 18.2 SUCCESSORS AND ASSIGNS..........................................55 18.3 ENTIRE AGREEMENT................................................55 18.4 COUNTERPARTS....................................................56 18.5 BROKERS AND AGENTS..............................................56 18.6 EXPENSES........................................................56 18.7 NOTICES.........................................................56 18.8 GOVERNING LAW...................................................58 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................58 18.10 EXERCISE OF RIGHTS AND REMEDIES.................................58 18.11 TIME............................................................58 18.12 REFORMATION AND SEVERABILITY....................................58 18.13 REMEDIES CUMULATIVE.............................................58 18.14 CAPTIONS........................................................58 -v- ANNEXES Annex I - Consideration to Be Paid to Stockholders Annex II - Stockholders and Stock Ownership of the Company Annex III - Certificate of Incorporation and By-Laws of Pentacon and Newco Annex IV - Form of Opinion of Counsel to Pentacon and Newco Annex V - Form of Opinion of Counsel to Company and Stockholders Annex VI - Form of Founder Employment Agreement -vi- SCHEDULES 5.1 Due Organization 5.2 Authorization 5.3 Capital Stock of the Company 5.4 Transactions in Capital Stock, Organization Accounting 5.5 No Bonus Shares 5.6 Subsidiaries 5.7 Predecessor Status; etc 5.8 Spin-off by the Company 5.9 Financial Statements 5.10 Liabilities and Obligations 5.11 Accounts and Notes Receivable 5.12 Permits and Intangibles 5.13 Environmental Matters 5.14 Personal Property 5.15 Significant Customers; Material Contracts and Commitments 5.16 Real Property 5.17 Insurance 5.18 Compensation; Employment Agreements; Labor Matters 5.19 Employee Plans 5.20 Compliance with ERISA 5.21 Conformity with Law; Litigation 5.22 Taxes 5.23 No Violations, Consents, etc. 5.24 Government Contracts 5.25 Absence of Changes 5.26 Deposit Accounts; Powers of Attorney 5.30 Prohibited Activities 5.31 No Warranties or Insurance 5.32 Related-Party Transactions 5.35 No Intention to Dispose of Pentacon Stock 6.3 Capital Stock of Pentacon and Newco 6.4 Options, Warrants and Rights 6.8 Litigation 6.9 No Violations 6.12 Side Agreements 7.2 Conduct of Business Pending Closing 7.3 Prohibited Activities 7.5 Notice to Bargaining Agents 7.6 Termination Agreements 7.15 Obligations to be Paid at Closing 9.7 Continuing Related Party Agreements 9.12 Employment Agreements 13.1 Prohibited Activities 18.5 Brokers and Agents -vii- AGREEMENT AND PLAN OF ORGANIZATION THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of the 1st day of December, 1997, by and among PENTACON, INC., a Delaware corporation ("Pentacon"), MAUMEE INDUSTRIES ACQUISITION COMPANY, a Delaware corporation ("Newco"), MAUMEE INDUSTRIES, INC., an Indiana corporation (the "Company"), and MICHAEL BLACK and MICHAEL PETERS (the "Stockholders"), who are all the stockholders of the Company, who herein agree as follows: RECITALS WHEREAS, Newco is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on November 26, 1997, solely for the purpose of completing the transactions set forth herein, and is a wholly-owned subsidiary of Pentacon, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective boards of directors of Newco and the Company (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that Newco merge with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and the State of Incorporation (as hereinafter defined); WHEREAS, Pentacon is entering into other separate agreements substantially similar to this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Organization," with each of the Other Founding Companies (as defined herein) and their respective stockholders in order to acquire additional fasteners companies; WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon Plan of Organization;" WHEREAS, the Stockholders and the boards of directors and the stockholders of Pentacon, each of the Other Founding Companies and each of the subsidiaries of Pentacon that are parties to the Other Agreements have approved and adopted the Pentacon Plan of Organization as an integrated plan pursuant to which the Stockholders and the stockholders of each of the other Founding Companies will transfer the capital stock of each of the Founding Companies to Pentacon and the Stockholders of each of the other Founding Companies will acquire the stock of Pentacon (but not cash or other property) as a tax-free transfer of property under Section 351 of the Code; WHEREAS, the Board of Directors of the Company has approved this Agreement as part of the Pentacon Plan of Organization in order to transfer the capital stock of the Company to Pentacon; -1- WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 ACT" means the Securities Act of 1933, as amended. "1934 ACT" means the Securities Exchange Act of 1934, as amended. "ACQUIRED PARTY" means the Company, any subsidiary and any member of a Relevant Group. "ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware companies wholly-owned by Pentacon prior to the Consummation Date. "AFFILIATES" shall mean with respect to any person or entity, any other person or entity that directly or indirectly, controls, is controlled, or is under common control with such person or entity. For purposes hereof, control shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger with respect to the Merger in such forms as may be required by the laws of the State of Delaware and the State of Incorporation. "BALANCE SHEET DATE" has means September 30, 1997. "CHARTER DOCUMENTS" has the meaning set forth in Section 5.1. "CLOSING" has the meaning set forth in Section 4. "CLOSING DATE" has the meaning set forth in Section 4. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY STOCK" has the meaning set forth in Section 2.1. "CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital of this Agreement. "CONSUMMATION DATE" has the meaning set forth in Section 4. "DELAWARE GCL" has the meaning set forth in Section 1.4. -2- "DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of the Registration Statement, and any corrections thereto and supplemental information delivered by Pentacon to the Company for delivery to the Stockholders prior to the time this Agreement is delivered by the Company and the Stockholders to Pentacon. "EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger becomes effective, which shall occur on the Consummation Date. "ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13. "ERISA" has the meaning set forth in Section 5.19. "EXPIRATION DATE" has the meaning set forth in Section 5(A). "FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "FOUNDING COMPANIES" means: Alatec Products, Inc., a California corporation; AXS Solutions, Inc., a Delaware corporation; Capitol Bolt & Supply, Inc., a Texas corporation; Maumee Industries, Inc., an Indiana corporation; and Sales Systems, Limited, a Pennsylvania corporation. "HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13. "HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c). "INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "IPO" means the initial public offering of Pentacon Stock pursuant to the Registration Statement described herein. "LICENSES" has the meaning set forth in Section 5.12. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise), of the subject entity and its subsidiaries taken as a whole. -3- "MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a). "MERGER" means the merger of Newco with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and the laws of the State of Incorporation. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.0l per share, of Newco. "OTHER AGREEMENTS" has the meaning set forth in the third recital hereof. "OTHER FOUNDING COMPANIES" means all of the Founding Companies other than the Company. "PBGC" has the meaning set forth in Section 5.19. "PENTACON" has the meaning set forth in the first paragraph of this Agreement. "PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1 "PENTACON STOCK" means the common stock, par value $.01 per share, of Pentacon. "PERSON" means an individual, partnership, joint venture, corporation, bank, trust, unincorporated organization or other entity. "PRICING" means the date of determination by Pentacon and the Underwriters of the public offering price of the shares of Pentacon Stock in the IPO; the parties hereto contemplate that the Pricing shall take place on the Closing Date. "PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30. "QUALIFIED PLANS" has the meaning set forth in Section 5.20. "REGISTRATION STATEMENT" means that certain registration statement on Form S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued in the IPO and all amendments thereto. "RELEVANT GROUP" means the Company and any affiliated, combined, consolidated, unitary or similar group of which the Company is or was a member. -4- "RETURNS" means any returns, reports or statements (including any information returns) required to be filed for purposes of reporting, computing or otherwise required in connection with a particular Tax. "SCHEDULE" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STATE OF INCORPORATION" means the State of Indiana. "STOCKHOLDERS" has the meaning set forth in the first paragraph of this Agreement. "SUBSIDIARIES" means with respect to a person or entity, any corporation or other entity in which such person or entity owns a 5% or greater ownership interest. "SURVIVING CORPORATION" has the meaning set forth in Section 1.2. "TAX" OR "TAXES" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, withholding, employment, excise, property, deed, stamp, alternative or add on minimum, or other taxes, assessments, duties, fees, levies or other governmental charges, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "UNDERWRITERS" means the prospective underwriters identified in the Draft Registration Statement. "YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(i). 1. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause the Articles of Merger to be signed, verified and delivered to Pentacon to be held for filing with the Secretary of State of the State of Delaware and the Secretary of State (or other appropriate authority) of the State of Incorporation on or effective as of the Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, Newco shall be merged with and into the Company in accordance with the Articles of Merger and the separate existence of Newco shall cease. The Company shall be the surviving party in the Merger and the Company is sometimes hereinafter referred to as the "Surviving Corporation". As a result of the Merger, the outstanding shares of capital stock of Newco and the Company shall be converted or canceled in the manner provided in Section 2. -5- 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the Company then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of Newco then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended (and such By-laws shall be amended, if necessary, to comply with applicable state law); (iii) the Board of Directors of the Surviving Corporation shall consist of the persons who are on the Board of Directors of the Company immediately prior to the Effective Time of the Merger, provided that Bruce Taten shall become an additional director of the Surviving Corporation effective as of the Effective Time of the Merger, and the number of directors constituting the entire Board of Directors of the Company shall be increased, if necessary, to accommodate the addition of such additional director; the Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Incorporation and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the Company immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Brian Fontana shall become an additional Vice President and Bruce Taten will become the Secretary of the Surviving Corporation, such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until their respective successors are duly elected and qualified. 1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of the State of Incorporation. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the Company shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of Newco shall be merged with and into the Company, and the Company, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of Newco shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the Company or Newco shall be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and -6- franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Company and Newco; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the State of Incorporation vested in the Company or Newco, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the Company and Newco and any claim existing, or action or proceeding pending, by or against the Company or Newco may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the Company or Newco shall be impaired by the Merger, and all debts, liabilities and duties of the Company and Newco shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. 2. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the Company ("Company Stock") into shares of Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of Company Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) the right to receive the number of shares of Pentacon Stock set forth on Annex I hereto with respect to such holder and (2) the right to receive the amount of cash set forth on Annex I hereto with respect to such holder; (ii) all shares of Company Stock that are held by the Company as treasury stock or which are otherwise issued but not outstanding shall be canceled and retired and shall cease to exist and no shares of Pentacon Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of Newco Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of Pentacon, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All Pentacon Stock received by the Stockholders pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as -7- all the other shares of outstanding Pentacon Stock by reason of the provisions of the Certificate of Incorporation of Pentacon or as otherwise provided by the Delaware GCL. All Pentacon Stock received by the Stockholders shall be issued and delivered to the Stockholders free and clear of any liens, claims or encumbrances of any kind or nature. All voting rights of such Pentacon Stock received by the Stockholders shall be fully exercisable by the Stockholders and the Stockholders shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, Pentacon shall have no class of capital stock issued and outstanding other than the Pentacon Stock. 3. DELIVERY OF MERGER CONSIDERATION 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date the Stockholders, who are the holders of all of the outstanding capital stock of the Company, shall, upon surrender of their certificates, receive the respective number of shares of Pentacon Stock and the amount of cash described on Annex I hereto, said cash to be payable by certified check, or if hereafter agreed by the Stockholder and Pentacon, by wire transfer. 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders shall deliver to Pentacon at the Closing the certificates representing Company Stock, duly endorsed in blank by the Stockholders, or accompanied by blank stock powers, and with all necessary transfer tax and other revenue stamps, acquired at the Stockholders' expense, affixed and canceled. The Stockholders agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such Company Stock or with respect to the stock powers accompanying any Company Stock. 4. CLOSING At or prior to the Pricing, the parties shall take all actions reasonably necessary to prepare to (i) effect the Merger (including the execution of the Articles of Merger which shall be placed in escrow with Pentacon for filing with the appropriate authorities effective on the Consummation Date, subject, however, to satisfaction or waiver of all conditions precedent) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) (or wire transfers) referred to in Section 3 hereof, each of which actions shall only be taken upon the Consummation Date as herein provided. In the event that there is no Consummation Date and this Agreement automatically terminates as provided in this Section 4 the Articles of Merger shall not be filed and shall be promptly returned to the Stockholders. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between the Stockholders and Pentacon. On the Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities so that they shall be, as early as practicable on the Consummation Date, effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check or checks (or wire -8- transfers) in an amount equal to the cash portion of the consideration which the Stockholders shall be entitled to receive pursuant to Section 3 hereof shall occur and be completed and (z) the closing with respect to the IPO shall occur and be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date." During the period from the Closing Date to the Consummation Date, this Agreement may only be terminated by the parties if the underwriting agreement in respect of the IPO is terminated pursuant to the terms of such underwriting agreement. This Agreement shall also in any event automatically terminate if the Consummation Date has not occurred within 15 business days following the Closing Date. Time is of the essence. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS. Each of the Stockholders, jointly and severally, and the Company represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that the warranties and representations set forth in Sections 5.13 and 5.22 hereof shall survive until such time as the applicable statute of limitations period has run or for five (5) years if there is no applicable statute of limitations, which shall be deemed to be the Expiration Date for Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall mean and refer to the Company and all of its Subsidiaries, if any. 5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the State of Incorporation, and has the requisite power and authority to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which failure to so qualify would reasonably be expected to have a Material Adverse Effect on the Company. Schedule 5.1 sets forth a list of all jurisdictions in which the Company is authorized or qualified to do business. True, complete and correct copies of (i) the Certificate of Incorporation and By-laws, each as amended, of the Company (the "Charter Documents"), and (ii) the stock records of the Company (including, without limitation, a copy of the Company's stock ledger), are all attached to Schedule 5.1. The Company has delivered complete and correct copies of all minutes of meetings, written consents and other written evidence, if any, of deliberations of or actions taken by the Company's Board of Directors, any Committees of the Board of Directors and stockholders during the last five years. -9- 5.2 AUTHORIZATION. (i) The officers or other representatives of the Company executing this Agreement have the authority to enter into and bind the Company to the terms of this Agreement and (ii) the Company has the full legal right, power and authority to enter into this Agreement and the Merger. The directors and Stockholders have approved this Agreement and the transactions contemplated hereby in all respects, and copies of all such resolutions, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, are attached hereto as Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company is as set forth on Schedule 5.3. All of the issued and outstanding shares of the capital stock of the Company are owned by the Stockholders in the amounts set forth in Annex II. Each Stockholder, severally, represents and warrants that except as set forth on Schedule 5.3, the shares of capital stock of the Company owned by such Stockholder are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the Stockholders and further, such shares were offered, issued, sold and delivered by the Company in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of any preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the Company has not acquired or redeemed any Company Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the Company to issue any of its authorized but unissued capital stock; (ii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the Company nor the relative ownership of shares among any of its respective Stockholders has been altered or changed in contemplation of the Merger and/or the Pentacon Plan of Organization. Except as set forth in Schedule 5.4, there are no voting trusts, proxies or other agreements or understandings to which the Company or any of the Stockholders is a party or is bound with respect to the voting of any shares of capital stock of the Company. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of Company Stock was issued pursuant to awards, grants or bonuses in contemplation of the Merger or the Pentacon Plan of Organization. 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule 5.6, the Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business -10- entity nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all predecessor companies of the Company, including the names of any entities acquired by the Company (by stock purchase, merger or otherwise) or owned by the Company or from whom the Company previously acquired material assets, in any case, from the earliest date upon which any Stockholder acquired his or her stock in any Company. Except as disclosed on Schedule 5.7, the Company has not been, within such period of time, a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the Company or any other person or entity that is an Affiliate of the Company since January 1, 1995. 5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following financial statements are attached hereto as Schedule 5.9: (i) the balance sheets of the Company as of December 31, 1995 and 1996 and the related statements of operations, stockholder's equity and cash flows for the two-year period ended December 31, 1996, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Year-end Financial Statements"); and (ii) the balance sheet of the Company as of September 30, 1997, (the "Interim Balance Sheet") and the related statements of operations, stockholder's equity and cash flows for the nine-month periods ended September 30, 1997, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Interim Financial Statements"). The Year-end Financial Statements and the Interim Financial Statements are collectively called the "Financial Statements". 5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate list as of the Balance Sheet Date of (i) all liabilities of the Company which are not reflected on the Interim Balance Sheet of the Company at the Balance Sheet Date or otherwise reflected in the Interim Financial Statements at the Balance Sheet Date except for those liabilities not required to be reflected or disclosed under generally accepted accounting principles or F.A.S.B. 5 and which were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other security agreements to which the Company is a party or by which its properties may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet Date, the Company has not incurred any liabilities or obligations of any kind, character or description, whether accrued, absolute, secured or unsecured, contingent or otherwise, -11- other than liabilities incurred in the ordinary course of business and consistent with past practices. The Company has also delivered to Pentacon on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, a good faith and reasonable estimate (to the extent the Company can reasonably make an estimate) of the maximum amount which the Company reasonably expects may be payable and the amount, if any, accrued or reserved for each such potential liability on the Company's Financial Statements. If no estimate is provided, the estimate shall for purposes of this Agreement be deemed to be zero. For each such contingent liability or liability for which the amount is not fixed or is contested, the Company has provided to Pentacon the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding; (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date (if any) on which such claim, suit or proceeding was instituted or the date (period) to which such claim relates. 5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate list of the accounts and notes receivable of the Company, as of the Balance Sheet Date, including any such amounts which are not reflected in the Interim Balance Sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the Stockholders, which are identified as such. Except to the extent reflected on Schedule 5.11, such accounts, notes and other receivables are collectible in the amounts shown on Schedule 5.11, net of reserves reflected in the Interim Balance Sheet of the Balance Sheet Date. 5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses, franchises, permits and other governmental authorizations ("Licenses") necessary to conduct the business of the Company and the Company has delivered to Pentacon an accurate list and summary description (which is set forth on Schedule 5.12) of all such material Licenses, including any material trademarks, trade names, patents, patent applications and copyrights owned or held by the Company or any of its employees (including interests in software or other technology systems, programs and intellectual property). At or prior to the Closing, all rights to such trademarks, trade names, patents, patent applications, copyrights and other intellectual property held by the Stockholders or their Affiliates will be assigned or licensed to the Company for no additional consideration. The Licenses and other rights listed on Schedule 5.12 are valid, and the Company has not received any notice that any person intends to cancel, terminate or not renew any such License or other right. The Company has conducted and is conducting its business in compliance with the requirements, standards, criteria -12- and conditions set forth in the Licenses and other rights listed on Schedule 5.12 and is not in violation of any of the foregoing. Except as specifically provided in Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the Company by, any such Licenses or other rights. 5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached hereto, (i) the Company has conducted its businesses in compliance with all applicable Environmental Laws, including, without limitation, having all environmental permits, licenses and other approvals and authorizations necessary for the operation of its business as presently conducted, (ii) none of the properties owned by the Company contain any Hazardous Substance as a result of any activity of the Company in amounts exceeding the levels permitted by applicable Environmental Laws, (iii) the Company has not received any notices, demand letters or requests for information from any Federal, state, local or foreign governmental entity or third party indicating that the Company may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of its business, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or to the knowledge of the Stockholders threatened, against the Company relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law, (vi) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law from any properties owned by the Company as a result of any activity of the Company during the time such properties were owned, leased or operated by the Company, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analysis regarding compliance or non-compliance with any applicable Environmental Law conducted by or which are in the possession of or readily available to the Company relating to the activities of the Company which are not listed on Schedule 5.13 attached hereto prior to the date hereof, (viii) there are no underground storage tanks on, in or under any properties owned by the Company and no underground storage tanks have been closed or removed from any of such properties during the time such properties were owned, leased or operated by the Company, (ix) there is no asbestos or asbestos containing material present in any of the properties owned by the Company, and no asbestos has been removed from any of such properties during the time such properties were owned, leased or operated by the Company, and (x) neither the Company nor any of its respective properties are subject to any material liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law. (b) As used herein, "ENVIRONMENTAL LAW" means any Federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity which is applicable where the Company conducts or conducted business or owns or owned property or is applicable to any disposal, transportation or release of Hazardous Substances by or for the Company and, in each case, relates to (x) the protection, preservation or restoration of the -13- environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as in effect on the Closing Date. The term Environmental Law includes, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as in effect on the Closing Date, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. (c) As used herein, "HAZARDOUS SUBSTANCE" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any government authority or any Environmental Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. 5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.14) of (x) all personal property material to the operations of the Company included in "plant, property and equipment" on the Interim Balance Sheet of the Company, (y) all other personal property owned by the Company with an individual fair market value in excess of $5,000 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all material leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases and (2) an indication as to which assets are currently owned, or were formerly owned, by Stockholders, relatives of Stockholders, or Affiliates of the Company. Except as set forth on Schedule 5.14, (i) all material personal property used by the Company in its business is either owned by the Company or leased by the Company pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in working order and condition sufficient for the operation of the Company's business, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. -14- 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.15) of all customers (persons or entities) representing 5% or more of the Company's annual revenues for the period covered by any of the most current Year-End Financial Statements. Except to the extent set forth on Schedule 5.15, none of such customers have canceled or substantially reduced or, to the knowledge of the Company and the Stockholders, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the Company. (b) The Company has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the Company is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances and options to purchase land), other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered (or, in the case of supplier and distributor contracts and customer contracts on standard purchase forms, has made available) true, complete and correct copies of such agreements to Pentacon. The Company has also indicated on Schedule 5.15 a summary description of all plans or projects commenced or approved in the last six (6) months and involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $20,000 by the Company during any 12-month period. (c) Except as set forth on Schedule 5.15, since January 1, 1995, the Company has not experienced any difficulties in obtaining any inventory items necessary to the operation of its business, and, to the knowledge of the Company and the Stockholders, no such shortage of supply of inventory items is threatened or pending. To the knowledge of the Company and the Stockholders, no customer or supplier of the Company will cease to do business with, or substantially reduce its purchases from, the Company after the consummation of the transactions contemplated hereby. (d) The Company is not required to provide any bonding or other financial security arrangements in any material amount in connection with any transactions with any of its customers or suppliers. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the Company at the date hereof and all other real property, if any, used by the Company in the conduct of its business. Except as set forth on Schedule 5.16, any such real property owned by the Company will be sold or distributed by the Company on terms acceptable to Pentacon and leased back by the Company on terms no less favorable to the Company than those available from an unaffiliated party and otherwise reasonably acceptable to Pentacon at or prior to the Closing Date. The Company has good and insurable title to any real property owned by it that is shown on Schedule 5.16, other than property intended to be sold or distributed prior to the Closing Date, -15- subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.16 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title which do not adversely affect the current use of the property. True, complete and correct copies of all leases and agreements in respect of such real property leased by the Company are attached to Schedule 5.16, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by Stockholders or Affiliates of the Company or Stockholders is included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the Balance Sheet Date of all insurance policies carried by the Company, (ii) an accurate list of all insurance loss runs (to the extent available) or workers compensation claims received for the past three policy years. True, complete and correct copies of all insurance policies currently in effect have been delivered or made available to Pentacon. Such insurance policies evidence all of the insurance that the Company is required to carry pursuant to all of its contracts and other agreements and pursuant to all applicable laws, and, in the reasonable judgment of the Company's management, provide adequate coverage against the risks involved in the Company's business. All of such insurance policies are currently in full force and effect and are scheduled to remain in full force and effect through the Consummation Date. Since January 1, 1995, no insurance carried by the Company has been canceled by the insurer and the Company has not been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS. (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.18) showing all officers, directors and key employees of the Company, listing all employment agreements with such officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided to Pentacon true, complete and correct copies of any existing employment agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and except as described in Schedule 5.18, there have been no increases in the compensation payable or any special -16- bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices and bonuses, as described in Schedule 5.18. (b) Except as set forth on Schedule 5.18, (i) the Company is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the Company are represented by any labor union or covered by any collective bargaining agreement, (iii) to the best knowledge of the Company, no campaign to establish such representation is in progress and (iv) there is no pending or, to the knowledge of the Company and the Stockholders, threatened labor dispute involving the Company and any group of its employees nor has the Company experienced any labor interruptions over the past three years. (c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no significant controversies pending or, to the knowledge of the Company and the Stockholders, threatened between the Company and any of its employees, (ii) the Company has complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, and (iii) to the knowledge of the Company and the Stockholders, no person has asserted that the Company is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee benefit plans of the Company, including all employment agreements and other agreements or arrangements containing "golden parachute" or other similar provisions, and deferred compensation agreements, together with true, complete and correct copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Balance Sheet Date. Except for the employee benefit plans, if any, described on Schedule 5.19, the Company does not sponsor, maintain or contribute to any plan program, fund or arrangement that constitutes an "employee pension benefit plan", and neither the Company nor any subsidiary has any obligation to contribute to or accrue or pay any benefits under any deferred compensation or retirement funding arrangement on behalf of any employee or employees (such as, for example, and without limitation, any individual retirement account or annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred compensation arrangement). For the purposes of this Agreement, the term "employee pension benefit plan" shall have the same meaning as is given that term in Section 3(2) of ERISA. The Company has not sponsored, maintained or contributed to any employee pension benefit plan other than the plans set forth on Schedule 5.19, and the Company is not or could not be required to contribute to any retirement plan pursuant to the provisions of any collective bargaining agreement establishing the terms and conditions or employment of any of the Company's employees. Except as set forth on Schedule 5.19, the Company is not now, or will not as a result of its past activities become, liable to the Pension Benefit Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit plan under the provisions of Title IV of ERISA. -17- All employee benefit plans listed on Schedule 5.19 and the administration thereof are in compliance with their terms and all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable federal, state and local statutes, ordinances and regulations. All accrued contribution obligations of the Company with respect to any plan listed on Schedule 5.19 as of the Balance Sheet Date have either been fulfilled in their entirety or are fully reflected on the Interim Balance Sheet as of the Balance Sheet Date. 5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, All such plans listed on Schedule 5.19 that are intended to qualify (the "Qualified Plans") under Section 401 (a) of the Code are, and have been so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the most recent determination letters with respect thereto are attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies of the most recent reports and filing relating thereto are included as part of Schedule 5.19 hereof. Neither Stockholders, any such plan listed in Schedule 5.19, nor the Company has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the Company has not incurred any liability for excise tax or penalty due to the Internal Revenue Service nor any liability to the PBGC. The Stockholders further represent that except as set forth on Schedule 5.19 hereto: (i) there have been no terminations, partial terminations or discontinuations of contributions to any Qualified Plan intended to qualify under Section 401(a) of the Code without notice to and approval by the Internal Revenue Service; (ii) no plan listed in Schedule 5.19 subject to the provisions of Title IV of ERISA has been terminated; (iii) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any such plan listed in Schedule 5.19; (iv) the Company (including any subsidiaries) has not incurred liability under Section 4062 of ERISA; and (v) to the knowledge of the Company and the Stockholders, no circumstances exist pursuant to which the Company would be reasonably likely to have any direct or indirect liability whatsoever (including, but not limited to, any liability to any multiemployer plan or the PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty, or being subject to any statutory lien to secure payment of any such liability) -18- with respect to any plan now or heretofore maintained or contributed to by any entity other than the Company that is, or at any time was, a member of a "controlled group" (as defined in Section 412(n)(6)(B) of the Code) that includes the Company. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it; and except to the extent set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or proceedings, pending or, to the knowledge of the Company and the Stockholders, threatened against or affecting, the Company, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Company, and, to the knowledge of the Company and the Stockholders, there is no basis for any such claim, action, suit or proceeding. The Company has conducted and is now conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, orders, approvals, variances, rules and regulations. 5.22 TAXES. Except as set forth in Schedule 5.22, the Company has timely filed all requisite Federal, state and other Tax Returns or extension requests for all fiscal periods ended on or before the Balance Sheet Date; and except as set forth on Schedule 5.22, the Company has no notice that any examinations are in progress or that any claims are pending against it for federal, state and other Taxes (including penalties and interest) for any period or periods prior to and including the Balance Sheet Date and no notice of any claim for Taxes, whether pending or threatened, has been received. Except as set forth in Schedule 5.22, all Tax, including interest and penalties (whether or not shown on any Tax Return) owed by the Company has been paid or accrued in its financial accounts. The amounts shown as accruals for Taxes on the Company Financial Statements are sufficient for the payment of all Taxes of the kinds indicated (including penalties and interest) for all fiscal periods ended on or before that date. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal and local income Tax Returns and franchise Tax Returns of Company for their last three (3) fiscal years, or such shorter period of time as any of them shall have existed, are attached hereto as Schedule 5.22 or have otherwise been delivered to Pentacon. The Company has a taxable year ended December 31. Except as set forth on Schedule 5.22, Company uses the accrual method of accounting for income tax purposes, and the Company's methods of accounting have not changed in the past five years. The Company is not an investment Company as defined in Section 351(e)(1) of the Code. Except as set forth in Schedule 5.22, the Company is not and has not during the last five years been a party to any tax sharing agreement or agreement of similar effect. The Company is not and has not during the last five years been a member of any consolidated group. Except as set forth on Schedule 5.22, the Company has not received, been denied, or applied for any private letter ruling during the last ten years. -19- 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC. (a) The Company is not in violation of any Charter Document. Except as set forth in Schedule 5.23, neither the Company nor, to the best knowledge of the Company and the Stockholders, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"). (b) Except as set forth in Schedule 5.23, the execution and delivery of this Agreement by each of the Company and the Stockholders do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the Charter Documents (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any Material Document or other material instrument, obligation or agreement of any kind to which the Company or any of the Stockholders is now a party or by which any of the Stockholders or the Company or any of its properties or assets may be bound or affected. The consummation by the Company and the Stockholders of the transactions contemplated hereby will not result in any violation, conflict, breach, right of termination or acceleration or creation of liens under any of the terms, conditions or provisions of the items described in clauses (i) through (iii) of the preceding sentence, subject, in the case of the terms, conditions or provisions of the items described in clause (iii) above, to obtaining (prior to the Effective Time of the Merger) such consents as may be required from commercial lenders, lessors or other third parties. (c) Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect, and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any material right or benefit. (d) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (iv) for filings in connection with listing on the NASDAQ National Market System or New York Stock Exchange or other nationally recognized securities exchange; (v) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13 and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholders are required to make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority -20- is necessary for the execution and delivery of this Agreement by the Company and the Stockholders or the consummation by the Company and the Stockholders of the transactions contemplated hereby. (e) Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the Company, Pentacon or Newco of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the Company from freely providing services or selling products to any other customer or potential customer of the Company, Pentacon, Newco or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth on Schedule 5.24, the Company is not now a party to any governmental contract that, by its express terms, is subject to price redetermination or renegotiation or that is customarily subject to price redetermination or renegotiations in the ordinary course of business. Except as set forth on Schedule 5.24, the Company is not now a party to any material contract based on minority ownership which would be canceled or otherwise materially adversely impacted by completion of the Pentacon Plan of Organization. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25 or as otherwise contemplated hereby, there has not been: (i) any Material Adverse Effect with respect to the Company; (ii) any damage, destruction or loss (whether or not covered by insurance), alone or in the aggregate, materially adversely affecting the properties or business of the Company; (iii) any change in the authorized capital of the Company or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the Company except for distributions that would have been permitted after the date hereof under Section 7.3(iii) hereof, (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the Company to any of its officers, directors, Stockholders, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business or future prospects of the Company; -21- (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of Company outside of the ordinary course of business to any person, including, without limitation, the Stockholders and their affiliates; (viii)any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the Company, including without limitation any indebtedness or obligation of any Stockholders or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the Company or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the Company's business; (xi) any waiver of any material rights or claims of the Company; (xii) any amendment or termination of any Material Document; (xiii)any transaction by the Company outside the ordinary course of its business; (xiv) any cancellation or termination of a Material Document or material customer contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the Company other than in the ordinary course of business and other than distributions of real estate and other assets as permitted by this Agreement. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an accurate schedule as of the date of the Agreement of: (i) the name of each financial institution in which the Company has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. -22- Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the Company and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the Company and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the Company and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the Stockholders, or any Affiliate of any of them has given or offered anything of value to any governmental official, political party or candidate for government office in violation of any applicable laws, rules or regulations, nor has it or any of them otherwise taken any action which would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any applicable law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules hereto, furnished to Pentacon by the Company and the Stockholders in connection herewith, do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements herein and therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by Pentacon or Newco. (b) The Company and the Stockholders acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither Pentacon or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the Company, the Stockholders or any other person affiliated or associated with the Company for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of Stockholders to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to Pentacon or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the Company has not, between the Balance Sheet Date and the date hereof, taken any of the actions which are prohibited ("Prohibited Activities") in Section 7.3. -23- 5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to the knowledge of the Company or the Stockholders, the Company has no liability or potential liability to any person under any product or service warranty and the Company does not offer or sell insurance or consumer protection plans or other similar arrangements that could result in the Company being required to make any material payment to or perform any material service for any person thereunder. 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS. Except as described on Schedule 5.32, no Stockholder, officer, director or Affiliate of the Company (i) possesses, directly or indirectly, any financial interest in, or is a director, officer, employee or affiliate of, any corporation, firm, association or business organization that is a client, supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a party to an agreement or relationship, that involves the receipt by such person of compensation or property from the Company other than through a customary employment relationship. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS. Each Stockholder severally, but not jointly, represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement as they relate to such Stockholder and that the representations and warranties set forth in this Sections 5(B) shall survive the Consummation Date. 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Such Stockholder has the full legal right, power and authority to enter into this Agreement. Such Stockholder owns beneficially and of record all of the shares of the Company stock identified on Annex II as being owned by such Stockholder, and, such Company Stock is owned free and clear of all liens, encumbrances and claims of every kind. This Agreement is a legal, valid, and binding obligation of each Stockholder. 5.34 PREEMPTIVE RIGHTS. Such Stockholder does not have, or hereby waives, any preemptive or other right to acquire shares of Company Stock or Pentacon Stock that such Stockholder has or may have had. Nothing herein, however, shall limit or restrict the rights of any Stockholder to acquire Pentacon Stock pursuant to (i) this Agreement or (ii) any option granted by Pentacon. 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. No Stockholder is under any binding commitment or contract to sell, exchange or otherwise dispose of shares of Pentacon Stock received as described in Section 3.1. -24- 6. REPRESENTATIONS OF PENTACON AND NEWCO Pentacon and Newco, jointly and severally, represent and warrant to the Stockholders that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Consummation Date, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of determining whether a claim for indemnification under Section 11.2(iv) hereof has been made on a timely basis, and solely to the extent that in connection with the IPO, any of the Stockholders actually incurs liability under the 1933 Act, the 1934 Act, or any other Federal or state securities laws, the representations and warranties of Pentacon and Newco set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly incorporated and organized, validly existing and in good standing under the laws of the State of Delaware, and each has the requisite power and authority to carry on its business as it is now being conducted. Pentacon and Newco are each qualified to do business and are each in good standing in each jurisdiction in which the nature of its business makes such qualification necessary. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter Documents") are all attached hereto as Annex III. 6.2 AUTHORIZATION. (i) The respective officers or other representatives of Pentacon and Newco executing this Agreement have the authority to enter into and bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and Newco have the full legal right, power and authority to enter into this Agreement and the Other Agreements and consummate the Merger. All corporate acts and other proceedings required to have been taken by Pentacon and Newco to authorize the execution, delivery and performance of this Agreement and the consummation of the Merger have been duly and properly taken. 6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration Statement. All of the issued and outstanding shares of the capital stock of Newco are owned by Pentacon and all of the issued and outstanding shares of the capital stock of Pentacon are owned by the persons set forth on Schedule 6.3 hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of Pentacon and Newco have been duly authorized and validly issued, are fully paid and nonassessable, and further, such shares were offered, issued, sold and delivered by Pentacon and Newco in compliance with all applicable state and Federal laws concerning the issuance of -25- securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of Pentacon or Newco. 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the Other Agreements and except as set forth in the Draft Registration Statement or in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates Pentacon or Newco to issue any of their respective authorized but unissued capital stock; (ii) no voting trust, voting agreement, proxy or other agreements or understandings exist with respect to the voting of any shares of capital stock of Pentacon; and (iii) neither Pentacon nor Newco has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes a list of all outstanding options, warrants or other rights to acquire shares of the stock of Pentacon. 6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries except for Newco and each of the companies identified as "Newco" in each of the Other Agreements. Except as set forth in the preceding sentence, neither Pentacon nor Newco presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, and neither Pentacon nor Newco, directly or indirectly, is a participant in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in the Draft Registration Statement (the "Pentacon Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon), and the balance sheet included therein presents fairly the financial position of Pentacon as of its date. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft Registration Statement, Pentacon and Newco have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees generally described in Part II of the Draft Registration Statement and incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the Draft Registration Statement, neither Pentacon nor Newco is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of Pentacon or Newco, threatened against or affecting, Pentacon or Newco, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. -26- Pentacon and Newco have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation, in any material respect, of any of the foregoing. 6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of Pentacon and Newco, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which Pentacon or Newco is a party, or by which Pentacon or Newco, or any of their respective properties, are bound (collectively, the "Pentacon Documents"); and (a) the rights and benefits of Pentacon and Newco under the Pentacon Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of their obligations hereunder and thereunder do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof will not, conflict with, or result in any violation or default (with or without notice or lapse of time, or both), under or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any lien upon any of the assets of Pentacon or Newco under, any provision of (i) the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the comparable governing instruments of Newco, (ii) any note, bond, mortgage, indenture or deed of trust or any license, lease, contract, commitment, agreement or arrangement to which Pentacon or Newco is a party or by which any of their respective properties or assets are bound or (iii) any judgment, order, decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or their respective properties or assets. (b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the Pentacon Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. (c) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) filings with blue sky authorities in connection with the transactions contemplated by this Agreement, (iv) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (v) for filings in consideration for listing on the NASDAQ National Market System or the New York Stock Exchange or other nationally recognized securities exchange; and (vi) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not required make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the transactions contemplated hereby. -27- 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the respective Boards of Directors and stockholders of Pentacon and Newco and this Agreement and the Other Agreements have been duly and validly authorized by all necessary corporate action and are legal, valid and binding obligations of Pentacon and Newco, enforceable against them in accordance with their respective terms. 6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the Stockholders, the Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement will constitute valid and legally issued shares of Pentacon, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all substantive respects (which do not include the form of certificate upon which it is printed or the presence or absence of a CUSIP number on any such certificate) to the Pentacon Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the Stockholders shall at the time of such issuance and delivery be free and clear of any liens, claims or encumbrances of any kind or character. The shares of Pentacon Stock to be issued to the Stockholders pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither Pentacon nor Newco has entered or will enter into any agreement with any of the Founding Companies or any of the Stockholders of the Founding Companies or Pentacon other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements and real property leases referred to herein or entered into in connection with the transactions contemplated hereby and thereby. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on March 20, 1997 and has conducted only limited operations since that time. Neither Pentacon nor Newco has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Except as described in the Draft Registration Statement, neither Pentacon nor Newco owns or has at any time owned any real property or any material personal property or is a party to any other material agreement other than the Other Agreements, the agreements contemplated thereby and such agreements as will be filed as Exhibits to the Registration Statement. 6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company and the Stockholders, together with this Agreement and the information furnished to the Company and the Stockholders in connection herewith, does not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by the Company or the Stockholders or information pertaining to the Company or a Stockholder which is confirmed in writing by the Company or such Stockholder. -28- 7. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Consummation Date, the Company will afford to the officers and authorized representatives of Pentacon and the Other Founding Companies access to all of the Company's sites, properties, books and records and will furnish Pentacon with such additional financial and operating data and other information as to the business and properties of the Company as Pentacon or the Other Founding Companies may from time to time reasonably request; provided, however, that the Company shall not prior to the Closing Date be required to disclose to the Other Founding Companies, and Pentacon shall not without first obtaining the written approval of the Company disclose to the Other Founding Companies, information relating to pricing or profitability on an account-by-account basis or any pricing information relating to the Company's suppliers on a supplier-by-supplier basis. The Company will cooperate with Pentacon, its representatives, auditors and counsel and the Other Founding Companies in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. Pentacon, Newco, the Stockholders and the Company will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, Pentacon will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1(a) requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Consummation Date, Pentacon will afford to the officers and authorized representatives of the Company and the Stockholders access to all of Pentacon's and Newco's sites, properties, books and records and will furnish the Company with such additional financial and operating data and other information as to the business and properties of Pentacon and Newco as the Company may from time to time reasonably request. Pentacon and Newco will cooperate with the Company, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The Company will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Consummation Date, the Company will, except as set forth on Schedule 7.2 or as otherwise expressly contemplated by this Agreement: (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; -29- (ii) use commercially reasonable efforts to maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform in all material respects all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) use commercially reasonable efforts to keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use commercially reasonable efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with material suppliers, customers and others having business relations with the Company; (vi) use commercially reasonable efforts to maintain compliance with all material permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments without the knowledge and consent of Pentacon (which consent shall not be unreasonably withheld, delayed or conditioned), provided that debt and/or lease instruments may be replaced without the consent of Pentacon if such replacement instruments are on terms at least as favorable to the Company as the instruments being replaced; and (viii)maintain or reduce present salaries and commission levels for all officers, directors, employees and agents except for ordinary and customary bonus and salary increases for employees in accordance with the Company's past practices. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3 or as otherwise expressly contemplated by this Agreement, between the date hereof and the Consummation Date, the Company will not, without prior written consent of Pentacon: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options, warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; -30- (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock; (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $25,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $25,000 necessary or desirable for the conduct of the businesses of the Company, (2) (A) liens for Taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested Taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business and other than distributions of real estate and other assets as permitted in this Agreement (including the Schedules hereto); (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii)merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the Company, provided that the Company may negotiate and adjust bills and accounts in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 to the extent they exceed the reserves, if any, established therefor, or unless specifically listed thereon; (x) amend or terminate any material agreement, permit, license or other right of the Company provided that the Company may continue to administer vendor and supplier contracts in the ordinary course of business provided written notice of any such material amendments or terminations is provided to Pentacon as soon as possible following such action and in any event prior to the Closing; or (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder. -31- 7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the Company, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than Pentacon, Newco or their authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the Company or a merger, consolidation or business combination of the Company. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide Pentacon on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The Stockholders and the Company shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the Company and any employee listed on Schedule 9.12 hereto and (ii) any existing agreement between the Company and any Stockholder, on or prior to the Consummation Date provided that nothing herein shall prohibit or prevent the Company from paying (either prior to or on the Closing Date) notes or other obligations from the Company to the Stockholders in accordance with the terms thereof, which terms have been disclosed to Pentacon. Such termination agreements are listed on Schedule 7.6 and copies thereof shall be attached thereto. 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY. The Stockholders and the Company shall give prompt notice to Pentacon of (i) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the Company or the Stockholders contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any Stockholder or the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. Pentacon and Newco shall give prompt notice to the Company of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of Pentacon or Newco contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of Pentacon or Newco to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery or deemed delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties -32- hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. If, prior to the Closing Date, the Chief Executive Officer, the Chief Financial Officer or the General Counsel of Pentacon shall determine that any of Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder for indemnification against any Stockholder(s) (whether or not such claim might exceed the Indemnification Threshold), then Pentacon shall promptly advise the affected Stockholder(s), in writing, of such potential claim and provide information supporting the basis and potential amount of such claim (a "Potential Claim Notice"). This procedure with respect to Potential Claim Notices is intended to afford the affected Stockholder(s) notice so that it may attempt to cure or otherwise address the claim prior to Closing; provided, however, that (i) this procedure shall not affect or delay Closing and (ii) neither the failure or delay by Pentacon to give a Potential Claim Notice nor the information included or omitted from a Potential Claim Notice shall constitute a waiver of, or shall otherwise adversely affect the right to receive indemnification for, any such claim paid by Pentacon, Newco, the Surviving Corporation or the company hereunder after the Closing Date. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until 24 hours prior to the anticipated effectiveness of the Registration Statement to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date, unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the Company that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to the Company may be made unless Pentacon and a majority of the Founding Companies other than the Company consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by Pentacon or Newco that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to Pentacon or Newco may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, Pentacon shall give the Company written notice promptly after it has knowledge thereof. If Pentacon and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given by Pentacon or any Founding Company if no response is received within 24 hours -33- following receipt of written notice of such amendment or supplement (or sooner if reasonable and if required by the circumstances under which such consent is requested), but the Company does not give its consent, the Company may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the Company seeks to amend or supplement a Schedule pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that Pentacon or Newco seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and Stockholders shall furnish or cause to be furnished to Pentacon and the Underwriters all of the information concerning the Company and the Stockholders reasonably required for inclusion in, and will cooperate with Pentacon and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement, except that the cost of the preparation of any such audited and unaudited Financial Statements shall be borne by Pentacon). The Company and the Stockholders agree promptly to advise Pentacon if at any time during the period in which a prospectus relating to the IPO is required to be delivered under the Securities Act, any information contained in the prospectus concerning the Company or the Stockholders becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the Company or the Stockholders, the Company represents and warrants as to such information with respect to itself, and each Stockholder represents and warrants, as to such information with respect to the Company and himself or herself, severally, but not jointly, that the information expressly provided for inclusion in the Registration Statement or otherwise confirmed in writing by such Stockholder will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the Consummation Date, and Pentacon shall have had sufficient time to review the unaudited consolidated balance sheets of the Company as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the Company for all fiscal quarters ended after the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the Company for the periods indicated therein. -34- 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall maintain its authorized capital stock as set forth in the Registration Statement filed with the SEC except for such changes in authorized capital stock as are made to respond to comments made by the SEC or requirements of any exchange or automated trading system for which application is made to register the Pentacon Stock and any changes necessary or advisable in order to permit the delivery of the opinion contemplated by Section 8.12 hereof. 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby recognize that one or more filings under the Hart-Scott-Rodino Act may be required in connection with the transactions contemplated herein. If it is determined by the parties to this Agreement that filings under the Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act, (ii) such compliance by the Stockholders and the Company shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 9 of this Agreement, and (iii) the parties agree to cooperate and use their best efforts to cause all filings required under the Hart-Scott-Rodino Act to be made. If filings under the Hart-Scott-Rodino Act are required, the costs and expenses thereof (including filing fees) shall be borne by Pentacon. The obligation of each party to consummate the transactions contemplated by this Agreement is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, if applicable. 7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date of the final prospectus of Pentacon utilized in connection with the IPO, the Company or the Stockholders become aware of any fact or circumstance which would materially affect the accuracy of a representation or warranty of Company or Stockholders in this Agreement, the Company and the Stockholders shall promptly give notice of such fact or circumstance to Pentacon. However, subject to the provisions of Section 7.8, such notification shall not relieve either the Company or the Stockholders of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of Pentacon, the truth and accuracy of any and all warranties and representations of the Company, or on behalf of the Company and of Stockholders at the date of this Agreement and on the Closing Date and on the Consummation Date, shall be a precondition to the consummation of this transaction. 7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately following the Effective Time of the Merger, Pentacon will pay, or cause to be paid, all of the outstanding liabilities, obligations and indebtedness of Company to the lenders identified on Schedule 7.15 hereto. In connection with such repayment of indebtedness, all associated guaranties of Founder Stockholders shall be terminated and cancelled. -35- 7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that one of the conditions to the Stockholders consummating the transactions contemplated herein is that the IPO shall be closed and the Stockholders (as a group) shall be entitled to receive consideration not less than the Minimum Value set forth on Annex I attached hereto. 7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon shall not exceed nine members immediately following the IPO unless the Founding Stockholder representatives to serve on such board agree in writing to a larger number of directors. 7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise required by applicable law, Pentacon will describe or report the transaction in any required tax reports of Pentacon as a tax-free transaction (insofar as its relates to the delivery of Pentacon Stock for Company Stock) in a manner consistent with the tax opinion referenced in Section 8.12. 7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain all material Licenses necessary for Pentacon to commence the conduct of business on the Consummation Date. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of Stockholders and the Company with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the Stockholders and the Company with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such conditions have not been satisfied, the Stockholders (acting in unison) shall have the right to terminate this Agreement, or in the alternative, waive any condition not so satisfied. The delivery of certificates representing Company Stock to Pentacon as of the Consummation Date shall constitute a waiver of any conditions not so satisfied. However, no such waiver shall be deemed to affect the survival of the representations and warranties of Pentacon and Newco contained in Section 6 hereof or the rights of the Stockholders pursuant to Section 11 hereof. 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of Pentacon and Newco contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by Pentacon and Newco on or before the Closing Date and the Consummation Date shall have been duly complied with and performed in all material respects; and certificates to the foregoing effect dated the Closing Date and the Consummation Date, respectively, and signed by the President or any Vice President of Pentacon shall have been delivered to the Stockholders. -36- 8.2 SATISFACTION. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall be reasonably satisfactory to the Company and its counsel. The Stockholders and the Company shall be satisfied that the Registration Statement and the prospectus forming a part thereof, including any amendments thereof or supplements thereto, shall not contain any untrue statement of a material fact, or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that, subject to the provisions set forth in the introductory paragraph of this Section 8, the condition contained in this sentence shall be deemed waived if the Company or Stockholders shall have failed to inform Pentacon in writing prior to the effectiveness of the Registration Statement of the existence of an untrue statement of a material fact or the omission of such a statement of a material fact. 8.3 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of the Company as a result of which the management of the Company deems it inadvisable to proceed with the transactions hereunder. 8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed hereto as Annex IV. 8.5 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of Pentacon Stock to be received by the Stockholders is not less than the Minimum Value set forth on Annex I. 8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency or any third party relating to the consummation of the transactions contemplated herein or set forth in Schedule 5.23 hereto shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Company as a result of which Company deems it inadvisable to proceed with the transactions hereunder. 8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have delivered to the Company a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which Pentacon or Newco is authorized to do business, showing that each of Pentacon and Newco is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for Pentacon and Newco, respectively, for all periods prior to the Closing have been filed and paid. -37- 8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to Pentacon or Newco which would constitute a Material Adverse Effect. 8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of Pentacon and of Newco, certifying the truth and correctness of attached copies of the Pentacon's and Newco's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the Stockholders of Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall have been afforded the opportunity to enter into an employment agreement substantially in the form of Annex VI hereto. 8.12 TAX MATTERS. The Stockholders shall have received an opinion of Ernst & Young, L.L.P. or other tax advisor of national recognition reasonably acceptable to the Stockholders that the Pentacon Plan of Organization will qualify as a tax-free transfer of property under Section 351 of the Code and that the Stockholders will not recognize gain to the extent the Stockholders exchange stock of the Company for Pentacon stock (but not cash or other property) pursuant to the Pentacon Plan of Organization. 8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for listing on the New York Stock Exchange, NASDAQ National Market System or the American Stock Exchange. 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO The obligations of Pentacon and Newco with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of Pentacon and Newco with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of the Consummation Date, if any such conditions have not been satisfied, Pentacon and Newco shall have the right to terminate this Agreement, or waive any such condition, but no such waiver shall be deemed to affect the survival of the representations and warranties contained in Section 5 hereof. -38- 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the representations and warranties of the Stockholders and the Company contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the Stockholders and the Company on or before the Closing Date or the Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the Stockholders shall have delivered to Pentacon certificates dated the Closing Date and the Consummation Date, respectively, and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which the management of Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate, dated the Closing Date and signed by the secretary of the Company, certifying the truth and correctness of attached copies of the Company's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and the Stockholders approving the Company's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the Company which would constitute a Material Adverse Effect, and the Company shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the Company to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The Stockholders shall have delivered to Pentacon an instrument dated the Closing Date, which shall be effective only upon the occurrence of the Consummation Date and shall relate only to matters accruing on or prior to the Consummation Date, releasing the Company and Pentacon from (i) any and all claims of the Stockholders against the Company and Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders, except for (w) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the Stockholders, (x) continuing obligations to Stockholders relating to their employment by the Company or Pentacon, (y) any obligations or liabilities arising under this Agreement or the transactions contemplated hereby and (z) real estate lease agreements between the Company and Stockholders, as amended which have been accepted or approved by Pentacon. In the event that the Consummation Date does not occur, then the release instrument referenced herein shall be void and of no further force or effect. -39- 9.6 SATISFACTION. All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or incidental hereto and all other related legal matters shall have been approved by counsel to Pentacon. 9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.7, all existing agreements between the Company and the Stockholders (and entities controlled by the Stockholders) shall have been canceled effective prior to or as of the Consummation Date. 9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from Counsel to the Company and the Stockholders, dated the Closing Date, substantially in the form annexed hereto as Annex V. 9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to Pentacon a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the Company's state of incorporation and, unless waived by Pentacon, in each state in which the Company is authorized to do business, showing the Company is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the Company for all periods prior to the Closing have been filed and paid. 9.11 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall enter into an employment agreement substantially in the form of Annex VI hereto. 9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. -40- 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Consummation Date, Pentacon shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the organization, including without limitation: (a) the retirement or reacquisition, directly or indirectly, of all or part of the Pentacon Stock issued in connection with the transactions contemplated hereby; or (b) the entering into of financial arrangements for the benefit of the Stockholders. 10.2 PREPARATION AND FILING OF TAX RETURNS. (i) The Company, if possible, or otherwise the Stockholders shall file or cause to be filed all Tax Returns (federal, state, local or otherwise) of any Acquired Party for all taxable periods that end on or before the Consummation Date, and shall permit Pentacon to review all such Returns prior to such filings. Unless the Company is a C corporation, the Stockholders shall pay or cause to be paid all Tax liabilities (in excess of all amounts already paid with respect thereto or properly accrued or reserved with respect thereto on the Financial Statements) shown by such Returns to be due. (ii) Pentacon shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Consummation Date. (iii) Each party hereto shall, and shall cause its Subsidiaries and Affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies, at the expense of the requesting party, of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the Company, Newco, Pentacon and each Stockholder shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free contribution under Section 351(a) of the Code subject to gain, if any, recognized on the receipt of cash or other -41- property under Section 351(b) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code. 10.3 DIRECTORS. The persons named in the Draft Registration Statement shall be appointed as directors and elected as officers of Pentacon, as and to the extent set forth in the Draft Registration Statement, promptly following the Consummation Date. 11. INDEMNIFICATION The Stockholders, Pentacon and Newco each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders covenant and agree that they, jointly and severally, will indemnify, defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date (provided that for purposes of Section 11.1(iii) below, the Expiration Date shall be the date on which the applicable statute of limitations expires), from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by Pentacon, Newco, the Company or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the Stockholders or the Company set forth herein or on the definitive, final schedules or certificates delivered by them in connection herewith, (ii) any breach of any agreement on the part of the Stockholders or, prior to Closing, the Company under this Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to the Company or the Stockholders, and provided in writing to Pentacon or its counsel by the Company or the Stockholders for inclusion in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to the Company or the Stockholders required to be stated therein or necessary to make the statements therein not misleading, provided, however, that such indemnity shall not inure to the benefit of Pentacon, Newco, the Company or the Surviving Corporation to the extent that such untrue statement (or alleged untrue statement) was made in, or omission (or alleged omission) occurred in, any preliminary prospectus and the Stockholders provided, in writing, corrected information to Pentacon counsel and to Pentacon for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no Stockholder shall be liable for any indemnification obligation pursuant to this Section 11.1(iii) to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other Stockholder. Pentacon and Newco acknowledge and agree that other than the representations and warranties of Company or Stockholders specifically contained in this Agreement, there are no representations or warranties of Company or Stockholders, either express or implied, with respect -42- to the transactions contemplated by this Agreement, the Company or its assets, liabilities and business. Pentacon, Newco and the Company further acknowledge and agree that, should the Closing occur, their sole and exclusive remedy with respect to any and all claims relating to this Agreement and the transactions contemplated in this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the Closing, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action they or any indemnified person may have against the Company or any Stockholder relating to this Agreement or the transactions contemplated hereby arising under or based upon any federal, state, local or foreign statute, law, rule, regulation or otherwise (and other than pursuant to the terms of this Agreement). 11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it will indemnify, defend, protect and hold harmless the Stockholders at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the Stockholders as a result of or arising from (i) any breach by Pentacon or Newco of their representations and warranties set forth herein or on the definitive, final schedules or certificates attached delivered by them pursuant hereto, (ii) any breach of any agreement on the part of Pentacon or Newco under this Agreement or any other agreement delivered pursuant hereto, (iii) any liabilities which the Stockholders may incur due to Pentacon's or Newco's or the Surviving Corporation's failure to pay, perform or discharge when due any of the liabilities and obligations of the Company for which Pentacon, Newco or the Surviving Corporation is responsible pursuant to this Agreement (except to the extent that Pentacon or Newco has bona fide claims hereunder against the Stockholders by reason of such liabilities); or (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to Pentacon, Newco or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to Pentacon or Newco or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading. 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has actual knowledge of any claim by a Person (including a governmental agency) not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, with respect to which the Indemnified Person would be entitled to receive indemnification pursuant to Section 11, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or -43- proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the reasonable expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense through appropriate proceedings, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person. Upon agreement as to such settlement between said Third Person and the Indemnifying Party, the Indemnifying Party shall, in exchange for a complete release from the Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in such settlement and the Indemnified Party shall, from that moment on, bear full responsibility for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. -44- 11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case pursuant to Section 14.3 or otherwise, to seek injunctive or other equitable relief (except for rescission which shall not be available) for a breach or threatened breach of this Agreement. Any indemnity payment under this Section 11 shall be treated as an adjustment to the exchange consideration for tax purposes unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the indemnified party or any of its affiliate causes any such payment not to be treated as an adjustment to the exchange consideration for U.S. Federal Income Tax purposes. (b) Nothing in this Article 11 shall restrict the Stockholders from subrogation or seeking reimbursement from third parties other than the Company. 11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 or 11.2 shall not assert any claim for indemnification hereunder against the Stockholders after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against the Stockholders shall exceed the greater of 1% of the value of the total consideration (including stock and cash) received by the Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and then only to the extent of the excess over the Indemnification Threshold. Stockholders shall not assert any claim for indemnification hereunder against Pentacon or Newco after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which Stockholders may have against Pentacon or Newco shall exceed the Indemnification Threshold, and then only to the extent of the excess over the Indemnification Threshold. The Indemnification Threshold and the other limitations contained in this Section 11.5 shall not be applicable to any breach of covenants made by the Stockholders in this Agreement which require an action or inaction by such Stockholders from and after the Closing Date (i.e., Article 10, Article 11, Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall be entitled to indemnification under this Section 11 if, and only to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. The pursuit by Pentacon, the Surviving Corporation, Newco or the Company, of any claim for indemnification hereunder against a Stockholder shall require a majority vote of the board of directors of Pentacon excluding for the purposes of such acts any directors who was previously a stockholder of the Company or is a representative of the stockholders of the Company as existing prior to the closing of the transactions contemplated at this Agreement. Notwithstanding any other term of this Agreement, no Stockholder shall be liable (in the aggregate from time to time taking into account all indemnification payments made hereunder) under -45- Section 11 (i) for any amount which is less than or equal to the Indemnification Threshold (and then only to the extent of the excess over the Indemnification Threshold) or (ii) for any amount which exceeds the amount of proceeds (including cash and stock) received by such Stockholder in connection with the Merger. Each Stockholder shall have the option of satisfying his or her indemnity obligation in cash and/or by returning or transferring shares of Pentacon Stock to Pentacon or any other Indemnified Party. For purposes of calculating the value of the Pentacon Stock received by a Stockholder and satisfying any indemnity claim by returning or transferring Pentacon Stock, Pentacon Stock shall be valued at its initial public offering price as set forth in the Registration Statement. Notwithstanding any of the foregoing provisions of this Section 11 that might be read to the contrary, it is the agreement of the parties that the Indemnification Threshold be given full effect under all circumstances. Accordingly, insofar as any of the foregoing provisions of this Section 11 may hold harmless an Indemnified Party before the Indemnification Threshold has been met, then Pentacon and the Stockholders shall cooperate in good faith to establish an equitable procedure pursuant to which Pentacon reimburses or causes the reimbursement to the affected Stockholder(s) of all expenditures and payments by Stockholders that are intended to be absorbed and borne by any Indemnified Parties as a result of the prior application of the Indemnification Threshold or otherwise takes such action as may be reasonably necessary to give effect to the Indemnification Threshold. 12. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Consummation Date solely: (i) by mutual consent of the boards of directors of Pentacon and the Company; (ii) by the Stockholders or the Company (acting through its board of directors), on the one hand, or by Pentacon (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by February 28, 1998, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Consummation Date; (iii) by the Stockholders or Company, on the one hand, or by Pentacon, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants or agreements contained herein, and the curing of such default shall not have been made on or before the Consummation Date or by the Stockholders or the Company, if the conditions set forth in Section 8 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable, or by Pentacon, if the conditions set forth in Section 9 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable; -46- (iv) pursuant to Section 7.8 hereof; (v) pursuant to the termination provisions contained in Section 4 hereof; or (vi) pursuant to the other express terms of this Agreement. 12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section 7.8 hereof, the termination of this Agreement will in no way limit any obligation or liability of any party based on or arising from a breach or default by such party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement including, but not limited to, legal and audit costs and out of pocket expenses. 13. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of five (5) years following the Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) except as disclosed in Schedule 13.1, engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any fastener business or operation or related services business in direct competition with Pentacon or any of the subsidiaries thereof, within 100 miles of where the Company or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) except with the prior written consent of Pentacon, call upon any person who is, at that time, within the Territory, an employee of Pentacon or any subsidiary thereof for the purpose or with the intent of enticing such employee away from or out of the employ of Pentacon or any subsidiary thereof; (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Consummation Date, a customer of Pentacon or any subsidiary thereof, of the Company or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services that are in direct competition with Pentacon within the Territory; (iv) call upon any prospective acquisition candidate, on any Stockholder's own behalf or on behalf of any competitor in the fastener business, which candidate, to the actual knowledge of such Stockholder after due inquiry, was called upon by Pentacon or any subsidiary thereof or for which, to the actual knowledge of such Stockholder after due -47- inquiry, Pentacon or any subsidiary thereof made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the Company to any person, firm, partnership, corporation or business for any reason or purpose relating to the fastener business except to the extent that the Company has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any Stockholder from acquiring as a passive investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to Pentacon as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to Pentacon for which it would have no other adequate remedy, each Stockholder agrees that the foregoing covenant may be enforced by Pentacon in the event of breach by such Stockholder, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the Stockholders in light of the activities and business of Pentacon and the subsidiaries thereof on the date of the execution of this Agreement and the current plans of Pentacon; but it is also the intent of Pentacon and the Stockholders that such covenants be construed and enforced in accordance with the changing activities; business and locations of Pentacon and its subsidiaries throughout the term of this covenant. During the term of this covenant, if Pentacon or one of its subsidiaries engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business it is currently conducting in the locations currently established therefor, then the Stockholders will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new activities or business within 100 miles of its then-established operating location(s) through the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. -48- 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any Stockholder against Pentacon or any subsidiary thereof, whether predicated on this Agreement or otherwise (except for a claim or cause of action based upon Pentacon's failure to pay or otherwise tender any of the consideration due to the Stockholders hereunder), shall not constitute a defense to the enforcement by Pentacon of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each Stockholder made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such Stockholder is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The Company and the Stockholders hereby agree that this covenant is a material and substantial part of this transaction. 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The Stockholders recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the Company, the Other Founding Companies, and/or Pentacon, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's, the Other Founding Companies' and/or Pentacon's respective businesses. The Stockholders agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of Pentacon, (b) following the Closing, such information may be disclosed by the Stockholders as is required in the course of performing their duties for Pentacon or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the Stockholders, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the Stockholders shall, if possible, give prior written notice thereof to Pentacon and provide Pentacon with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the Stockholders of the provisions of this Section, Pentacon shall be entitled to an injunction restraining such Stockholders from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Pentacon from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, Stockholders shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the Company. -49- 14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that they had in the past and currently have access to certain confidential information of the Company, including, but not limited to, customer and prospect lists, financial information, operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's business. Pentacon and Newco agree that, prior to the Consummation Date, or if the transactions contemplated by this Agreement are not consummated, they will not, appropriate or make use of any such information, whether for its own benefit or the benefit of any other person or entity, for any purpose whatsoever (except pending the Consummation Date, effecting the transactions contemplated hereby) disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the Company, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.2, (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of Pentacon or Newco, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), Pentacon and Newco shall, if possible, give prior written notice thereof to the Company and the Stockholders and provide the Company and the Stockholders with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, and (d) to the public to the extent necessary or advisable in connection with the filing of the Registration Statement and the IPO and the securities laws applicable thereto and to the operation of Pentacon as a publicly held entity after the IPO. In the event of a breach or threatened breach by Pentacon or Newco of the provisions of this Section, the Company and the Stockholders shall be entitled to an injunction restraining Pentacon and Newco from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the Company and the Stockholders from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach or threatened breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders or other appropriate equitable relief, without posting any bond or other security or having to prove irreparable harm or injury. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Consummation Date, or without limitation if the transactions contemplated hereby are not consummated. -50- 15. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts or partnerships for the benefit of charities, the Stockholders, family members, the trustees or partners of which so agree), for a period of one year from the Closing, except pursuant to Section 17 hereof, none of the Stockholders shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any shares of Pentacon Stock received by the Stockholders in the Merger. The certificates evidencing the Pentacon Stock delivered to the Stockholders pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as Pentacon may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 16. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement have not been and will not be registered under the 1933 Act (except as provided in Section 17 hereof) and therefore may not be resold without compliance with the 1933 Act. The Pentacon Stock to be acquired by such Stockholders pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. The Stockholders covenant, warrant and represent that none of the shares of Pentacon Stock issued to such Stockholders will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the Pentacon Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. -51- 16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the economic risk of an investment in the Pentacon Stock to be acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the Pentacon Stock. The Stockholders party hereto have had an adequate opportunity to ask questions and receive answers from the officers of Pentacon concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of Pentacon, the plans for the operations of the business of Pentacon, the business, operations and financial condition of the Founding Companies other than the Company, and any plans for additional acquisitions and the like. The Stockholders have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 17. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever Pentacon proposes to register any Pentacon Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf or other registration of shares to be used as consideration for acquisitions of additional businesses by Pentacon and (ii) registrations relating to employee benefit plans, Pentacon shall give each of the Stockholders prompt written notice of its intent to do so. Upon the written request of any of the Stockholders given within 30 days after receipt of such notice, Pentacon shall cause to be included in such registration all of the Pentacon Stock issued to the Stockholders pursuant to this Agreement (including any stock issued as (or issuable upon the conversion or exchange of any convertible security, warrant, right or other security which is issued by Pentacon as) a dividend or other distribution with respect to, or in exchange for, or in replacement of such Pentacon Stock) which any such Stockholder requests, provided that Pentacon shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares would, in the written opinion of tax counsel to Pentacon or its independent auditors, reasonably be likely to jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free organization under Section 351 of the Code. In addition, if Pentacon is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than Pentacon is greater than the number of such shares which can be offered without adversely affecting the offering, Pentacon may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter, provided, that, for each such offering made by Pentacon after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than Pentacon, the Stockholders and the Stockholders of the Other Founding Companies (collectively, the Stockholders and the Stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. -52- 17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as expeditiously as possible: (i) Prepare and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements or term sheets thereto, Pentacon will furnish a representative of the Stockholders with copies of all such documents proposed to be filed) as promptly as practical; (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days; (iii) Furnish to each Stockholder who so requests such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus and any term sheet associated therewith), and such other documents as such Stockholder may reasonably request in order to facilitate the disposition of the relevant shares; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Stockholders, and to keep such registration or qualification effective during the period such registration statement is to be kept effective, provided that Pentacon shall not be required to become subject to taxation, to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) Cause all such shares of Pentacon Stock to be listed or included on any securities exchanges or trading systems on which similar securities issued by Pentacon are then listed or included; (vi) Notify each Stockholder at any time when a prospectus relating thereto is required to be delivered under the 1933 Act within the period that Pentacon is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement, together with any associated term sheet, contains an untrue statement of a material fact or omits any fact necessary to make the statement therein not misleading, and, at the request of such Stockholder, Pentacon will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the covered shares, such prospectus will not contain an untrue statement of material fact or omit to state any fact necessary to make the statements therein not misleading. -53- All expenses incurred in connection with the registration under this Article 17 (including all registration, filing, qualification, legal, printer and accounting fees, but excluding underwriting commissions and discounts), shall be borne by Pentacon. 17.3 INDEMNIFICATION. (a) In connection with any registration hereunder, Pentacon shall indemnify, to the extent permitted by law, each Stockholder against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or associated term sheet or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same are caused by or contained in or omitted from any information furnished in writing to Pentacon by such indemnified party expressly for use therein or by any indemnified parties' failure to deliver a copy of the registration statement or prospectus or any amendment or supplements thereto after Pentacon has furnished such Indemnified Party with a sufficient number of copies of the same. (b) In connection with any registration hereunder, each Stockholder shall furnish to Pentacon in writing such information as is reasonably requested by Pentacon for use in any such registration statement or prospectus and will indemnify, to the extent permitted by law, Pentacon, its directors and officers and each person who controls Pentacon (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement or material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in information so furnished in writing by such Stockholder specifically for use in preparing the registration statement. Notwithstanding the foregoing, the liability of a Stockholder under this Section 17.3 shall be limited to an amount equal to the net proceeds actually received by such Stockholder from the sale of the relevant shares covered by the registration statement. (c) Any person entitled to indemnification under this Section will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified parties' reasonable judgment, a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Any failure to give prompt notice shall deprive a party of its right to indemnification hereunder only to the extent that such failure shall have adversely affected the indemnifying party. If the defense of any claim is assumed, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled or elects not to assume the defense of a claim, will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the -54- reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant to Section 17.1 covering an underwritten registered offering, Pentacon and each participating holder agree to enter into a written agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between such managing underwriters and companies of Pentacon's size and investment stature, including indemnification. 17.5 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC that may permit the sale of Pentacon stock to the public without registration, Pentacon agrees to use its commercially reasonable efforts to: (i) make and keep public information regarding Pentacon available as those terms are understood and defined in Rule 144 under the 1933 Act for a period of four years beginning 90 days following the effective date of the Registration Statement; (ii) file with the SEC in a timely manner all reports and other documents required of Pentacon under the 1933 Act and the 1934 Act at any time after it has become subject to such reporting requirements; and (iii) so long as a Stockholder owns any restricted Pentacon Common Stock, furnish to each Stockholder forthwith upon written request a written statement by Pentacon as to its compliance with the reporting requirements of Rule 144 (at any time from and after 90 days following the effective date of the Registration Statement, and of the 1933 Act and the 1934 Act (any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Pentacon, and such other reports and documents so filed as a Stockholder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Stockholder to sell any such shares without registration. 18. GENERAL 18.1 COOPERATION. The Company, Stockholders, Pentacon and Newco shall each deliver or cause to be delivered to the other on the Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The Company will cooperate and use its reasonable efforts to have the present officers, directors and employees of the Company cooperate with Pentacon on and after the Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Consummation Date. -55- 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of Pentacon, and the heirs and legal representatives of the Stockholders. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the Stockholders, the Company, Newco and Pentacon and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only (i) pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a written instrument executed by the Stockholders, the Company, Newco and Pentacon, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby, provided that the Company shall make a good faith effort to cross reference disclosure, as necessary or advisable, between related Schedules, and provided further that the failure to do so will not affect the validity of such disclosure. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, Pentacon will pay the fees, expenses and disbursements of Pentacon and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto, including all costs and expenses incurred in the performance and compliance with all conditions to be performed by Pentacon under this Agreement, including the fees and expenses of Ernst & Young, L.L.P., Andrews & Kurth L.L.P., and any other person or entity retained by Pentacon or by McFarland Grossman Capital Ventures II, L.C., and the costs of preparing the Registration Statement. Except as otherwise agreed in writing by Pentacon, each Stockholder shall pay their respective fees, expenses and disbursements of counsel and other professionals in connection with this transaction and shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware. Each Stockholder shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each Stockholder acknowledges that he, and not the Company or Pentacon, will -56- pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof. The Stockholders acknowledge that the risks of the transactions contemplated hereby include tax risks, with respect to which the Stockholders are relying solely on the opinion contemplated by Section 8.12 hereof. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to Pentacon, or Newco, addressed to them at: Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 with copies to: Bruce Taten, Esquire Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 and Christopher S. Collins, Esquire Andrews & Kurth L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 (b) If to the Stockholders, addressed to them at their addresses set forth on Annex II, with copies to: F. L. Dennis Logan Rothberg & Logan P. O. Box 11647 Fort Wayne, Indiana 46859 (c) If to the Company, addressed to it at: Michael Peters Maumee Industries, Inc. 3010 Independence Drive -57- Fort Wayne, Indiana 46808 or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the applicable Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. Except as otherwise provided in Section 11.4, no right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. -58- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PENTACON, INC. By:/s/MARK E. BALDWIN Mark E. Baldwin Chief Executive Officer MAUMEE INDUSTRIES ACQUISITION COMPANY By: /s/ MARK E. BALDWIN Name: Mark E. Baldwin Title: President MAUMEE INDUSTRIES, INC. By: /s/ MICHAEL BLACK Name: Michael Black Title: President STOCKHOLDERS: /s/MICHAEL BLACK MICHAEL BLACK /s/MICHAEL PETERS MICHAEL PETERS -59- ANNEX I (Maumee Industries, Inc.) CONSIDERATION TO BE PAID TO THE STOCKHOLDERS Stockholder Shares of Common Stock of Merger Cash* PENTACON, INC. - ------------------- -------------------------- ------------------ Michael Black 901,321 $3,844,348.50 Michael Peters 300,441 $1,281,449.50 -------------------------- ------------------ 1,201,762 $5,125,798 ========================== ================== MINIMUM VALUE: $17,419,823 *Merger Cash is fixed and will not be adjusted as a result of changes in the size of the IPO. ANNEX II MAUMEE INDUSTRIES, INC. STOCK OWNERSHIP Michael Black 75 Shares Michael Peters 25 Shares See attached for Stockholders' addresses. EX-10.5 6 EXHIBIT 10.5 AGREEMENT AND PLAN OF ORGANIZATION dated as of the 1st day of December 1997 by and among PENTACON, INC. SALES SYSTEMS LIMITED ACQUISITION COMPANY (a subsidiary of Pentacon, Inc.) SALES SYSTEMS, LIMITED and the STOCKHOLDERS named herein TABLE OF CONTENTS Page RECITALS.....................................................................1 1. THE MERGER.............................................................6 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER........................6 1.2 EFFECTIVE TIME OF THE MERGER.....................................6 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION............................................6 1.4 EFFECT OF MERGER.................................................7 2. CONVERSION OF STOCK....................................................7 2.1 MANNER OF CONVERSION.............................................7 3. DELIVERY OF MERGER CONSIDERATION.......................................8 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK.....................8 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED........................8 4. CLOSING................................................................9 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS.....9 5.1 DUE ORGANIZATION................................................10 5.2 AUTHORIZATION...................................................10 5.3 CAPITAL STOCK OF THE COMPANY....................................10 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........10 5.5 NO BONUS SHARES.................................................11 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES.......................11 5.7 PREDECESSOR STATUS; ETC.........................................11 5.8 SPIN-OFF BY THE COMPANY.........................................11 5.9 FINANCIAL STATEMENTS............................................11 5.10 LIABILITIES AND OBLIGATIONS.....................................12 5.11 ACCOUNTS AND NOTES RECEIVABLE...................................12 5.12 PERMITS AND INTANGIBLES.........................................13 5.13 ENVIRONMENTAL MATTERS...........................................13 5.14 PERSONAL PROPERTY...............................................15 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS.......15 5.16 REAL PROPERTY...................................................16 5.17 INSURANCE.......................................................16 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS..............17 -i- 5.19 EMPLOYEE PLANS..................................................17 5.20 COMPLIANCE WITH ERISA...........................................18 5.21 CONFORMITY WITH LAW; LITIGATION.................................19 5.22 TAXES...........................................................19 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC.........................20 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS..................21 5.25 ABSENCE OF CHANGES..............................................22 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY............................23 5.27 VALIDITY OF OBLIGATIONS.........................................23 5.28 RELATIONS WITH GOVERNMENTS......................................23 5.29 DISCLOSURE......................................................24 5.30 PROHIBITED ACTIVITIES...........................................24 5.31 NO WARRANTIES OR INSURANCE......................................24 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS....................................................24 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS...................25 5.34 PREEMPTIVE RIGHTS...............................................25 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK.......................25 6. REPRESENTATIONS OF PENTACON AND NEWCO.................................25 6.1 DUE ORGANIZATION................................................26 6.2 AUTHORIZATION...................................................26 6.3 CAPITAL STOCK OF PENTACON AND NEWCO.............................26 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING..........26 6.5 SUBSIDIARIES....................................................27 6.6 FINANCIAL STATEMENTS............................................27 6.7 LIABILITIES AND OBLIGATIONS.....................................27 6.8 CONFORMITY WITH LAW; LITIGATION.................................27 6.9 NO VIOLATIONS...................................................27 6.10 VALIDITY OF OBLIGATIONS.........................................28 6.11 PENTACON STOCK..................................................28 6.12 NO SIDE AGREEMENTS..............................................29 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS....................29 6.14 DISCLOSURE......................................................29 7. COVENANTS PRIOR TO CLOSING............................................29 7.1 ACCESS AND COOPERATION; DUE DILIGENCE...........................29 7.2 CONDUCT OF BUSINESS PENDING CLOSING.............................30 7.3 PROHIBITED ACTIVITIES...........................................31 7.4 NO SHOP.........................................................32 7.5 NOTICE TO BARGAINING AGENTS.....................................33 7.6 AGREEMENTS......................................................33 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY.........................................................33 7.8 AMENDMENT OF SCHEDULES..........................................34 -ii- 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT............35 7.10 FINAL FINANCIAL STATEMENTS......................................35 7.11 FURTHER ASSURANCES..............................................35 7.12 AUTHORIZED CAPITAL..............................................36 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT")..........36 7.14 PRE-CLOSING NOTIFICATIONS.......................................36 7.15 PAYMENT OF INDEBTEDNESS.........................................36 7.16 MINIMUM VALUE...................................................37 7.17 DIRECTORS. ....................................................37 7.18 TRANSACTION REPORTING...........................................37 7.19 PERMITS.........................................................37 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY.......37 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS......37 8.2 SATISFACTION....................................................38 8.3 NO LITIGATION...................................................38 8.4 OPINION OF COUNSEL..............................................38 8.5 REGISTRATION STATEMENT..........................................38 8.6 CONSENTS AND APPROVALS..........................................38 8.7 GOOD STANDING CERTIFICATES......................................38 8.8 NO MATERIAL ADVERSE CHANGE......................................39 8.9 CLOSING OF IPO..................................................39 8.10 SECRETARY'S CERTIFICATE.........................................39 8.11 EMPLOYMENT AGREEMENTS...........................................39 8.12 TAX MATTERS.....................................................39 8.13 EXCHANGE LISTING................................................39 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO.............39 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS.....40 9.2 NO LITIGATION...................................................40 9.3 SECRETARY'S CERTIFICATE.........................................40 9.4 NO MATERIAL ADVERSE EFFECT......................................40 9.5 STOCKHOLDERS' RELEASE...........................................40 9.6 SATISFACTION....................................................41 9.7 TERMINATION OF RELATED PARTY AGREEMENTS.........................41 9.8 OPINION OF COUNSEL..............................................41 9.9 CONSENTS AND APPROVALS..........................................41 9.10 GOOD STANDING CERTIFICATES......................................41 9.11 REGISTRATION STATEMENT..........................................41 9.12 EMPLOYMENT AGREEMENTS...........................................41 -iii- 9.13 CLOSING OF IPO..................................................41 9.14 FIRPTA CERTIFICATE..............................................42 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING..............42 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT....................42 10.2 PREPARATION AND FILING OF TAX RETURNS...........................42 10.3 DIRECTORS.......................................................43 11. INDEMNIFICATION.......................................................43 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS.....................43 11.2 INDEMNIFICATION BY PENTACON.....................................44 11.3 THIRD PERSON CLAIMS.............................................45 11.4 EXCLUSIVE REMEDY................................................46 11.5 LIMITATIONS ON INDEMNIFICATION..................................46 12. TERMINATION OF AGREEMENT..............................................47 12.1 TERMINATION.....................................................47 12.2 LIABILITIES IN EVENT OF TERMINATION.............................48 13. NONCOMPETITION........................................................48 13.1 PROHIBITED ACTIVITIES...........................................48 13.2 DAMAGES.........................................................49 13.3 REASONABLE RESTRAINT............................................49 13.4 SEVERABILITY; REFORMATION.......................................50 13.5 INDEPENDENT COVENANT............................................50 13.6 MATERIALITY.....................................................50 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION.............................50 14.1 STOCKHOLDERS....................................................50 14.2 PENTACON AND NEWCO..............................................51 14.3 DAMAGES.........................................................51 14.4 SURVIVAL........................................................52 15. TRANSFER RESTRICTIONS.................................................52 15.1 TRANSFER RESTRICTIONS...........................................52 16. FEDERAL SECURITIES ACT REPRESENTATIONS................................52 16.1 COMPLIANCE WITH LAW.............................................52 16.2 ECONOMIC RISK; SOPHISTICATION...................................53 17. REGISTRATION RIGHTS...................................................53 17.1 PIGGYBACK REGISTRATION RIGHTS...................................53 -iv- 17.2 REGISTRATION PROCEDURES.........................................54 17.3 INDEMNIFICATION.................................................55 17.4 UNDERWRITING AGREEMENT..........................................56 17.5 RULE 144 REPORTING..............................................56 18. GENERAL...............................................................57 18.1 COOPERATION.....................................................57 18.2 SUCCESSORS AND ASSIGNS..........................................57 18.3 ENTIRE AGREEMENT................................................57 18.4 COUNTERPARTS....................................................57 18.5 BROKERS AND AGENTS..............................................57 18.6 EXPENSES........................................................58 18.7 NOTICES.........................................................58 18.8 GOVERNING LAW...................................................60 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES......................60 18.10 EXERCISE OF RIGHTS AND REMEDIES.................................60 18.11 TIME............................................................60 18.12 REFORMATION AND SEVERABILITY....................................60 18.13 REMEDIES CUMULATIVE.............................................60 18.14 CAPTIONS........................................................61 -v- ANNEXES Annex I - Consideration to Be Paid to Stockholders and Other Stockholders Annex II - Stockholders and Stock Ownership of the Company Annex III - Certificate of Incorporation and By-Laws of Pentacon and Newco Annex IV - Form of Opinion of Counsel to Pentacon and Newco Annex V - Form of Opinion of Counsel to Company and Stockholders Annex VI - Form of Founder Employment Agreement -vi- SCHEDULES 5.1 Due Organization 5.2 Authorization 5.3 Capital Stock of the Company 5.4 Transactions in Capital Stock, Organization Accounting 5.5 No Bonus Shares 5.6 Subsidiaries 5.7 Predecessor Status; etc. 5.8 Spin-off by the Company 5.9 Financial Statements 5.10 Liabilities and Obligations 5.11 Accounts and Notes Receivable 5.12 Permits and Intangibles 5.13 Environmental Matters 5.14 Personal Property 5.15 Significant Customers; Material Contracts and Commitments 5.16 Real Property 5.17 Insurance 5.18 Compensation; Employment Agreements; Labor Matters 5.19 Employee Plans 5.20 Compliance with ERISA 5.21 Conformity with Law; Litigation 5.22 Taxes 5.23 No Violations, Consents, etc. 5.24 Government Contracts 5.25 Absence of Changes 5.26 Deposit Accounts; Powers of Attorney 5.30 Prohibited Activities 5.31 No Warranties or Insurance 5.32 Related Party Transactions 5.33 Exceptions Regarding Company Stock 5.35 No Intention to Dispose of Pentacon Stock 6.3 Capital Stock of Pentacon and Newco 6.4 Options, Warrants and Rights 6.8 Litigation 6.9 No Violations 6.12 Side Agreements 7.2 Conduct of Business Pending Closing 7.3 Prohibited Activities 7.5 Notice to Bargaining Agents 7.6 Termination Agreements 7.15 Obligations to be Paid at Closing 9.7 Continuing Related Party Agreements 9.12 Employment Agreements 13.1 Prohibited Activities 18.5 Brokers and Agents -vii- AGREEMENT AND PLAN OF ORGANIZATION THIS AGREEMENT AND PLAN OF ORGANIZATION (this "Agreement") is made as of the 1st day of December, 1997, by and among PENTACON, INC., a Delaware corporation ("Pentacon"), SALES SYSTEMS LIMITED ACQUISITION COMPANY, a Delaware corporation ("Newco"), SALES SYSTEMS, LIMITED, a Pennsylvania corporation (the "Company"), and BENJAMIN E. SPENCE, JR. and RICHARD D. KNORR (the "Stockholders "), who, together with the other stockholders of the Company, James D. Mitchell and William C. Creecy, who are not party to this Agreement (the "Other Stockholders "), are all the stockholders of the Company, who herein agree as follows: RECITALS WHEREAS, Newco is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on November 26, 1997, solely for the purpose of completing the transactions set forth herein, and is a wholly owned subsidiary of Pentacon, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective boards of directors of Newco and the Company (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that Newco merge with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and the State of Incorporation (as hereinafter defined); WHEREAS, Pentacon is entering into other separate agreements substantially similar to this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Organization,"with each of the Other Founding Companies (as defined herein) and their respective stockholders in order to acquire additional fasteners companies; WHEREAS, this Agreement and the Other Agreements constitute the "Pentacon Plan of Organization"; WHEREAS, the Stockholders and Other Stockholders and the boards of directors and the stockholders of Pentacon, each of the Other Founding Companies and each of the subsidiaries of Pentacon that are parties to the Other Agreements have approved and adopted the Pentacon Plan of Organization as an integrated plan pursuant to which the Stockholders, the Other Stockholders and the stockholders of each of the other Founding Companies will transfer the capital stock of each of the Founding Companies to Pentacon and the stockholders of each of the other Founding Companies will acquire the stock of Pentacon (but not cash or other property) as a tax-free transfer of property under Section 351 of the Code; -1- WHEREAS, the Board of Directors of the Company has approved this Agreement as part of the Pentacon Plan of Organization in order to transfer the capital stock of the Company to Pentacon; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 ACT" means the Securities Act of 1933, as amended. "1934 ACT" means the Securities Exchange Act of 1934, as amended. "ACQUIRED PARTY" means the Company, any subsidiary and any member of a Relevant Group. "ACQUISITION COMPANIES" shall mean Newco and each of the other Delaware companies wholly-owned by Pentacon prior to the Consummation Date. "AFFILIATES" shall mean with respect to any person or entity, any other person or entity that directly or indirectly, controls, is controlled, or is under common control with such person or entity. For purposes hereof, control shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "ARTICLES OF MERGER" shall mean those Articles or Certificates of Merger with respect to the Merger in such forms as may be required by the laws of the State of Delaware and the State of Incorporation. "BALANCE SHEET DATE" means September 30, 1997. "CHARTER DOCUMENTS" has the meaning set forth in Section 5.1. "CLOSING" has the meaning set forth in Section 4. "CLOSING DATE" has the meaning set forth in Section 4. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY STOCK" has the meaning set forth in Section 2.1. "CONSTITUENT CORPORATIONS" has the meaning set forth in the second recital of this Agreement. -2- "CONSUMMATION DATE" has the meaning set forth in Section 4. "DELAWARE GCL" has the meaning set forth in Section 1.4. "DRAFT REGISTRATION STATEMENT" means the draft dated November 28, 1997, of the Registration Statement, and any corrections thereto and supplemental information delivered by Pentacon to the Company for delivery to the Stockholders prior to the time this Agreement is delivered by the Company and the Stockholders to Pentacon. "EFFECTIVE TIME OF THE MERGER" shall mean the time as of which the Merger becomes effective, which shall occur on the Consummation Date. "ENVIRONMENTAL LAW" has the meaning set forth in Section 5.13. "ERISA" has the meaning set forth in Section 5.19. "EXPIRATION DATE" has the meaning set forth in Section 5(A). "FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "FOUNDING COMPANIES" means: Alatec Products, Inc., a California corporation; AXS Solutions, Inc., a Delaware corporation; Capitol Bolt & Supply, Inc., a Texas corporation; Maumee Industries, Inc., an Indiana corporation; and Sales Systems, Limited, a Pennsylvania corporation. "HART-SCOTT-RODINO ACT" has the meaning set forth in Section 7.13. "HAZARDOUS SUBSTANCE" has the meaning set forth in Section 5.13(c). "INTERIM FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(ii). "IPO" means the initial public offering of Pentacon Stock pursuant to the Registration Statement described herein. "LICENSES" has the meaning set forth in Section 5.12. -3- "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise), of the subject entity and its subsidiaries taken as a whole. "MATERIAL DOCUMENTS" has the meaning set forth in Section 5.23(a). "MERGER" means the merger of Newco with and into the Company pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and the laws of the State of Incorporation. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.0l per share, of Newco. "OTHER AGREEMENTS" has the meaning set forth in the third recital hereof. "OTHER FOUNDING COMPANIES" means all of the Founding Companies other than the Company. "OTHER STOCKHOLDERS" means those persons or entities owning stock in the Company other than the Stockholders . "PBGC" has the meaning set forth in Section 5.19. "PENTACON" has the meaning set forth in the first paragraph of this Agreement. "PENTACON CHARTER DOCUMENTS" has the meaning set forth in Section 6.1 "PENTACON STOCK" means the common stock, par value $.01 per share, of Pentacon. "PERSON" means an individual, partnership, joint venture, corporation, bank, trust, unincorporated organization or other entity. "PRICING" means the date of determination by Pentacon and the Underwriters of the public offering price of the shares of Pentacon Stock in the IPO; the parties hereto contemplate that the Pricing shall take place on the Closing Date. "PROHIBITED ACTIVITIES" has the meaning set forth in Section 5.30. "QUALIFIED PLANS" has the meaning set forth in Section 5.20. "REDEMPTION AGREEMENTS" has the meaning set forth in Paragraph 3 of Annex II. -4- "REGISTRATION STATEMENT" means that certain registration statement on Form S-1 to be filed with the SEC covering the shares of Pentacon Stock to be issued in the IPO and all amendments thereto. "RELEVANT GROUP" means the Company and any affiliated, combined, consolidated, unitary or similar group of which the Company is or was a member. "RETURNS" means any returns, reports or statements (including any information returns) required to be filed for purposes of reporting, computing or otherwise required in connection with a particular Tax. "SCHEDULE" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STATE OF INCORPORATION" means the Commonwealth of Pennsylvania. "STOCKHOLDERS" has the meaning set forth in the first paragraph of this Agreement. "SUBSIDIARIES" means with respect to a person or entity, any corporation or other entity in which such person or entity owns a 5% or greater ownership interest. "SURVIVING CORPORATION" has the meaning set forth in Section 1.2. "TAX" OR "TAXES" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, withholding, employment, excise, property, deed, stamp, alternative or add on minimum, or other taxes, assessments, duties, fees, levies or other governmental charges, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "UNDERWRITERS" means the prospective underwriters identified in the Draft Registration Statement. "YEAR-END FINANCIAL STATEMENTS" has the meaning set forth in Section 5.9(i). -5- 1. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause the Articles of Merger to be signed, verified and delivered to Pentacon to be held for filing with the Secretary of State of the State of Delaware and the Secretary of State (or other appropriate authority) of the State of Incorporation on or effective as of the Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, Newco shall be merged with and into the Company in accordance with the Articles of Merger and the separate existence of Newco shall cease. The Company shall be the surviving party in the Merger and the Company is sometimes hereinafter referred to as the "Surviving Corporation". As a result of the Merger, the outstanding shares of capital stock of Newco and the Company shall be converted or canceled in the manner provided in Section 2. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the Company then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of Newco then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended (and such By-laws shall be amended, if necessary, to comply with applicable state law); (iii) the Board of Directors of the Surviving Corporation shall consist of the persons who are on the Board of Directors of the Company immediately prior to the Effective Time of the Merger, provided that Bruce Taten shall become an additional director of the Surviving Corporation effective as of the Effective Time of the Merger, and the number of directors constituting the entire Board of Directors of the Company shall be increased, if necessary, to accommodate the addition of such additional director; the Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Incorporation and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the Company immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Brian Fontana shall become an additional Vice President and Bruce Taten will become the Secretary of the Surviving Corporation, such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until their respective successors are duly elected and qualified. -6- 1.4 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the laws of the State of Incorporation. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the Company shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of Newco shall be merged with and into the Company, and the Company, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of Newco shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the Company or Newco shall be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Company and Newco; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the State of Incorporation vested in the Company or Newco, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the Company and Newco and any claim existing, or action or proceeding pending, by or against the Company or Newco may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the Company or Newco shall be impaired by the Merger, and all debts, liabilities and duties of the Company and Newco shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. 2. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the Company ("Company Stock") into shares of Pentacon Stock and cash and (ii) outstanding Newco Stock into common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of Company Stock issued and outstanding immediately prior to the Effective Time of the Merger (other than shares of Company Stock subject to the Redemption Agreements), by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) the right to receive the number of shares of Pentacon Stock set forth on Annex I hereto with respect to such holder and (2) the right to receive the amount of cash set forth on Annex I hereto with respect to such holder; -7- (ii) all shares of Company Stock that are held by the Company as treasury stock or which are otherwise issued but not outstanding (including the shares of Company Stock subject to the Redemption Agreements) shall be canceled and retired and shall cease to exist and no shares of Pentacon Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of Newco Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of Pentacon, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All Pentacon Stock received by the Stockholders and Other Stockholders pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding Pentacon Stock by reason of the provisions of the Certificate of Incorporation of Pentacon or as otherwise provided by the Delaware GCL. All Pentacon Stock received by the Stockholders and Other Stockholders shall be issued and delivered to the Stockholders and Other Stockholders free and clear of any liens, claims or encumbrances of any kind or nature. All voting rights of such Pentacon Stock received by the Stockholders and Other Stockholders shall be fully exercisable by the Stockholders and Other Stockholders and the Stockholders and Other Stockholders shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, Pentacon shall have no class of capital stock issued and outstanding other than the Pentacon Stock. 3. DELIVERY OF MERGER CONSIDERATION 3.1 EXCHANGE OF COMPANY STOCK FOR PENTACON STOCK. On the Consummation Date the Stockholders and Other Stockholders , who are the holders of all of the issued and outstanding Company Stock, shall, upon surrender of their share certificates, receive the respective number of shares of Pentacon Stock, the amount of cash or the combination of Pentacon Stock or cash (as appropriate) set forth on Annex I hereto, said cash to be payable by certified check, or if hereafter agreed by the Stockholders and Pentacon, by wire transfer. 3.2 ENDORSED CERTIFICATES; DEFICIENCIES CURED. The Stockholders and Other Stockholders shall deliver to Pentacon at the Closing the certificates representing Company Stock, duly endorsed in blank by the Stockholders and Other Stockholders, or accompanied by blank stock powers, and with all necessary transfer tax and other revenue stamps, acquired at the Stockholders' and Other Stockholders' expense, affixed and canceled. The Stockholders and Other Stockholders agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such Company Stock or with respect to the stock powers accompanying any Company Stock. -8- 4. CLOSING At or prior to the Pricing, the parties shall take all actions reasonably necessary to prepare to (i) effect the Merger (including the execution of the Articles of Merger which shall be placed in escrow with Pentacon for filing with the appropriate authorities effective on the Consummation Date, subject, however, to satisfaction or waiver of all conditions precedent) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) (or wire transfers) referred to in Section 3 hereof, each of which actions shall only be taken upon the Consummation Date as herein provided. In the event that there is no Consummation Date and this Agreement automatically terminates as provided in this Section 4 the Articles of Merger shall not be filed and shall be promptly returned to the Stockholders. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Andrews & Kurth L.L.P, 4200 Texas Commerce Tower, 600 Travis, Houston, Texas 77002 or such place as may be agreed between the Stockholders and Pentacon. On the Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities so that they shall be, as early as practicable on the Consummation Date, effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check or checks (or wire transfers) in an amount equal to the cash portion of the consideration which the Stockholders shall be entitled to receive pursuant to Section 3 hereof shall occur and be completed and (z) the closing with respect to the IPO shall occur and be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Consummation Date". During the period from the Closing Date to the Consummation Date, this Agreement may only be terminated by the parties if the underwriting agreement in respect of the IPO is terminated pursuant to the terms of such underwriting agreement. This Agreement shall also in any event automatically terminate if the Consummation Date has not occurred within 15 business days following the Closing Date. Time is of the essence. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS. Each of the Stockholders, jointly and severally, and the Company represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that the warranties and representations set forth in Sections 5.13 and 5.22 hereof shall survive until such time as the applicable statute of limitations period has run or for five (5) years if there is no applicable statute of limitations, which shall be deemed to be the Expiration Date for Sections 5.13 and 5.22. For purposes of this Section 5, the term "Company" shall mean and refer to the Company and all of its Subsidiaries, if any. -9- 5.1 DUE ORGANIZATION. The Company is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the State of Incorporation, and has the requisite power and authority to carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing in each jurisdiction in which failure to so qualify would reasonably be expected to have a Material Adverse Effect on the Company. Schedule 5.1 sets forth a list of all jurisdictions in which the Company is authorized or qualified to do business. True, complete and correct copies of (i) the Certificate of Incorporation and By-laws, each as amended, of the Company (the "Charter Documents"), and (ii) the stock records of the Company (including, without limitation, a copy of the Company's stock ledger), are all attached to Schedule 5.1. The Company has delivered complete and correct copies of all minutes of meetings, written consents and other written evidence, if any, of deliberations of or actions taken by the Company's Board of Directors, any Committees of the Board of Directors and stockholders during the last five years. 5.2 AUTHORIZATION. (i) The officers or other representatives of the Company executing this Agreement have the authority to enter into and bind the Company to the terms of this Agreement and (ii) the Company has the full legal right, power and authority to enter into this Agreement and the Merger. The directors and Stockholders and Other Stockholders have approved this Agreement and the transactions contemplated hereby in all respects, and copies of all such resolutions, certified by the Secretary or an Assistant Secretary of the Company as being in full force and effect on the date hereof, are attached hereto as Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company is as set forth on Schedule 5.3. All of the issued and outstanding shares of the capital stock of the Company are owned by the Stockholders and Other Stockholders in the amounts set forth in Annex II. Each Stockholder and each of the Other Stockholders by their execution of the Limited Joinder hereto, severally represents and warrants that except as set forth on Schedule 5.3, the shares of capital stock of the Company owned by each Stockholder and Other Stockholder are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the Stockholders and Other Stockholders and further, such shares were offered, issued, sold and delivered by the Company in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of any preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the Company has not acquired or redeemed any Company Stock since January 1, 1995. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the Company to issue any of its authorized but unissued capital stock; (ii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the Company nor the -10- relative ownership of shares among any of its respective stockholders has been altered or changed in contemplation of the Merger and/or the Pentacon Plan of Organization. Except as set forth in Schedule 5.4, there are no voting trusts, proxies or other agreements or understandings to which the Company or any of its stockholders is a party or is bound with respect to the voting of any shares of capital stock of the Company. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of Company Stock was issued pursuant to awards, grants or bonuses in contemplation of the Merger or the Pentacon Plan of Organization. 5.6 SUBSIDIARIES; OWNERSHIP IN OTHER ENTITIES. Except as set forth on Schedule 5.6, the Company has no Subsidiaries. Except as set forth in Schedule 5.6, the Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth on Schedule 5.7 is a listing of all predecessor companies of the Company, including the names of any entities acquired by the Company (by stock purchase, merger or otherwise) or owned by the Company or from whom the Company previously acquired material assets, in any case, from the earliest date upon which any Stockholder acquired his or her stock in any Company. Except as disclosed on Schedule 5.7, the Company has not been, within such period of time, a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the Company or any other person or entity that is an Affiliate of the Company since January 1, 1995. 5.9 FINANCIAL STATEMENTS. Complete and correct copies of the following financial statements are attached hereto as Schedule 5.9: (i) the balance sheets of the Company as of December 31, 1995 and 1996 and the related statements of operations, stockholder's equity and cash flows for the two-year period ended December 31, 1996, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and cash flows and the related notes and schedules are referred to herein as the "Year-end Financial Statements"); and (ii) the balance sheet of the Company as of September 30, 1997, (the "Interim Balance Sheet") and the related statements of operations, stockholder's equity and cash flows for the nine-month periods ended September 30, 1997, together with the related notes and schedules (such balance sheets, the related statements of operations, stockholder's equity and -11- cash flows and the related notes and schedules are referred to herein as the "Interim Financial Statements"). The Year-end Financial Statements and the Interim Financial Statements are collectively called the "Financial Statements". 5.10 LIABILITIES AND OBLIGATIONS. Schedule 5.10 sets forth an accurate list as of the Balance Sheet Date of (i) all liabilities of the Company which are not reflected on the Interim Balance Sheet of the Company at the Balance Sheet Date or otherwise reflected in the Interim Financial Statements at the Balance Sheet Date except for those liabilities not required to be reflected or disclosed under generally accepted accounting principles or F.A.S.B. 5 and which were not reflected or disclosed in the Interim Balance Sheet, and (ii) all loan agreements, indemnity or guaranty agreements, bonds, mortgages, pledges or other security agreements to which the Company is a party or by which its properties may be bound. Except as set forth on Schedule 5.10, since the Balance Sheet Date, the Company has not incurred any liabilities or obligations of any kind, character or description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business and consistent with past practices. The Company has also delivered to Pentacon on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, a good faith and reasonable estimate (to the extent the Company can reasonably make an estimate) of the maximum amount which the Company reasonably expects may be payable and the amount, if any, accrued or reserved for each such potential liability on the Company's Financial Statements. If no estimate is provided, the estimate shall for purposes of this Agreement be deemed to be zero. For each such contingent liability or liability for which the amount is not fixed or is contested, the Company has provided to Pentacon the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding; (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date (if any) on which such claim, suit or proceeding was instituted or the date (period) to which such claim relates. 5.11 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.11 sets forth an accurate list of the accounts and notes receivable of the Company, as of the Balance Sheet Date, including any such amounts which are not reflected in the Interim Balance Sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the Stockholders or Other Stockholders, which are identified as such. Except to the extent reflected on Schedule 5.11, such accounts, notes -12- and other receivables are collectible in the amounts shown on Schedule 5.11, net of reserves reflected in the Interim Balance Sheet of the Balance Sheet Date. 5.12 PERMITS AND INTANGIBLES. The Company holds all material licenses, franchises, permits and other governmental authorizations ("Licenses") necessary to conduct the business of the Company and the Company has delivered to Pentacon an accurate list and summary description (which is set forth on Schedule 5.12) of all such material Licenses, including any material trademarks, trade names, patents, patent applications and copyrights owned or held by the Company or any of its employees (including interests in software or other technology systems, programs and intellectual property). At or prior to the Closing, all rights to such trademarks, trade names, patents, patent applications, copyrights and other intellectual property held by the Stockholders, or their Affiliates will be assigned or licensed to the Company for no additional consideration. The Licenses and other rights listed on Schedule 5.12 are valid, and the Company has not received any notice that any person intends to cancel, terminate or not renew any such License or other right. The Company has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in the Licenses and other rights listed on Schedule 5.12 and is not in violation of any of the foregoing. Except as specifically provided in Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the Company by, any such Licenses or other rights. 5.13 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.13 attached hereto, (i) the Company has conducted its businesses in compliance with all applicable Environmental Laws, including, without limitation, having all environmental permits, licenses and other approvals and authorizations necessary for the operation of its business as presently conducted, (ii) none of the properties owned by the Company contain any Hazardous Substance as a result of any activity of the Company in amounts exceeding the levels permitted by applicable Environmental Laws, (iii) the Company has not received any notices, demand letters or requests for information from any Federal, state, local or foreign governmental entity or third party indicating that the Company may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of its business, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or to the knowledge of the Stockholders threatened, against the Company relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law, (vi) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law from any properties owned by the Company as a result of any activity of the Company during the time such properties were owned, leased or operated by the Company, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analysis regarding compliance or non-compliance with any applicable Environmental Law conducted by or which are in the possession of or readily available to the Company relating to the activities of the Company which are not listed on Schedule 5.13 attached hereto prior to the date hereof, (viii) there are no underground storage tanks on, in or under any properties owned by the Company and no -13- underground storage tanks have been closed or removed from any of such properties during the time such properties were owned, leased or operated by the Company, (ix) there is no asbestos or asbestos containing material present in any of the properties owned by the Company, and no asbestos has been removed from any of such properties during the time such properties were owned, leased or operated by the Company, and (x) neither the Company nor any of its respective properties are subject to any material liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law. (b) As used herein, "ENVIRONMENTAL LAW" means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, judgment, decree, injunction, requirement or agreement with any governmental entity which is applicable where the Company conducts or conducted business or owns or owned property or is applicable to any disposal, transportation or release of Hazardous Substances by or for the Company and, in each case, relates to (x) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as in effect on the Closing Date. The term Environmental Law includes, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as in effect on the Closing Date, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. (c) As used herein, "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any government authority or any Environmental Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. -14- 5.14 PERSONAL PROPERTY. The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.14) of (x) all personal property material to the operations of the Company included in "plant, property and equipment" on the Interim Balance Sheet of the Company, (y) all other personal property owned by the Company with an individual fair market value in excess of $5,000 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all material leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases and (2) an indication as to which assets are currently owned, or were formerly owned, by Stockholders or Other Stockholders, relatives of Stockholders or Other Stockholders, or Affiliates of the Company. Except as set forth on Schedule 5.14, (i) all material personal property used by the Company in its business is either owned by the Company or leased by the Company pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in working order and condition sufficient for the operation of the Company's business, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.15) of all customers (persons or entities) representing 5% or more of the Company's annual revenues for the period covered by any of the most current Year-End Financial Statements. Except to the extent set forth on Schedule 5.15, none of such customers have canceled or substantially reduced or, to the knowledge of the Company and the Stockholders, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the Company. (b) The Company has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the Company is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances and options to purchase land), other than agreements listed on Schedules 5.10, 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered (or, in the case of supplier and distributor contracts and customer contracts on standard purchase forms, has made available) true, complete and correct copies of such agreements to Pentacon. The Company has also indicated on Schedule 5.15 a summary description of all plans or projects commenced or approved in the last six (6) months and involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $20,000 by the Company during any 12-month period. (c) Except as set forth on Schedule 5.15, since January 1, 1995, the Company has not experienced any difficulties in obtaining any inventory items necessary to the operation of its business, and, to the knowledge of the Company and the Stockholders, no such shortage of supply -15- of inventory items is threatened or pending. To the knowledge of the Company and the Stockholders, no customer or supplier of the Company will cease to do business with, or substantially reduce its purchases from, the Company after the consummation of the transactions contemplated hereby. (d) The Company is not required to provide any bonding or other financial security arrangements in any material amount in connection with any transactions with any of its customers or suppliers. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the Company at the date hereof and all other real property, if any, used by the Company in the conduct of its business. Except as set forth on Schedule 5.16, any such real property owned by the Company will be sold or distributed by the Company on terms acceptable to Pentacon and leased back by the Company on terms no less favorable to the Company than those available from an unaffiliated party and otherwise reasonably acceptable to Pentacon at or prior to the Closing Date. The Company has good and insurable title to any real property owned by it that is shown on Schedule 5.16, other than property intended to be sold or distributed prior to the Closing Date, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.16 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title which do not adversely affect the current use of the property. True, complete and correct copies of all leases and agreements in respect of such real property leased by the Company are attached to Schedule 5.16, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by Stockholders or Other Stockholders or Affiliates of the Company or Stockholders or Other Stockholders is included in Schedule 5.16. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the Company and of the other parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. Set forth on Schedule 5.17 is an accurate list as of the Balance Sheet Date of all insurance policies carried by the Company, (ii) an accurate list of all insurance loss runs (to the extent available) or workers compensation claims received for the past three policy years. True, complete and correct copies of all insurance policies currently in effect have been delivered or made available to Pentacon. Such insurance policies evidence all of the insurance that the -16- Company is required to carry pursuant to all of its contracts and other agreements and pursuant to all applicable laws, and, in the reasonable judgment of the Company's management, provide adequate coverage against the risks involved in the Company's business. All of such insurance policies are currently in full force and effect and are scheduled to remain in full force and effect through the Consummation Date. Since January 1, 1995, no insurance carried by the Company has been canceled by the insurer and the Company has not been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; LABOR MATTERS. (a) The Company has delivered to Pentacon an accurate list (which is set forth on Schedule 5.18) showing all officers, directors and key employees of the Company, listing all employment agreements with such officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The Company has provided to Pentacon true, complete and correct copies of any existing employment agreements for persons listed on Schedule 5.18. Since the Balance Sheet Date and except as described in Schedule 5.18, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices and bonuses, as described in Schedule 5.18. (b) Except as set forth on Schedule 5.18, (i) the Company is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the Company are represented by any labor union or covered by any collective bargaining agreement, (iii) to the best knowledge of the Company, no campaign to establish such representation is in progress and (iv) there is no pending or, to the knowledge of the Company and the Stockholders, threatened labor dispute involving the Company and any group of its employees nor has the Company experienced any labor interruptions over the past three years. (c) Except as set forth in Schedule 5.18 attached hereto, (i) there are no significant controversies pending or, to the knowledge of the Company and the Stockholders, threatened between the Company and any of its employees, (ii) the Company has complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, and (iii) to the knowledge of the Company and the Stockholders, no person has asserted that the Company is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. 5.19 EMPLOYEE PLANS. Schedule 5.19 accurately reflects all employee benefit plans of the Company, including all employment agreements and other agreements or arrangements containing "golden parachute" or other similar provisions, and deferred compensation agreements, together with true, complete and correct copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Balance Sheet Date. Except for the employee benefit plans, if any, described on Schedule 5.19, the Company does not sponsor, -17- maintain or contribute to any plan program, fund or arrangement that constitutes an "employee pension benefit plan", and neither the Company nor any subsidiary has any obligation to contribute to or accrue or pay any benefits under any deferred compensation or retirement funding arrangement on behalf of any employee or employees (such as, for example, and without limitation, any individual retirement account or annuity, any "excess benefit plan" (within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or any non-qualified deferred compensation arrangement). For the purposes of this Agreement, the term "employee pension benefit plan" shall have the same meaning as is given that term in Section 3(2) of ERISA. The Company has not sponsored, maintained or contributed to any employee pension benefit plan other than the plans set forth on Schedule 5.19, and the Company is not or could not be required to contribute to any retirement plan pursuant to the provisions of any collective bargaining agreement establishing the terms and conditions or employment of any of the Company's employees. Except as set forth on Schedule 5.19, the Company is not now, or will not as a result of its past activities become, liable to the Pension Benefit Guaranty Corporation ("PBGC") or to any multiemployer employee pension benefit plan under the provisions of Title IV of ERISA. All employee benefit plans listed on Schedule 5.19 and the administration thereof are in compliance with their terms and all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable federal, state and local statutes, ordinances and regulations. All accrued contribution obligations of the Company with respect to any plan listed on Schedule 5.19 as of the Balance Sheet Date have either been fulfilled in their entirety or are fully reflected on the Interim Balance Sheet as of the Balance Sheet Date. 5.20 COMPLIANCE WITH ERISA. Except as set forth on Schedule 5.20, All such plans listed on Schedule 5.19 that are intended to qualify (the "Qualified Plans") under Section 401 (a) of the Code are, and have been so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the most recent determination letters with respect thereto are attached to Schedule 5.19. Except as disclosed on Schedule 5.20, all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies of the most recent reports and filing relating thereto are included as part of Schedule 5.19 hereof. Neither Stockholders, the Other Stockholders, any such plan listed in Schedule 5.19, nor the Company has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA. No such Plan listed in Schedule 5.19 has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(l) of ERISA; and the Company has not incurred any liability for excise tax or penalty due to the Internal Revenue Service nor any liability to the PBGC. The Stockholders further represent that except as set forth on Schedule 5.19 hereto: -18- (i) there have been no terminations, partial terminations or discontinuations of contributions to any Qualified Plan intended to qualify under Section 401(a) of the Code without notice to and approval by the Internal Revenue Service; (ii) no plan listed in Schedule 5.19 subject to the provisions of Title IV of ERISA has been terminated; (iii) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any such plan listed in Schedule 5.19; (iv) the Company (including any subsidiaries) has not incurred liability under Section 4062 of ERISA; and (v) to the knowledge of the Company and the Stockholders, no circumstances exist pursuant to which the Company would be reasonably likely to have any direct or indirect liability whatsoever (including, but not limited to, any liability to any multiemployer plan or the PBGC under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty, or being subject to any statutory lien to secure payment of any such liability) with respect to any plan now or heretofore maintained or contributed to by any entity other than the Company that is, or at any time was, a member of a "controlled group" (as defined in Section 412(n)(6)(B) of the Code) that includes the Company. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21 or 5.13 or in other Schedules to this Agreement, the Company is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it; and except to the extent set forth on Schedule 5.10 or 5.13, there are no claims, actions, suits or proceedings, pending or, to the knowledge of the Company and the Stockholders, threatened against or affecting, the Company, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received by the Company, and, to the knowledge of the Company and the Stockholders, there is no basis for any such claim, action, suit or proceeding. The Company has conducted and is now conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, orders, approvals, variances, rules and regulations. 5.22 TAXES. (a) Except as set forth in Schedule 5.22, the Company has timely filed all requisite Federal, state and other Tax Returns or extension requests for all fiscal periods ended on or before the Balance Sheet Date; and except as set forth on Schedule 5.22, the Company has no notice that any examinations are in progress or that any claims are pending against it for federal, state and other -19- Taxes (including penalties and interest) for any period or periods prior to and including the Balance Sheet Date and no notice of any claim for Taxes, whether pending or threatened, has been received. Except as set forth in Schedule 5.22, all Tax, including interest and penalties (whether or not shown on any Tax Return) owed by the Company has been paid or accrued in its financial accounts. The amounts shown as accruals for Taxes on the Company Financial Statements are sufficient for the payment of all Taxes of the kinds indicated (including penalties and interest) for all fiscal periods ended on or before that date. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal and local income Tax Returns and franchise Tax Returns of Company for their last three (3) fiscal years, or such shorter period of time as any of them shall have existed, are attached hereto as Schedule 5.22 or have otherwise been delivered to Pentacon. The Company has a taxable year ended December 31. Except as set forth on Schedule 5.22, Company uses the accrual method of accounting for income tax purposes, and the Company's methods of accounting have not changed in the past five years. The Company is not an investment Company as defined in Section 351(e)(1) of the Code. Except as set forth in Schedule 5.22, the Company is not and has not during the last five years been a party to any tax sharing agreement or agreement of similar effect. The Company is not and has not during the last five years been a member of any consolidated group. Except as set forth on Schedule 5.22, the Company has not received, been denied, or applied for any private letter ruling during the last ten years. (b) The stockholders of the Company made a valid election under the provisions of Subchapter S of the Code and the Company has not, within the past twelve (12) months, been taxed under the provisions of Subchapter C of the Code. The Stockholders shall pay all income taxes with respect to the Company payable for all periods through and including the Closing Date, except for income taxes of the Company which are accrued on the Interim Balance Sheet and payable by the Company. 5.23 NO VIOLATIONS; NO CONSENT REQUIRED, ETC. (a) The Company is not in violation of any Charter Document. Except as set forth in Schedule 5.23, neither the Company nor, to the best knowledge of the Company and the Stockholders, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.13, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"). (b) Except as set forth in Schedule 5.23, the execution and delivery of this Agreement by each of the Company and the Stockholders do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company under any of the terms, conditions or provisions of (i) the Charter Documents (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any -20- Material Document or other material instrument, obligation or agreement of any kind to which the Company or any of the Stockholders is now a party or by which any of the Stockholders or the Company or any of its properties or assets may be bound or affected. The consummation by the Company and the Stockholders of the transactions contemplated hereby will not result in any violation, conflict, breach, right of termination or acceleration or creation of liens under any of the terms, conditions or provisions of the items described in clauses (i) through (iii) of the preceding sentence, subject, in the case of the terms, conditions or provisions of the items described in clause (iii) above, to obtaining (prior to the Effective Time of the Merger) such consents as may be required from commercial lenders, lessors or other third parties. (c) Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect, and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any material right or benefit. (d) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (iv) for filings in connection with listing on the NASDAQ National Market System or New York Stock Exchange or other nationally recognized securities exchange; (v) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13 and (vi) as set forth in Schedule 5.23, neither the Company nor the Stockholders are required to make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by the Company and the Stockholders or the consummation by the Company and the Stockholders of the transactions contemplated hereby. (e) Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the Company, Pentacon or Newco of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the Company from freely providing services or selling products to any other customer or potential customer of the Company, Pentacon, Newco or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS; MINORITY BASED CONTRACTS. Except as set forth on Schedule 5.24, the Company is not now a party to any governmental contract that, by its express terms, is subject to price redetermination or renegotiation or that is customarily subject to price redetermination or renegotiations in the ordinary course of business. Except as set forth on Schedule 5.24, the Company is not now a party to any material contract based on minority ownership which would be canceled or otherwise materially adversely impacted by completion of the Pentacon Plan of Organization. -21- 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25 or as otherwise contemplated hereby, there has not been: (i) any Material Adverse Effect with respect to the Company; (ii) any damage, destruction or loss (whether or not covered by insurance), alone or in the aggregate, materially adversely affecting the properties or business of the Company; (iii) any change in the authorized capital of the Company or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the Company except for distributions that would have been permitted after the date hereof under Section 7.3(iii) hereof, (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the Company to any of its officers, directors, Stockholders, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business or future prospects of the Company; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of Company outside of the ordinary course of business to any person, including, without limitation, the Stockholders, Other Stockholders and their respective affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the Company, including without limitation any indebtedness or obligation of any Stockholders, Other Stockholders or any respective affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the Company or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the Company's business; -22- (xi) any waiver of any material rights or claims of the Company; (xii) any amendment or termination of any Material Document; (xiii) any transaction by the Company outside the ordinary course of its business; (xiv) any cancellation or termination of a Material Document or material customer contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the Company other than in the ordinary course of business and other than distributions of real estate and other assets as permitted by this Agreement. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.26 sets forth an accurate schedule as of the date of the Agreement of: (i) the name of each financial institution in which the Company has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the Company and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the Company and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the Company and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. 5.28 RELATIONS WITH GOVERNMENTS. None of the Company, any of the Stockholders, or any Affiliate of any of them has given or offered anything of value to any governmental official, political party or candidate for government office in violation of any applicable laws, rules or regulations, nor has it or any of them otherwise taken any action which would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any applicable law of similar effect. -23- 5.29 DISCLOSURE. (a) This Agreement, including the Annexes and Schedules hereto, furnished to Pentacon by the Company and the Stockholders in connection herewith, do not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements herein and therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by Pentacon or Newco. (b) The Company and the Stockholders acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither Pentacon or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the Company, the Stockholders or any other person affiliated or associated with the Company for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of Stockholders to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to Pentacon or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the Company has not, between the Balance Sheet Date and the date hereof, taken any of the actions which are prohibited ("Prohibited Activities") in Section 7.3. 5.31 NO WARRANTIES OR INSURANCE. Except as set forth on Schedule 5.31, to the knowledge of the Company or the Stockholders, the Company has no liability or potential liability to any person under any product or service warranty and the Company does not offer or sell insurance or consumer protection plans or other similar arrangements that could result in the Company being required to make any material payment to or perform any material service for any person thereunder. 5.32 INTEREST IN CUSTOMERS AND SUPPLIERS AND RELATED-PARTY TRANSACTIONS. Except as described on Schedule 5.32, no Stockholder, officer, director or Affiliate of the Company (i) possesses, directly or indirectly, any financial interest in, or is a director, officer, employee or affiliate of, any corporation, firm, association or business organization that is a client, supplier, customer, lessor, lessee or competitor of the Company, or (ii) is a party to an agreement or relationship, that involves the receipt by such person of compensation or property from the Company other than through a customary employment relationship. -24- (B) REPRESENTATIONS AND WARRANTIES ON BEHALF OF STOCKHOLDERS AND OTHER STOCKHOLDERS. Each Stockholder and each of the Other Stockholders by their execution of the Limited Joinder hereto, severally, but not jointly, represents and warrants to Pentacon that the representations and warranties set forth below are true as of the date of this Agreement as they relate to each Stockholder or Other Stockholder and that the representations and warranties set forth in this Section 5(B) shall survive the Consummation Date. 5.33 AUTHORITY; OWNERSHIP; VALIDITY OF OBLIGATIONS. Each Stockholder has the full legal right, power and authority to enter into this Agreement. Each Stockholder and Other Stockholder owns beneficially and of record all of the shares of the Company stock identified on Annex II as being owned by such Stockholder and Other Stockholder, and, except as set forth on Schedule 5.33, such Company Stock is owned free and clear of all liens, encumbrances and claims of every kind. This Agreement is a legal, valid, and binding obligation of the Stockholder. Each Other Stockholder has the full legal right, power and authority to enter into the Limited Joinder Agreement and such agreement is a legal, valid and binding obligation of such Other Stockholder. 5.34 PREEMPTIVE RIGHTS. Except as contemplated herein, no Stockholder or Other Stockholder has any preemptive or other right to acquire shares of Company Stock or Pentacon Stock. Nothing herein, however, shall limit or restrict the rights of any Stockholder to acquire Pentacon Stock pursuant to (i) this Agreement or (ii) any option granted by Pentacon. 5.35 NO INTENTION TO DISPOSE OF PENTACON STOCK. Except as set forth in Schedule 5.35, no Stockholder or Other Stockholder is under any binding commitment or contract to sell, exchange or otherwise dispose of shares of Pentacon Stock received as described in Section 3.1. 6. REPRESENTATIONS OF PENTACON AND NEWCO Pentacon and Newco, jointly and severally, represent and warrant to the Stockholders that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Consummation Date, and that such representations and warranties shall survive the Consummation Date for a period of twenty-four months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of determining whether a claim for indemnification under Section 11.2(iv) hereof has been made on a timely basis, and solely to the extent that in connection with the IPO, any of the Stockholders actually incurs liability under the 1933 Act, the 1934 Act, or any other Federal or state securities laws, the representations and warranties of Pentacon and Newco set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. -25- 6.1 DUE ORGANIZATION. Pentacon and Newco are each corporations duly incorporated and organized, validly existing and in good standing under the laws of the State of Delaware, and each has the requisite power and authority to carry on its business as it is now being conducted. Pentacon and Newco are each qualified to do business and are each in good standing in each jurisdiction in which the nature of its business makes such qualification necessary. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as proposed to be amended, of Pentacon and Newco (the "Pentacon Charter Documents") are all attached hereto as Annex III. 6.2 AUTHORIZATION. (i) The respective officers or other representatives of Pentacon and Newco executing this Agreement have the authority to enter into and bind Pentacon and Newco to the terms of this Agreement and (ii) Pentacon and Newco have the full legal right, power and authority to enter into this Agreement and the Other Agreements and consummate the Merger. All corporate acts and other proceedings required to have been taken by Pentacon and Newco to authorize the execution, delivery and performance of this Agreement and the consummation of the Merger have been duly and properly taken. 6.3 CAPITAL STOCK OF PENTACON AND NEWCO. The authorized capital stock of Pentacon and Newco is as set forth in Schedule 6.3 and the Draft Registration Statement. All of the issued and outstanding shares of the capital stock of Newco are owned by Pentacon and all of the issued and outstanding shares of the capital stock of Pentacon are owned by the persons set forth on Schedule 6.3 hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of Pentacon and Newco have been duly authorized and validly issued, are fully paid and nonassessable, and further, such shares were offered, issued, sold and delivered by Pentacon and Newco in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of Pentacon or Newco. 6.4 TRANSACTIONS IN CAPITAL STOCK, ORGANIZATION ACCOUNTING. Except for the Other Agreements and except as set forth in the Draft Registration Statement or in Schedule 6.3 hereof, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates Pentacon or Newco to issue any of their respective authorized but unissued capital stock; (ii) no voting trust, voting agreement, proxy or other agreements or understandings exist with respect to the voting of any shares of capital stock of Pentacon; and (iii) neither Pentacon nor Newco has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes a list of all outstanding options, warrants or other rights to acquire shares of the stock of Pentacon. -26- 6.5 SUBSIDIARIES. Newco has no subsidiaries. Pentacon has no subsidiaries except for Newco and each of the companies identified as "Newco" in each of the Other Agreements. Except as set forth in the preceding sentence, neither Pentacon nor Newco presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, and neither Pentacon nor Newco, directly or indirectly, is a participant in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. The financial statements of Pentacon included in the Draft Registration Statement (the "Pentacon Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon), and the balance sheet included therein presents fairly the financial position of Pentacon as of its date. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth in the Draft Registration Statement, Pentacon and Newco have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees generally described in Part II of the Draft Registration Statement and incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth in the Draft Registration Statement, neither Pentacon nor Newco is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of Pentacon or Newco, threatened against or affecting, Pentacon or Newco, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. Pentacon and Newco have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation, in any material respect, of any of the foregoing. 6.9 NO VIOLATIONS. (a) Neither Pentacon nor Newco is in violation of any Pentacon Charter Document. None of Pentacon, Newco, or, to the knowledge of Pentacon and Newco, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which Pentacon or Newco is a party, or by which Pentacon or Newco, or any of their respective properties, are bound (collectively, the "Pentacon Documents"); and (a) the rights and benefits of Pentacon and Newco under the Pentacon Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of their obligations hereunder and thereunder do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the -27- terms hereof and thereof will not, conflict with, or result in any violation or default (with or without notice or lapse of time, or both), under or give rise to a right of termination, cancellation, or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any lien upon any of the assets of Pentacon or Newco under, any provision of (i) the Certificate of Incorporation or Bylaws of Pentacon Charter Documents or the comparable governing instruments of Newco, (ii) any note, bond, mortgage, indenture or deed of trust or any license, lease, contract, commitment, agreement or arrangement to which Pentacon or Newco is a party or by which any of their respective properties or assets are bound or (iii) any judgment, order, decree or law, ordinance, rule or regulation, applicable to Pentacon or Newco or their respective properties or assets. (b) Except as set forth on Schedule 6.9 or in Section 6.9(c), none of the Pentacon Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. (c) Except (i) for the filings by Pentacon in connection with the IPO of the Registration Statement, (ii) for the declaration of the effectiveness thereof by the SEC and filings with various state blue sky authorities, (iii) filings with blue sky authorities in connection with the transactions contemplated by this Agreement, (iv) for the making of the merger filings with the Secretary of State of the State of Delaware and the State of Incorporation in connection with the Merger, (v) for filings in consideration for listing on the NASDAQ National Market System or the New York Stock Exchange or other nationally recognized securities exchange; and (vi) for possible filings under the Hart-Scott-Rodino Act as contemplated in Section 7.13, Purchaser is not required make any declaration, filing or registration with, or notice to, or obtain any authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by NEWCO or Pentacon or the consummation by the Newco and Pentacon of the transactions contemplated hereby. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement and the Other Agreements by Pentacon and Newco and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the respective Boards of Directors and stockholders of Pentacon and Newco and this Agreement and the Other Agreements have been duly and validly authorized by all necessary corporate action and are legal, valid and binding obligations of Pentacon and Newco, enforceable against them in accordance with their respective terms. 6.11 PENTACON STOCK. At the time of issuance thereof and delivery to the Stockholders, the Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement will constitute valid and legally issued shares of Pentacon, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all substantive respects (which do not include the form of certificate upon which it is printed or the presence or absence of a CUSIP number on any such certificate) to the Pentacon Stock issued and outstanding -28- as of the date hereof by reason of the provisions of the Delaware GCL. The Pentacon Stock issued and delivered to the Stockholders shall at the time of such issuance and delivery be free and clear of any liens, claims or encumbrances of any kind or character. The shares of Pentacon Stock to be issued to the Stockholders pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Except as set forth in Schedule 6.12, neither Pentacon nor Newco has entered or will enter into any agreement with any of the Founding Companies or any of the Stockholders of the Founding Companies or Pentacon other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements and real property leases referred to herein or entered into in connection with the transactions contemplated hereby and thereby. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. Pentacon was formed on March 20, 1997 and has conducted only limited operations since that time. Neither Pentacon nor Newco has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Except as described in the Draft Registration Statement, neither Pentacon nor Newco owns or has at any time owned any real property or any material personal property or is a party to any other material agreement other than the Other Agreements, the agreements contemplated thereby and such agreements as will be filed as Exhibits to the Registration Statement. 6.14 DISCLOSURE. The Draft Registration Statement delivered to the Company and the Stockholders, together with this Agreement and the information furnished to the Company and the Stockholders in connection herewith, does not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing does not apply to statements contained in or omitted from any of such documents made or omitted in reliance upon information furnished in writing by the Company or the Stockholders or information pertaining to the Company or a Stockholder which is confirmed in writing by the Company or such Stockholder. 7. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Consummation Date, the Company will afford to the officers and authorized representatives of Pentacon and the Other Founding Companies access to all of the Company's sites, properties, books and records and will furnish Pentacon with such additional financial and operating data and other information as to the business and properties of the Company as Pentacon or the Other Founding Companies may from time to time reasonably request; provided, however, that the Company shall not prior to the Closing Date be required to disclose to the Other Founding Companies, and Pentacon shall not without first obtaining the written approval of the Company disclose to the Other Founding Companies, information relating to pricing -29- or profitability on an account-by-account basis or any pricing information relating to the Company's suppliers on a supplier-by-supplier basis. The Company will cooperate with Pentacon, its representatives, auditors and counsel and the Other Founding Companies in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. Pentacon, Newco, the Stockholders and the Company will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, Pentacon will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1(a) requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Consummation Date, Pentacon will afford to the officers and authorized representatives of the Company and the Stockholders access to all of Pentacon's and Newco's sites, properties, books and records and will furnish the Company with such additional financial and operating data and other information as to the business and properties of Pentacon and Newco as the Company may from time to time reasonably request. Pentacon and Newco will cooperate with the Company, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The Company will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Consummation Date, the Company will, except as set forth on Schedule 7.2 or as otherwise expressly contemplated by this Agreement: (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) use commercially reasonable efforts to maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform in all material respects all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) use commercially reasonable efforts to keep in full force and effect present insurance policies or other comparable insurance coverage; -30- (v) use commercially reasonable efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with material suppliers, customers and others having business relations with the Company; (vi) use commercially reasonable efforts to maintain compliance with all material permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments without the knowledge and consent of Pentacon (which consent shall not be unreasonably withheld, delayed or conditioned), provided that debt and/or lease instruments may be replaced without the consent of Pentacon if such replacement instruments are on terms at least as favorable to the Company as the instruments being replaced; and (viii)maintain or reduce present salaries and commission levels for all officers, directors, employees and agents except for ordinary and customary bonus and salary increases for employees in accordance with the Company's past practices. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3 or as otherwise expressly contemplated by this Agreement, between the date hereof and the Consummation Date, the Company will not, without prior written consent of Pentacon: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options, warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock except for (1) dividends paid in respect of the Company's Accumulated Adjustment Accounts provided that any such dividends shall reduce, dollar-for-dollar, the amount of cash consideration to be received by the Stockholder on the Consummation Date whether or not such dividend is listed or described on a schedule attached hereto and (2) dividends paid to cover estimated quarterly tax payments required to be made by the Stockholders and Other Stockholders; (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $25,000; -31- (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $25,000 necessary or desirable for the conduct of the businesses of the Company, (2) (A) liens for Taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested Taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedules 5.10, 5.15 and/or 5.16 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business and other than distributions of real estate and other assets as permitted in this Agreement (including the Schedules hereto); (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii)merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the Company, provided that the Company may negotiate and adjust bills and accounts in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 to the extent they exceed the reserves, if any, established therefor, or unless specifically listed thereon; (x) amend or terminate any material agreement, permit, license or other right of the Company provided that the Company may continue to administer vendor and supplier contracts in the ordinary course of business provided written notice of any such material amendments or terminations is provided to Pentacon as soon as possible following such action and in any event prior to the Closing; or (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder. 7.4 NO SHOP. Except as contemplated hereby, none of the Stockholders, the Company, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, -32- (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than Pentacon, Newco or their authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the Company or a merger, consolidation or business combination of the Company. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the Company shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide Pentacon on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The Stockholders, Other Stockholders and the Company shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the Company and any employee listed on Schedule 9.12 hereto and (ii) any existing agreement between the Company and any Stockholder or Other Stockholder, on or prior to the Consummation Date provided that nothing herein shall prohibit or prevent the Company from paying (either prior to or on the Closing Date) notes or other obligations from the Company to the Stockholders or Other Stockholders in accordance with the terms thereof, which terms have been disclosed to Pentacon. Such termination agreements are listed on Schedule 7.6 and copies thereof shall be attached thereto. 7.7 NOTIFICATION OF CERTAIN MATTERS BY THE STOCKHOLDERS AND THE COMPANY. The Stockholders and the Company shall give prompt notice to Pentacon of (i) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the Company or the Stockholders contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any Stockholder or the Company to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. Pentacon and Newco shall give prompt notice to the Company of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of Pentacon or Newco contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of Pentacon or Newco to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery or deemed delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. If, prior to the Closing Date, the Chief Executive Officer, the Chief Financial Officer or the General Counsel of Pentacon shall determine that any of Pentacon, Newco, the Surviving Corporation or the Company has a claim hereunder for indemnification against any STOCKHOLDER(S) -33- (whether or not such claim might exceed the Indemnification Threshold), then Pentacon shall promptly advise the affected Stockholder(s), in writing, of such potential claim and provide information supporting the basis and potential amount of such claim (a "Potential Claim Notice"). This procedure with respect to Potential Claim Notices is intended to afford the affected Stockholder(s) notice so that it may attempt to cure or otherwise address the claim prior to Closing; provided, however, that (i) this procedure shall not affect or delay Closing and (ii) neither the failure or delay by Pentacon to give a Potential Claim Notice nor the information included or omitted from a Potential Claim Notice shall constitute a waiver of, or shall otherwise adversely affect the right to receive indemnification for, any such claim paid by Pentacon, Newco, the Surviving Corporation or the Company hereunder after the Closing Date. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until 24 hours prior to the anticipated effectiveness of the Registration Statement to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date, unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the Company that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to the Company may be made unless Pentacon and a majority of the Founding Companies other than the Company consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by Pentacon or Newco that constitutes or reflects an event or occurrence that would have a Material Adverse Effect with respect to Pentacon or Newco may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, Pentacon shall give the Company written notice promptly after it has knowledge thereof. If Pentacon and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given by Pentacon or any Founding Company if no response is received within 24 hours following receipt of written notice of such amendment or supplement (or sooner if reasonable and if required by the circumstances under which such consent is requested), but the Company does not give its consent, the Company may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the Company seeks to amend or supplement a Schedule pursuant to this Section 7.8, and Pentacon and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that Pentacon or Newco seeks to amend or supplement a -34- Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The Company and Stockholders shall furnish or cause to be furnished to Pentacon and the Underwriters all of the information concerning the Company and the Stockholders reasonably required for inclusion in, and will cooperate with Pentacon and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement, except that the cost of the preparation of any such audited and unaudited Financial Statements shall be borne by Pentacon). The Company and the Stockholders agree promptly to advise Pentacon if at any time during the period in which a prospectus relating to the IPO is required to be delivered under the Securities Act, any information contained in the prospectus concerning the Company or the Stockholders becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the Company or the Stockholders, the Company represents and warrants as to such information with respect to itself, and each Stockholder represents and warrants, as to such information with respect to the Company and himself or herself, severally, but not jointly, that the information expressly provided for inclusion in the Registration Statement or otherwise confirmed in writing by such Stockholder will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The Company shall provide prior to the Consummation Date, and Pentacon shall have had sufficient time to review the unaudited consolidated balance sheets of the Company as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the Company for all fiscal quarters ended after the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the Company for the periods indicated therein. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. -35- 7.12 AUTHORIZED CAPITAL. Prior to the Consummation Date, Pentacon shall maintain its authorized capital stock as set forth in the Registration Statement filed with the SEC except for such changes in authorized capital stock as are made to respond to comments made by the SEC or requirements of any exchange or automated trading system for which application is made to register the Pentacon Stock and any changes necessary or advisable in order to permit the delivery of the opinion contemplated by Section 8.12 hereof. 7.13 COMPLIANCE WITH THE HART-SCOTT-RODINO-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HART-SCOTT-RODINO ACT"). All parties to this Agreement hereby recognize that one or more filings under the Hart-Scott-Rodino Act may be required in connection with the transactions contemplated herein. If it is determined by the parties to this Agreement that filings under the Hart-Scott-Rodino Act are required, then: (i) each of the parties hereto agrees to cooperate and use its best efforts to comply with the Hart-Scott-Rodino Act, (ii) such compliance by the Stockholders and the Company shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 8 of this Agreement, and such compliance by Pentacon and Newco shall be deemed a condition precedent in addition to the conditions precedent set forth in Section 9 of this Agreement, and (iii) the parties agree to cooperate and use their best efforts to cause all filings required under the Hart-Scott-Rodino Act to be made. If filings under the Hart-Scott-Rodino Act are required, the costs and expenses thereof (including filing fees) shall be borne by Pentacon. The obligation of each party to consummate the transactions contemplated by this Agreement is subject to the expiration or termination of the waiting period under the Hart-Scott-Rodino Act, if applicable. 7.14 PRE-CLOSING NOTIFICATIONS. If, prior to the 25th day after the date of the final prospectus of Pentacon utilized in connection with the IPO, the Company or the Stockholders become aware of any fact or circumstance which would materially affect the accuracy of a representation or warranty of Company or Stockholders in this Agreement, the Company and the Stockholders shall promptly give notice of such fact or circumstance to Pentacon. However, subject to the provisions of Section 7.8, such notification shall not relieve either the Company or the Stockholders of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of Pentacon, the truth and accuracy of any and all warranties and representations of the Company, or on behalf of the Company and of Stockholders at the date of this Agreement and on the Closing Date and on the Consummation Date, shall be a precondition to the consummation of this transaction. 7.15 PAYMENT OF INDEBTEDNESS. On the Consummation Date, immediately following the Effective Time of the Merger, Pentacon will pay, or cause to be paid, all of the outstanding liabilities, obligations and indebtedness of Company to the lenders identified on Schedule 7.15 hereto. In connection with such repayment of such liabilities, obligations and indebtedness, Pentacon will cause all associated guaranties or suretyships of the Stockholders and the Other Stockholders to be terminated and cancelled. Furthermore, on the Consummation Date the Company will cause to be paid to the Other Stockholders, the $5,000,000 aggregate redemption payment amount owed by the Company in connection with the Redemption Agreements. -36- 7.16 MINIMUM VALUE. All of the parties to this Agreement recognize that one of the conditions to the Stockholders consummating the transactions contemplated herein is that the IPO shall be closed and the Stockholders and Other Stockholders (as a group) shall be entitled to receive consideration not less than the Minimum Value set forth on Annex I attached hereto. 7.17 DIRECTORS. Pentacon agrees that the number of directors of Pentacon shall not exceed nine members immediately following the IPO unless the Founding Stockholder representatives to serve on such board agree in writing to a larger number of directors. 7.18 TRANSACTION REPORTING. Pentacon agrees that, except as otherwise required by applicable law, Pentacon will describe or report the transaction in any required tax reports of Pentacon as a tax-free transaction (insofar as its relates to the delivery of Pentacon Stock for Company Stock) in a manner consistent with the tax opinion referenced in Section 8.12. 7.19 PERMITS. Pentacon agrees, prior to the Consummation Date, to obtain all material Licenses necessary for Pentacon to commence the conduct of business on the Consummation Date. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of Stockholders and the Company with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the Stockholders and the Company with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.5, 8.8, 8.9 and 8.12, as of the Consummation Date, if any such conditions have not been satisfied, the Stockholders (acting in unison) shall have the right to terminate this Agreement, or in the alternative, waive any condition not so satisfied. The delivery of certificates representing Company Stock to Pentacon as of the Consummation Date shall constitute a waiver of any conditions not so satisfied. However, no such waiver shall be deemed to affect the survival of the representations and warranties of Pentacon and Newco contained in Section 6 hereof or the rights of the Stockholders pursuant to Section 11 hereof. 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of Pentacon and Newco contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by Pentacon and Newco on or before the Closing Date and the Consummation Date shall have been duly complied with and performed in all material respects; and certificates to the foregoing effect dated the Closing Date and the Consummation Date, respectively, and signed by the President or any Vice President of Pentacon shall have been delivered to the Stockholders. -37- 8.2 SATISFACTION. All actions, proceedings, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall be reasonably satisfactory to the Company and its counsel. The Stockholders and the Company shall be satisfied that the Registration Statement and the prospectus forming a part thereof, including any amendments thereof or supplements thereto, shall not contain any untrue statement of a material fact, or omit to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that, subject to the provisions set forth in the introductory paragraph of this Section 8, the condition contained in this sentence shall be deemed waived if the Company or Stockholders shall have failed to inform Pentacon in writing prior to the effectiveness of the Registration Statement of the existence of an untrue statement of a material fact or the omission of such a statement of a material fact. 8.3 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of the Company as a result of which the management of the Company deems it inadvisable to proceed with the transactions hereunder. 8.4 OPINION OF COUNSEL. The Stockholders shall have received an opinion from counsel for Pentacon and Newco, dated the Closing Date, in the form annexed hereto as Annex IV. 8.5 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of Pentacon Stock to be received by the Stockholders and Other Stockholders is not less than the Minimum Value set forth on Annex I. 8.6 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency or any third party relating to the consummation of the transactions contemplated herein or set forth in Schedule 5.23 hereto shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Company as a result of which Company deems it inadvisable to proceed with the transactions hereunder. 8.7 GOOD STANDING CERTIFICATES. Pentacon and Newco each shall have delivered to the Company a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which Pentacon or Newco is authorized to do business, showing that each of Pentacon and Newco is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for Pentacon and Newco, respectively, for all periods prior to the Closing have been filed and paid. -38- 8.8 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to Pentacon or Newco which would constitute a Material Adverse Effect. 8.9 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. 8.10 SECRETARY'S CERTIFICATE. The Stockholders shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of Pentacon and of Newco, certifying the truth and correctness of attached copies of the Pentacon's and Newco's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the Stockholders of Pentacon and Newco approving Pentacon's and Newco's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall have been afforded the opportunity to enter into an employment agreement substantially in the form of Annex VI hereto. 8.12 TAX MATTERS. The Stockholders shall have received an opinion of Ernst & Young LLP or other tax advisor of national recognition reasonably acceptable to the Stockholders that the Pentacon Plan of Organization (including the Plan of Organization under this Agreement) will qualify as a tax-free transfer of property under Section 351 of the Code and that the Stockholders and Other Stockholders will not recognize gain to the extent the Stockholders and Other Stockholders exchange stock of the Company for Pentacon Stock (but not cash or other property) pursuant to the Pentacon Plan of Organization. 8.13 EXCHANGE LISTING. The Pentacon Stock shall have been accepted for listing on the New York Stock Exchange, NASDAQ National Market System or the American Stock Exchange. 9. CONDITIONS PRECEDENT TO OBLIGATIONS OF PENTACON AND NEWCO The obligations of Pentacon and Newco with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of Pentacon and Newco with respect to actions to be taken on the Consummation Date are subject to the satisfaction or waiver on or prior to the Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.13. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.13, as of the Consummation Date, if any such conditions have not been satisfied, Pentacon and Newco shall have the right to terminate this Agreement, or waive any such condition, but no such waiver shall be deemed to affect the survival of the representations and warranties contained in Section 5 hereof. -39- 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE AND OBLIGATIONS. All the representations and warranties of the Stockholders and the Company contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the Stockholders and the Company on or before the Closing Date or the Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the Stockholders shall have delivered to Pentacon certificates dated the Closing Date and the Consummation Date, respectively, and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the Merger or the IPO and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which the management of Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. Pentacon shall have received a certificate, dated the Closing Date and signed by the secretary of the Company, certifying the truth and correctness of attached copies of the Company's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and the Stockholders and Other Stockholders approving the Company's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the Company which would constitute a Material Adverse Effect, and the Company shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the Company to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The Stockholders and Other Stockholders shall have delivered to Pentacon an instrument dated the Closing Date, which shall be effective only upon the occurrence of the Consummation Date and shall relate only to matters accruing on or prior to the Consummation Date, releasing the Company and Pentacon from (i) any and all claims of the Stockholders and Other Stockholders against the Company and Pentacon and (ii) obligations of the Company and Pentacon to the Stockholders and Other Stockholders, except for (w) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the Stockholders, (x) continuing obligations to Stockholders relating to their employment by the Company or Pentacon, (y) any obligations or liabilities arising under this Agreement or the transactions contemplated hereby (including, but not limited to, any claims for indemnification that the Stockholders may have against Pentacon pursuant to Section 11 hereof irrespective of whether such claims accrued, or otherwise relate to matters that occurred, on or before the Consummation Date) and (z) real estate lease agreements between the Company and Stockholders and Other Stockholders, as amended which have been accepted or approved by Pentacon. In the event that the -40- Consummation Date does not occur, then the release instrument referenced herein shall be void and of no further force or effect. 9.6 SATISFACTION. All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or incidental hereto and all other related legal matters shall have been approved by counsel to Pentacon. 9.7 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.7, all existing agreements between the Company and the Stockholders or Other Stockholders (and entities controlled by the Stockholders or Other Stockholders) shall have been canceled effective prior to or as of the Consummation Date. 9.8 OPINION OF COUNSEL. Pentacon shall have received an opinion from Counsel to the Company and the Stockholders, dated the Closing Date, substantially in the form annexed hereto as Annex V. 9.9 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of Pentacon as a result of which Pentacon deems it inadvisable to proceed with the transactions hereunder. 9.10 GOOD STANDING CERTIFICATES. The Company shall have delivered to Pentacon a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the Company's state of incorporation and, unless waived by Pentacon, in each state in which the Company is authorized to do business, showing the Company is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the Company for all periods prior to the Closing have been filed and paid. 9.11 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.12 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.12 shall enter into an employment agreement substantially in the form of Annex VI hereto. 9.13 CLOSING OF IPO. The closing of the sale of the Pentacon Stock to the Underwriters in the IPO shall have occurred simultaneously with the Consummation Date hereunder. -41- 9.14 FIRPTA CERTIFICATE. Each Stockholder shall have delivered to Pentacon a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. 10. COVENANTS OF PENTACON AND THE STOCKHOLDERS AFTER CLOSING 10.1 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Consummation Date, Pentacon shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the organization, including without limitation: (a) the retirement or reacquisition, directly or indirectly, of all or part of the Pentacon Stock issued in connection with the transactions contemplated hereby; or (b) the entering into of financial arrangements for the benefit of the Stockholders. 10.2 PREPARATION AND FILING OF TAX RETURNS. (i) The Company, if possible, or otherwise the Stockholders shall file or cause to be filed all Tax Returns (federal, state, local or otherwise) of any Acquired Party for all taxable periods that end on or before the Consummation Date, and shall permit Pentacon to review all such Returns prior to such filings. Unless the Company is a C corporation, the Stockholders shall pay or cause to be paid all Tax liabilities (in excess of all amounts already paid with respect thereto or properly accrued or reserved with respect thereto on the Financial Statements) shown by such Returns to be due. (ii) Pentacon shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Consummation Date. (iii) Each party hereto shall, and shall cause its Subsidiaries and Affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies, at the expense of the requesting party, of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. -42- (iv) Each of the Company, Newco, Pentacon and each Stockholder shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free contribution under Section 351(a) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code subject to gain, if any, recognized on the receipt of cash or other property under Section 351(b) of the Code. 10.3 DIRECTORS. The persons named in the Draft Registration Statement shall be appointed as directors and elected as officers of Pentacon, as and to the extent set forth in the Draft Registration Statement, promptly following the Consummation Date. 11. INDEMNIFICATION The Stockholders, Pentacon and Newco each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The Stockholders covenant and agree that they, jointly and severally, will indemnify, defend, protect and hold harmless Pentacon, Newco, the Company and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date (provided that for purposes of Section 11.1(iii) below, the Expiration Date shall be the date on which the applicable statute of limitations expires), from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by Pentacon, Newco, the Company or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the Stockholders or the Company set forth herein or on the definitive, final schedules or certificates delivered by them in connection herewith (but excluding any representations or warranties made by the Other Stockholders with respect to their Common Stock), (ii) any breach of any agreement on the part of the Stockholders or, prior to Closing, the Company under this Agreement, or (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to the Company or the Stockholders, and provided in writing to Pentacon or its counsel by the Company or the Stockholders for inclusion in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to the Company or the Stockholders required to be stated therein or necessary to make the statements therein not misleading, provided, however, that such indemnity shall not inure to the benefit of Pentacon, Newco, the Company or the Surviving Corporation to the extent that such untrue statement (or alleged untrue statement) was made in, or omission (or alleged omission) occurred in, any preliminary prospectus and the Stockholders provided, in writing, corrected information to Pentacon counsel and to Pentacon for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no Stockholder shall be liable for any -43- indemnification obligation pursuant to this Section 11.1(iii) to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any Other Stockholder. Pentacon and Newco acknowledge and agree that other than the representations and warranties of Company or Stockholders specifically contained in this Agreement, there are no representations or warranties of Company or Stockholders, either express or implied, with respect to the transactions contemplated by this Agreement, the Company or its assets, liabilities and business. Pentacon, Newco and the Company further acknowledge and agree that, should the Closing occur, their sole and exclusive remedy with respect to any and all claims relating to this Agreement and the transactions contemplated in this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 11.1. Pentacon, Newco and the Company hereby waive, from and after the Closing, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action they or any indemnified person may have against the Company or any Stockholder relating to this Agreement or the transactions contemplated hereby arising under or based upon any federal, state, local or foreign statute, law, rule, regulation or otherwise (and other than pursuant to the terms of this Agreement). 11.2 INDEMNIFICATION BY PENTACON. Pentacon covenants and agrees that it will indemnify, defend, protect and hold harmless the Stockholders at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the Stockholders as a result of or arising from (i) any breach by Pentacon or Newco of their representations and warranties set forth herein or on the definitive, final schedules or certificates attached delivered by them pursuant hereto, (ii) any breach of any agreement on the part of Pentacon or Newco under this Agreement or any other agreement delivered pursuant hereto, (iii) any liabilities which the Stockholders may incur due to Pentacon's or Newco's or the Surviving Corporation's failure to pay, perform or discharge when due any of the liabilities and obligations of the Company for which Pentacon, Newco or the Surviving Corporation is responsible pursuant to this Agreement (except to the extent that Pentacon or Newco has bona fide claims hereunder against the Stockholders by reason of such liabilities); or (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to Pentacon, Newco or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to Pentacon or Newco or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading. -44- 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has actual knowledge of any claim by a Person (including a governmental agency) not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, with respect to which the Indemnified Person would be entitled to receive indemnification pursuant to Section 11, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the reasonable expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense through appropriate proceedings, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person. Upon agreement as to such settlement between said Third Person and the Indemnifying Party, the Indemnifying Party shall, in exchange for a complete release from the Indemnified Party, promptly pay to the Indemnified Party the amount agreed to in such settlement and the Indemnified Party shall, from that moment on, bear full responsibility for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the -45- Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. (a) The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case pursuant to Section 14.3 or otherwise, to seek injunctive or other equitable relief (except for rescission which shall not be available) for a breach or threatened breach of this Agreement. Any indemnity payment under this Section 11 shall be treated as an adjustment to the exchange consideration for tax purposes unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the indemnified party or any of its affiliate causes any such payment not to be treated as an adjustment to the exchange consideration for U.S. Federal Income Tax purposes. (b) Nothing in this Article 11 shall restrict the Stockholders from subrogation or seeking reimbursement from third parties other than the Company. 11.5 LIMITATIONS ON INDEMNIFICATION. Pentacon, Newco, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 or 11.2 shall not assert any claim for indemnification hereunder against the Stockholders after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against the Stockholders shall exceed the greater of 1% of the value of the total consideration (including stock and cash) received by the Stockholders from the Merger or $100,000 (the "Indemnification Threshold"), and then only to the extent of the excess over the Indemnification Threshold. Stockholders shall not assert any claim for indemnification hereunder against Pentacon or Newco after the applicable Expiration Date and in no event until such time as, and solely to the extent that, the aggregate of all claims which Stockholders may have against Pentacon or Newco shall exceed the Indemnification Threshold, and then only to the extent of the excess over the Indemnification Threshold. The Indemnification Threshold and other limitations contained in this Section 11.5 shall not be applicable to any breach of covenants made by the Stockholders in this Agreement which require an action or inaction by such Stockholders from and after the Closing Date (I.E., Article 10, Article 11, Article 13, Article 14, Article 17 and Sections 18.1 and 18.6). No person shall be entitled to indemnification under this Section 11 if, and only to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. -46- The pursuit by Pentacon, the Surviving Corporation, Newco or the Company, of any claim for indemnification hereunder against a Stockholder shall require a majority vote of the board of directors of Pentacon excluding for the purposes of such vote, any director who was previously a stockholder of the Company or is a representative of the stockholders of the Company as existing prior to the closing of the transactions contemplated in this Agreement. Notwithstanding any other term of this Agreement, no Stockholder shall be liable (in the aggregate from time to time taking into account all indemnification payments made hereunder) under this Section 11(a) for any amount which is less than or equal to the Indemnification Threshold (and then only to the extent of the excess over the Indemnification Threshold) or (b) for any amount which exceeds the amount of proceeds (including cash and stock) received by such Stockholder in connection with the Merger. Each Stockholder shall have the option of satisfying his or her indemnity obligation in cash and/or by returning or transferring shares of Pentacon Stock to Pentacon or any other Indemnified Party. For purposes of calculating the value of the Pentacon Stock received by a Stockholder and satisfying any indemnity claim by returning or transferring Pentacon Stock, Pentacon Stock shall be valued at its initial public offering price as set forth in the Registration Statement. Notwithstanding any of the foregoing provisions of this Section 11 that might be read to the contrary, it is the agreement of the parties that the Indemnification Threshold be given full effect under all circumstances. Accordingly, insofar as any of the foregoing provisions of this Section 11 may hold harmless an Indemnified Party before the Indemnification Threshold has been met, then Pentacon and the Stockholders shall cooperate in good faith to establish an equitable procedure pursuant to which Pentacon reimburses or causes the reimbursement to the affected Stockholder(s) of all expenditures and payments by Stockholders that are intended to be absorbed and borne by any Indemnified Parties as a result of the prior application of the Indemnification Threshold or otherwise takes such action as may be reasonably necessary to give effect to the Indemnification Threshold. 12. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Consummation Date solely: (i) by mutual consent of the boards of directors of Pentacon and the Company; (ii) by the Stockholders or the Company (acting through its board of directors), on the one hand, or by Pentacon (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by February 28, 1998, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Consummation Date; -47- (iii) by the Stockholders or Company, on the one hand, or by Pentacon, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants or agreements contained herein, and the curing of such default shall not have been made on or before the Consummation Date or by the Stockholders or the Company, if the conditions set forth in Section 8 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable, or by Pentacon, if the conditions set forth in Section 9 hereof have not been satisfied or waived as of the Closing Date or the Consummation Date, as applicable; (iv) pursuant to Section 7.8 hereof; (v) pursuant to the termination provisions contained in Section 4 hereof; or (vi) pursuant to the other express terms of this Agreement. 12.2 LIABILITIES IN EVENT OF TERMINATION. Except as provided in Section 7.8 hereof, the termination of this Agreement will in no way limit any obligation or liability of any party based on or arising from a breach or default by such party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement including, but not limited to, legal and audit costs and out of pocket expenses. 13. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The Stockholders will not, for a period of five (5) years following the Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) except as disclosed in Schedule 13.1, engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any fastener business or operation or related services business in direct competition with Pentacon or any of the subsidiaries thereof, within 100 miles of where the Company or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) except with the prior written consent of Pentacon, call upon any person who is, at that time, within the Territory, an employee of Pentacon or any subsidiary thereof for the purpose or with the intent of enticing such employee away from or out of the employ of Pentacon or any subsidiary thereof; (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Consummation Date, a customer of Pentacon or any subsidiary -48- thereof, of the Company or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services that are in direct competition with Pentacon within the Territory; (iv) call upon any prospective acquisition candidate, on any Stockholder's own behalf or on behalf of any competitor in the fastener business, which candidate, to the actual knowledge of such Stockholder after due inquiry, was called upon by Pentacon or any subsidiary thereof or for which, to the actual knowledge of such Stockholder after due inquiry, Pentacon or any subsidiary thereof made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the Company to any person, firm, partnership, corporation or business for any reason or purpose relating to the fastener business except to the extent that the Company has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any Stockholder from acquiring as a passive investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to Pentacon as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to Pentacon for which it would have no other adequate remedy, each Stockholder agrees that the foregoing covenant may be enforced by Pentacon in the event of breach by such Stockholder, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the Stockholders in light of the activities and business of Pentacon and the subsidiaries thereof on the date of the execution of this Agreement and the current plans of Pentacon; but it is also the intent of Pentacon and the Stockholders that such covenants be construed and enforced in accordance with the changing activities; business and locations of Pentacon and its subsidiaries throughout the term of this covenant. During the term of this covenant, if Pentacon or one of its subsidiaries engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business it is currently conducting in the locations currently established therefor, then the Stockholders will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new activities or business within 100 miles of its then-established operating location(s) through the term of this covenant. -49- 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any Stockholder against Pentacon or any subsidiary thereof, whether predicated on this Agreement or otherwise (except for a claim or cause of action based upon Pentacon's failure to pay or otherwise tender any of the consideration due to the Stockholders hereunder), shall not constitute a defense to the enforcement by Pentacon of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each Stockholder made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such Stockholder is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The Company and the Stockholders hereby agree that this covenant is a material and substantial part of this transaction. 14. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The Stockholders and each of the Other Stockholders by their execution of the Limited Joinder hereto recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the Company, the Other Founding Companies, and/or Pentacon, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's, the Other Founding Companies' and/or Pentacon's respective businesses. The Stockholders and Other Stockholders agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of Pentacon, (b) following the Closing, such information may be disclosed by the Stockholders as is required in the course of performing their duties for Pentacon or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the Stockholders or Other Stockholders (as the case may be), (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the Stockholders shall, if possible, give prior written notice thereof to Pentacon and provide Pentacon with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. -50- In the event of a breach or threatened breach by any of the Stockholders or Other Stockholders of the provisions of this Section, Pentacon shall be entitled to an injunction restraining such Stockholders or Other Stockholders from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Pentacon from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, the Stockholders or Other Stockholders shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the Company. 14.2 PENTACON AND NEWCO. Pentacon and Newco recognize and acknowledge that they had in the past and currently have access to certain confidential information of the Company, including, but not limited to, customer and prospect lists, financial information, operational policies, and pricing and cost policies that are valuable, special and unique assets of the Company's business. Pentacon and Newco agree that, prior to the Consummation Date, or if the transactions contemplated by this Agreement are not consummated, they will not, appropriate or make use of any such information, whether for its own benefit or the benefit of any other person or entity, for any purpose whatsoever (except pending the Consummation Date, effecting the transactions contemplated hereby) disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the Company, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.2, (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of Pentacon or Newco, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), Pentacon and Newco shall, if possible, give prior written notice thereof to the Company and the Stockholders and provide the Company and the Stockholders with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, and (d) to the public to the extent necessary or advisable in connection with the filing of the Registration Statement and the IPO and the securities laws applicable thereto and to the operation of Pentacon as a publicly held entity after the IPO. In the event of a breach or threatened breach by Pentacon or Newco of the provisions of this Section, the Company and the Stockholders shall be entitled to an injunction restraining Pentacon and Newco from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the Company and the Stockholders from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach or threatened breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and -51- restraining orders or other appropriate equitable relief, without posting any bond or other security or having to prove irreparable harm or injury. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Consummation Date, or without limitation if the transactions contemplated hereby are not consummated. 15. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Pentacon, except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts or partnerships for the benefit of charities, the Stockholders or Other Stockholders, family members, the trustees or partners of which so agree), for a period of one year from the Closing, except pursuant to Section 17 hereof, none of the Stockholders or Other Stockholders shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of any shares of Pentacon Stock received by the Stockholders or Other Stockholders in the Merger. The certificates evidencing the Pentacon Stock delivered to the Stockholders or Other Stockholders pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as Pentacon may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO FIRST ANNIVERSARY OF CLOSING DATE. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 16. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 COMPLIANCE WITH LAW. The Stockholders acknowledge that the shares of Pentacon Stock to be delivered to the Stockholders pursuant to this Agreement have not been and will not be registered under the 1933 Act (except as provided in Section 17 hereof) and therefore may not be resold without compliance with the 1933 Act. The Pentacon Stock to be acquired by such Stockholders pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. The Stockholders covenant, warrant and represent that none of the shares of Pentacon Stock issued to such Stockholders will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the Pentacon -52- Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The Stockholders are able to bear the economic risk of an investment in the Pentacon Stock to be acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the Pentacon Stock. The Stockholders party hereto have had an adequate opportunity to ask questions and receive answers from the officers of Pentacon concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of Pentacon, the plans for the operations of the business of Pentacon, the business, operations and financial condition of the Founding Companies other than the Company, and any plans for additional acquisitions and the like. The Stockholders have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 17. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever Pentacon proposes to register any Pentacon Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf or other registration of shares to be used as consideration for acquisitions of additional businesses by Pentacon and (ii) registrations relating to employee benefit plans, Pentacon shall give each of the Stockholders and Other Stockholders prompt written notice of its intent to do so. Upon the written request of any of the Stockholders given within 30 days after receipt of such notice, Pentacon shall cause to be included in such registration all of the Pentacon Stock issued to the Stockholders and Other Stockholders pursuant to this Agreement (including any stock issued as (or issuable upon the conversion or exchange of any convertible security, warrant, right or other security which is issued by Pentacon as) a dividend or other distribution with respect to, or in exchange for, or in replacement of such Pentacon Stock) which any such Stockholder and Other Stockholder requests, provided that Pentacon shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares would, in the written opinion of tax counsel to Pentacon or its independent auditors, reasonably be likely to jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free organization under Section 351 of the Code. In addition, if Pentacon is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than Pentacon is greater than the number of such shares which can be offered without adversely affecting the offering, Pentacon may reduce pro rata the -53- number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter, provided, that, for each such offering made by Pentacon after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than Pentacon, the Stockholders and Other Stockholders and the Stockholders of the Other Founding Companies (collectively, the Stockholders, the Other Stockholders and the Stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. 17.2 REGISTRATION PROCEDURES. Whenever Pentacon is required to register shares of Pentacon Stock pursuant to Section 17.1, Pentacon will, as expeditiously as possible: (i) Prepare and file with the SEC a registration statement with respect to such shares and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements or term sheets thereto, Pentacon will furnish a representative of the Stockholders and Other Stockholders with copies of all such documents proposed to be filed) as promptly as practical; (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days; (iii) Furnish to each Stockholder or Other Stockholder who so requests such number of copies of such registration statement, each amendment and supplement thereto and the prospectus included in such registration statement (including each preliminary prospectus and any term sheet associated therewith), and such other documents as such Stockholder or Other Stockholder may reasonably request in order to facilitate the disposition of the relevant shares; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Stockholders or Other Stockholders, and to keep such registration or qualification effective during the period such registration statement is to be kept effective, provided that Pentacon shall not be required to become subject to taxation, to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (v) Cause all such shares of Pentacon Stock to be listed or included on any securities exchanges or trading systems on which similar securities issued by Pentacon are then listed or included; -54- (vi) Notify each Stockholder or Other Stockholder at any time when a prospectus relating thereto is required to be delivered under the 1933 Act within the period that Pentacon is required to keep the registration statement effective of the happening of any event as a result of which the prospectus included in such registration statement, together with any associated term sheet, contains an untrue statement of a material fact or omits any fact necessary to make the statement therein not misleading, and, at the request of such Stockholder or Other Stockholder, Pentacon will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of the covered shares, such prospectus will not contain an untrue statement of material fact or omit to state any fact necessary to make the statements therein not misleading. All expenses incurred in connection with the registration under this Article 17 (including all registration, filing, qualification, legal, printer and accounting fees, but excluding underwriting commissions and discounts), shall be borne by Pentacon. 17.3 INDEMNIFICATION. (a) In connection with any registration hereunder, Pentacon shall indemnify, to the extent permitted by law, each Stockholder and Other Stockholder against all losses, claims, damages, liabilities and expenses arising out of or resulting from any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or associated term sheet or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading except insofar as the same are caused by or contained in or omitted from any information furnished in writing to Pentacon by such indemnified party expressly for use therein or by any indemnified parties' failure to deliver a copy of the registration statement or prospectus or any amendment or supplements thereto after Pentacon has furnished such Indemnified Party with a sufficient number of copies of the same. (b) In connection with any registration hereunder, each Stockholder or Other Stockholder shall furnish to Pentacon in writing such information as is reasonably requested by Pentacon for use in any such registration statement or prospectus and will indemnify, to the extent permitted by law, Pentacon, its directors and officers and each person who controls Pentacon (within the meaning of the 1933 Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement or material fact or any omission or alleged omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in information so furnished in writing by such Stockholder specifically for use in preparing the registration statement. Notwithstanding the foregoing, the liability of a Stockholder or Other Stockholder under this Section 17.3 shall be limited to an amount equal to the net proceeds actually received by such Stockholder or Other Stockholder from the sale of the relevant shares covered by the registration statement. -55- (c) Any person entitled to indemnification under this Section will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in such indemnified parties' reasonable judgment, a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. Any failure to give prompt notice shall deprive a party of its right to indemnification hereunder only to the extent that such failure shall have adversely affected the indemnifying party. If the defense of any claim is assumed, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled or elects not to assume the defense of a claim, will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party, a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. 17.4 UNDERWRITING AGREEMENT. In connection with each registration pursuant to Section 17.1 covering an underwritten registered offering, Pentacon and each participating holder agree to enter into a written agreement with the managing underwriters in such form and containing such provisions as are customary in the securities business for such an arrangement between such managing underwriters and companies of Pentacon's size and investment stature, including indemnification. 17.5 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the SEC that may permit the sale of Pentacon stock to the public without registration, Pentacon agrees to use commercially reasonable efforts to: (i) make and keep public information regarding Pentacon available as those terms are understood and defined in Rule 144 under the 1933 Act for a period of four years beginning 90 days following the effective date of the Registration Statement; (ii) file with the SEC in a timely manner all reports and other documents required of Pentacon under the 1933 Act and the 1934 Act at any time after it has become subject to such reporting requirements; and (iii) so long as a Stockholder or Other Stockholder owns any restricted Pentacon Stock, furnish to each Stockholder or Other Stockholder forthwith upon written request a written statement by Pentacon as to its compliance with the reporting requirements of Rule 144 (at any time from and after 90 days following the effective date of the Registration Statement, and of the 1933 Act and the 1934 Act (any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of Pentacon, and such other reports and documents so filed as a Stockholder or Other Stockholder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Stockholder or Other Stockholder to sell any such shares without registration. -56- 18. GENERAL 18.1 COOPERATION. The Company, Stockholders or Other Stockholders, Pentacon and Newco shall each deliver or cause to be delivered to the other on the Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The Company will cooperate and use its reasonable efforts to have the present officers, directors and employees of the Company cooperate with Pentacon on and after the Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of Pentacon, and the heirs and legal representatives of the Stockholders. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the Stockholders, the Company, Newco and Pentacon and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only (i) pursuant to Section 7.8 with respect to the amendment of Schedules or (ii) by a written instrument executed by the Stockholders, the Company, Newco and Pentacon, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby, provided that the Company shall make a good faith effort to cross reference disclosure, as necessary or advisable, between related Schedules, and provided further that the failure to do so will not affect the validity of such disclosure. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. -57- 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, Pentacon will pay the fees, expenses and disbursements of Pentacon and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto, including all costs and expenses incurred in the performance and compliance with all conditions to be performed by Pentacon under this Agreement, including the fees and expenses of Ernst & Young LLP, Andrews & Kurth L.L.P., and any other person or entity retained by Pentacon or by McFarland, Grossman Capital Ventures II, L.C., and the costs of preparing the Registration Statement. Except as otherwise agreed in writing by Pentacon, each Stockholder and Other Stockholder shall pay their respective fees, expenses and disbursements of counsel and other professionals in connection with this transaction and shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware. Each Stockholder and Other Stockholder shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each Stockholder and Other Stockholder acknowledges that he, and not the Company or Pentacon, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof. The Stockholders and Other Stockholders acknowledge that the risks of the transactions contemplated hereby include tax risks, with respect to which the Stockholders are relying solely on the opinion contemplated by Section 8.12 hereof. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to Pentacon, or Newco, addressed to them at: Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 with copies to: Bruce Taten, Esquire Pentacon, Inc. 9432 Old Katy Road, Suite 222 Houston, Texas 77055 and Christopher S. Collins, Esquire Andrews & Kurth, L.L.P. 4200 Texas Commerce Tower -58- Houston, Texas 77002 (b) If to the Stockholders, addressed to them at: Benjamin E. Spence, Jr. 3842 Crestwood Drive Schnecksville, Pennsylvania 18078 Richard D. Knorr 49 Baynard Cove Road Hilton Head, South Carolina 29928 with copies to: Barry N. Mosebach Stevens & Lee 190 Brodhead Road, Suite 200 P. O. Box 20830 Lehigh Valley, Pennsylvania 18002 (c) If to the Company, addressed to it at: Benjamin E. Spence, Jr. Sales Systems, Limited 810 Hickory Lane Allentown, Pennsylvania 18106 (d) If to the Other Stockholders addressed to them at: William C. Creecy 3602 Harding Drive Chesapeake, Virginia 23321 with a copy to: Cooper, Spong & Davis Central Fidelity Bank Building 200 High Street - Suite 500 P. O. Box 1475 Portsmouth, Virginia 23705-1475 Attention: Albert J. Taylor Jr., Esquire James D. Mitchell -59- 432 Springview Lane Phoenixville, Pennsylvania 19460 with a copy to: Garland D. Cherry, Sr., Esquire 202 A. North Monroe Street Media, Pennsylvania 19063 or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the applicable Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. Except as set forth in Section 11.4, no right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. -60- 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. -61- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PENTACON, INC. By:/s/ MARK E. BALDWIN Mark E. Baldwin Chief Executive Officer SALES SYSTEMS LIMITED ACQUISITION COMPANY By:/s/ Mark E. Baldwin Mark E. Baldwin President SALES SYSTEMS, LIMITED By:/s/ BENJAMIN E. SPENCE, JR. Benjamin E. Spence, Jr. President Stockholders: /s/ BENJAMIN E. SPENCE, JR BENJAMIN E. SPENCE, JR. /s/ RICHARD D. KNORR RICHARD D. KNORR -62- ANNEX I (SSL) CONSIDERATION TO BE PAID TO THE STOCKHOLDERS STOCKHOLDER OR SHARES OF COMMON STOCK OF OTHER STOCKHOLDER PENTACON, INC. MERGER CASH ------------- ------------- Benjamin Spence, Jr .................... 232,132 $1,169,856.50 Richard Knorr .......................... 232,132 $1,169,856.50 James D. Mitchell ...................... 59,003 0.00 William C. Creecy ...................... 25,287 0.00 ------------- ------------- 548,554 $2,339,713.00 ============= ============= MINIMUM VALUE: ......................... $7,951,420.40 ANNEX II Sales Systems, Limited Stock Ownership Benjamin Spence, Jr. 12.5 shares Richard D. Knorr 12.5 shares James D. Mitchell ___ shares William C. Creecy ___ shares LIMITED JOINDER JAMES D. MITCHELL, an adult individual with an address at 432 Springview Lane, Phoenixville, Pennsylvania 19460 ("Mitchell"), and WILLIAM C. CREECY, an adult individual with an address at 3602 Harding Drive, Chesapeake, Virginia 23321 ("Creecy") (Mitchell and Creecy shall be collectively referred to herein as the "Other Stockholders"), each intending to be legally bound and to induce Pentacon, Inc., a Delaware corporation ("Pentacon"), to enter into the foregoing Agreement and Plan of Organization dated as of December 1, 1997 (the "Agreement") among Pentacon, Sales Systems Limited Acquisition Corp. and Sales Systems, Limited, hereby join in the Agreement for the purposes of making and agreeing to perform and be bound by all of the representations, warranties, covenants and agreements set forth in (a) Sections 5.3 and 5(B) of the Agreement pertaining to title to the shares of Company Stock owned by the Other Stockholders and various related matters and (b) Section 14 of the Agreement relating to nondisclosure of confidential information all in accordance with terms and conditions set forth in the Agreement (all of which terms and conditions including, but not limited to, all defined terms relating thereto) are hereby incorporated by reference into this Limited Joinder and made a part hereof. Capitalized terms used in this Limited Joinder that are not otherwise defined herein shall have the respective meanings assigned to them in the Agreement. This Limited Joinder has been duly executed by the Other Shareholders as of the 1st day of December, 1997. Witness: _____________________________ _________________________________ (SEAL) James D. Mitchell _____________________________ _________________________________ (SEAL) William C. Creecy EX-10.6 7 EXHIBIT 10.6 CONFORMED CHIEF EXECUTIVE OFFICER'S EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between Pentacon, Inc., a Delaware corporation (the "Company"), and Mark E. Baldwin ("Executive") is hereby entered into and effective as of the 2nd day of December, 1997. This Agreement hereby supersedes any other employment agreements or understandings, written or oral, between the Company and Executive. RECITALS The following statements are true and correct: As of the date of this Agreement, the Company is engaged primarily in the acquisition and operation of companies engaged in the distribution of fasteners and provision of related inventory services. Executive is employed hereunder by the Company in a confidential relationship wherein Executive, in the course of his employment with the Company, has and will continue to become familiar with and aware of confidential and proprietary information as to the Company's customers and specific manner of doing business, including the processes, techniques and trade secrets utilized by the Company, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company. This confidential and proprietary information is a trade secret and constitutes the valuable goodwill of the Company. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: AGREEMENTS 1. EMPLOYMENT AND DUTIES. (a) The Company hereby employs Executive as Chief Executive Officer of the Company. As such, Executive shall have responsibilities, duties and authority reasonably accorded to, expected of and consistent with Executive's position as Chief Executive Officer of the Company and will report directly to the Board of Directors of the Company (the "Board"). Executive hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(c), agrees to devote substantially all of his business-related time, attention and efforts to promote and further the business and interests of the Company and its affiliates. (b) Executive shall faithfully adhere to all lawful policies established by the Company. -1- (c) Executive shall not, during the term of his employment hereunder, be engaged in any other business activity pursued for gain, profit or other pecuniary advantage if such activity interferes in any material respect with Executive's duties and responsibilities hereunder. The foregoing limitations shall not be construed as prohibiting Executive from (i) making personal investments in such form or manner as will neither require his services in the operation or affairs of the companies or enterprises in which such investments are made nor violate the terms of paragraph 3 hereof; (ii) participating in professional development activities; or (iii) acting as a director of not more than one other corporation which does not compete with the Company provided such representation does not adversely impact the Executive's duties hereunder. (d) Executive cannot be required by the Company to relocate unless the Executive consents to such relocation. The Executive's refusal to relocate shall not be considered "cause" for termination. Furthermore, Executive shall not be required to commute to another location or travel extensively in lieu of relocation. 2. COMPENSATION. For all services rendered by Executive, the Company shall compensate Executive beginning upon the consummation of the initial public offering of the common stock of Pentacon (the "IPO") as follows: (a) BASE SALARY. The base salary payable to Executive shall be $150,000 per year commencing upon the consummation of the IPO, and payable on a regular basis in accordance with the Company's standard payroll procedures but not less than monthly. Such base salary may be increased (but not decreased) from time to time, at the discretion of the Board, in light of Executive's annual review, position, responsibilities and performance. (b) STOCK OPTION GRANT. Executive shall receive 185,000 options to purchase shares of stock of the Company, exercisable at the price the stock is issued in the IPO. Such options shall vest as follows: 30% shall vest at the end of the second anniversary hereof and 100% shall vest at the end of the third anniversary hereof. (c) BONUS. Executive shall receive an annual bonus to be determined by the Board. Such bonus shall be targeted at 50% of Executive's base salary, subject to yet to-be-determined performance criteria. (d) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Executive shall be entitled to receive additional benefits and compensation from the Company in such form and to such extent as specified below: (i) Payment of all premiums for coverage for Executive and his dependent family members under health, hospitalization, disability, dental, life and other insurance plans that -2- the Company may have in effect from time to time (all in an amount not less than such benefits provided to other Company executives). (ii) Reimbursement for all business travel and other out-of-pocket expenses and professional dues and fees reasonably incurred by Executive in the performance of his services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy. (iii) The Company shall provide Executive with other executive perquisites as may be available to or deemed appropriate for Executive by the Board and Executive shall be eligible for participation in all other Company-wide employee benefits as are available from time to time. (iv) The Executive shall be entitled to three weeks paid vacation per year. 3. NON-COMPETITION AGREEMENT. (a) Executive recognizes that the Company's willingness to enter into this Agreement is based in material part on Executive's agreement to the provisions of this paragraph 3 and that Executive's breach of the provisions of this paragraph 3 could materially damage the Company. Subject to and so long as the Company is not in violation of its obligations under this Agreement, Executive will not, during the period of his employment by or with the Company, and for a period of two (2) years immediately following the termination of his employment under this Agreement, for any reason whatsoever (other than a termination by the Company without cause, or a termination by Executive with Good Reason (as hereinafter defined)), directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business in direct competition with the Company or its subsidiaries, within one hundred (100) miles of where the Company or any of its subsidiaries conduct business, including any territory serviced by the Company or any of its subsidiaries (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of the Company or its subsidiaries (including the respective subsidiaries thereof) in a managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of the Company or its subsidiaries; -3- (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to that time, a customer of the Company or its subsidiaries within the Territory for the purpose of soliciting or selling products or services in direct competition with the Company or its subsidiaries within the Territory; or (iv) call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was, to Executive's knowledge after due inquiry, either called upon by the Company or its subsidiaries or for which the Company or its subsidiaries made an acquisition analysis, for the purpose of acquiring such entity. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Executive from acquiring as an investment not more than two percent (2%) of the capital stock of a competing business, whose stock is traded on a national securities exchange or on an over-the-counter or similar market. (b) Because of the difficulty of measuring economic losses to the Company and its subsidiaries as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to the Company and its subsidiaries for which they would have no other adequate remedy, Executive agrees that the foregoing covenant may be enforced by the Company or its subsidiaries, in the event of breach by him, by injunctions and restraining orders. (c) It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Executive in light of the activities and business of the Company or its subsidiaries, as the case may be, on the date of the execution of this Agreement and the current plans of the Company and its subsidiaries; but it is also the intent of the Company and Executive that such covenants be construed and enforced in accordance with the changing activities, business and locations of the Company and its subsidiaries, as the case may be, throughout the term of this covenant, whether before or after the date of termination of the employment of Executive. For example, if, during the term of this Agreement, the Company or its subsidiaries, as the case may be, engage in new and different activities, enter a new business or establish new locations for their current activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefor, then Executive will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business within 100 miles of its then- established operating location(s) through the term of this covenant. It is further agreed by the parties hereto that, in the event that Executive shall cease to be employed hereunder, and shall enter into a business or pursue other activities not in competition with the Company or its subsidiaries, or similar activities or business in locations the operation of which, under such circumstances, does not violate clause (a) of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Executive's obligations under this paragraph 3, if any, Executive shall not be chargeable with a violation of this paragraph -4- 3 if the Company or its subsidiaries shall thereafter enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. (d) The covenants in this paragraph 3 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. (e) All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Executive against the Company or its subsidiaries, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company or its subsidiaries of such covenants. It is specifically agreed that the period of two (2) years following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Executive made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Executive is in violation of any provision of this paragraph 3. 4. TERM; TERMINATION; RIGHTS ON TERMINATION. (a) The term of this Agreement shall begin on the consummation of the IPO and continue for five (5) years (the "Term"), and, unless terminated sooner as herein provided, shall continue thereafter on a year-to-year basis on the same terms and conditions contained herein in effect as of the time of renewal. This Agreement and Executive's employment may be terminated in any one of the followings ways: (i) DEATH. The death of Executive shall immediately terminate this Agreement with no severance compensation due to Executive's estate. (ii) DISABILITY. If, as a result of incapacity due to physical or mental illness or injury, Executive shall have been absent from his full-time duties hereunder for four (4) consecutive months, then thirty (30) days after receiving written notice (which notice may occur before or after the end of such four (4) month period, but which shall not be effective earlier than the last day of such four (4) month period), the Company may terminate Executive's employment hereunder, provided that Executive is unable to resume his full-time duties at the conclusion of such notice period. Also, Executive may terminate his employment hereunder if his health should become impaired to an extent that makes the continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request made within thirty (30) days of the date of such written statement, Executive shall submit to an examination by a doctor selected by the Company who is reasonably acceptable to Executive or Executive's doctor and such doctor shall have concurred in the conclusion of -5- Executive's doctor. In the event this Agreement is terminated as a result of Executive's disability, Executive shall receive from the Company, in a lump-sum payment due within ten (10) days of the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Initial Term (as hereinafter defined) of this Agreement, provided that such period shall not exceed one (1) year. (iii) GOOD CAUSE. The Company may terminate the Agreement ten (10) days after written notice to Executive for good cause, which shall be: (i) Executive's breach of any material provision of this Agreement (continuing for ten (10) days after receipt of notice of need to cure); (ii) Executive's gross negligence in the performance or intentional nonperformance (continuing for ten (10) days after receipt of written notice of need to cure) of any of Executive's material duties and responsibilities hereunder which is harmful or injurious to the Company; (iii) Executive's dishonesty, fraud or misconduct with respect to the business or affairs of the Company or its subsidiaries which materially and adversely affects the operations or reputation of the Company or its subsidiaries; (iv) Executive's conviction of a felony crime; or (v) alcohol abuse or a confirmed positive illegal drug test result. In the event of a termination for good cause, as enumerated above, Executive shall have no right to any severance compensation but shall receive all compensation due and payable through the date of termination. (iv) WITHOUT CAUSE. At any time after the commencement of employment, Executive may, without cause, and without Good Reason terminate this Agreement and Executive's employment, effective thirty (30) days after written notice is provided to the Company. Executive may only be terminated without cause by the Company during the Term hereof if such termination is approved by at least eighty percent (80%) of the members of the Board of Directors of the Company. Should Executive be terminated by the Company without cause or should Executive terminate with Good Reason during the first three (3) years of the Term (the "Initial Term"), Executive shall receive from the Company, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Initial Term of this Agreement or for two (2) years, whichever amount is greater. Should Executive be terminated by the Company without cause or should Executive terminate with Good Reason after the Initial Term, Executive shall receive from the Company, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect equivalent to one (1) year of salary. Further, any termination without cause by the Company shall operate to shorten the period set forth in paragraph 3(a) and during which the terms of paragraph 3 apply to one (1) year from the date of termination of employment. If Executive resigns or otherwise terminates his employment without cause, rather than the Company terminating his employment pursuant to this paragraph 4(a)(iv), or if Executive terminates without Good Reason, Executive shall receive no severance compensation. Executive shall have "Good Reason" to terminate this Agreement and his employment hereunder upon the occurrence of any of the following events: (a) Executive experiences a reduction -6- in authority, responsibilities or duties to a position of less stature or importance within the Company than the position described in paragraph 1 hereof (b) a material breach of this Agreement by the Company which continues for thirty (30) days after receipt of written notice of breach is received by the Company from the Employee or (c) Executive is required to support (by action or silence) conduct which constitutes dishonesty, fraud or willful misconduct with respect to the business or affairs of the Company or its subsidiaries. Upon termination of this Agreement for any reason provided above, Executive shall be entitled to receive all compensation earned and/or accrued and all benefits and reimbursements due and/or accrued through the effective date of termination. Additional compensation subsequent to termination, if any, will be due and payable to Executive only to the extent and in the manner expressly provided above or in paragraph 11. All other rights and obligations of the Company and Executive under this Agreement shall cease as of the effective date of termination, except that the Executive's obligations under paragraphs 3, 5, 6, 7, 8 and 9 herein and the Company's obligations with respect to stock grants, stock options, and severance shall survive such termination in accordance with their terms. (b) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in Control" of the Company (as defined below) during the Term or any extension or renewal thereof, refer to paragraph 11 below. (c) TREATMENT OF STOCK OPTIONS AND STOCK OPTION GRANTS. Any unvested portion of any awards of stock options or stock grants pursuant to this Agreement in connection with Executive's employment shall be treated in the following manner in the event of a termination of Executive's employment. (i) If Executive's employment is terminated by the Company for cause or if Executive resigns or terminates his employment other than for Good Reason, then any unvested portion of any awards of stock options or stock grants shall lapse or shall be forfeited. (ii) If Executive's employment is terminated by the Company without cause or if Executive terminates his employment for Good Reason, then any unvested portion of any awards of stock options or stock grants shall immediately vest to their fullest extent (notwithstanding any vesting provisions to the contrary) and Executive shall be entitled to all rights and privileges associated with such awards (subject to applicable securities laws and regulations). (iii) If Executive's employment is terminated pursuant to a "Change in Control," then the stock options and stock awards shall be treated in the manner provided in paragraph 11 hereof. -7- 5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Executive by or on behalf of the Company, its subsidiaries or their representatives, vendors or customers which pertain to the business of the Company or its subsidiaries shall be and remain the property of the Company or its subsidiaries, as the case may be, and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the Company or its subsidiaries which is collected by Executive shall be delivered promptly to the Company without request by it upon termination of Executive's employment. 6. INVENTIONS. Executive shall disclose promptly to the Company any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not, which are conceived or made by Executive, solely or jointly with another, during the period of employment, and which are directly related to the business or activities of the Company and which Executive conceives as a result of his employment by the Company. Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. 7. TRADE SECRETS. Executive agrees that he will not, during or after the Term of this Agreement with the Company, disclose the specific terms of the Company's or its subsidiaries' relationships or agreements with their respective significant vendors or customers or any other significant and material trade secret of the Company or its subsidiaries, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except in connection with (a) any legal proceeding of the Company in which such disclosure is required to be made by the Company (b) obtaining the advice of outside consultants engaged by the Company (c) discussions with the Company's outside auditors (d) obtaining or maintenance of the Company's credit facility or (e) otherwise with the consent of the Company's CEO or the Board of Directors. 8. CONFIDENTIALITY. (a) Executive acknowledges and agrees that all Confidential Information (as defined below) of the Company is confidential and a valuable, special and unique asset of the Company that gives the Company an advantage over its actual and potential, current and future competitors. Executive further acknowledges and agrees that Executive owes the Company a fiduciary duty to preserve and protect all Confidential Information from unauthorized disclosure or unauthorized use, that certain Confidential Information constitutes "trade secrets" under applicable laws, and that unauthorized disclosure or unauthorized use of the Company's Confidential Information would irreparably injure the Company. -8- (b) Both during the term of Executive's employment and after the termination of Executive's employment for any reason (including wrongful termination), Executive shall hold all Confidential Information in strict confidence, and shall not use any Confidential Information except for the benefit of the Company, in accordance with the duties assigned to Executive. Executive shall not, at any time (either during or after the term of Executive's employment), disclose any Confidential Information to any person or entity (except other employees of the Company who have a need to know the information in connection with the performance of their employment duties), or copy, reproduce, modify, decompile or reverse engineer any Confidential Information, or remove any Confidential Information from the Company's premises, without the prior consent of the CEO of the Company or the Board of Directors of the Company or permit any other person to do so. In the event Executive is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or other process) to disclose any Confidential Information, Executive will provide the Company with immediate written notice of any such request or requirement so that the Company may seek an appropriate protective order and/or seek with Executive's cooperation to narrow the request or demand or waive Executive's compliance with the provisions of this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, Executive is, in the opinion of his counsel, compelled to disclose Confidential Information, Executive may disclose only that portion of the Confidential Information which Executive's counsel advises Executive in writing that Executive is compelled to disclose and Executive will exercise his or her best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. In any event, Executive will not oppose action by the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. Executive shall take reasonable precautions to protect the physical security of all documents and other material containing Confidential Information (regardless of the medium on which the Confidential Information is stored). This Agreement applies to all Confidential Information, whether now known or later to become known to Executive. (c) Upon the termination of Executive's employment with the Company for any reason, and upon request of the Company at any other time, Executive shall promptly surrender and deliver to the Company all documents and other written material of any nature containing or pertaining to any Confidential Information and shall not retain any such document or other material. Within five days of any such request, Executive shall certify to the Company in writing that all such materials have been returned. (d) As used in this Agreement, the term "Confidential Information" shall mean any information or material known to or used by or for the Company (whether or not owned or developed by the Company and whether or not developed by Executive) that is not generally known to the public. Confidential information includes, but is not limited to, the following: all trade secrets of the Company; all information that the Company has marked as confidential or has otherwise described to Executive (either in writing or orally) as confidential; all nonpublic information -9- concerning the Company's products, services, prospective products or services, research, product designs, prices, discounts, costs, marketing plans, marketing techniques, market studies, test data, customers, customer lists and records, suppliers and contracts; all Company business records and plans; all Company personnel files; all financial information of or concerning the Company; all information relating to operating system software, application software, software and system methodology, hardware platforms, technical information, inventions, computer programs and listings, source codes, object codes, copyrights and other intellectual property; all technical specifications; any proprietary information belonging to the Company; all computer hardware or software manual; all training or instruction manuals; and all data and all computer system passwords and user codes. 9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his employment by the Company and the performance of his duties hereunder will not violate or be a breach of any agreement with a former employer, client or any other person or entity. Further, Executive agrees to indemnify the Company for any claim, including, but not limited to, attorneys' fees and expenses of investigation, by any such third party that such third party may now have or may hereafter come to have against the Company based upon or arising out of any non-competition agreement, invention or secrecy agreement between Executive and such third party which was in existence as of the date of this Agreement. 10. ASSIGNMENT; BINDING EFFECT. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two (2) sentences and the express provisions of paragraph 11 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. 11. CHANGE IN CONTROL. (a) Unless he elects to terminate this Agreement pursuant to subsections b, c or d below, Executive understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder or that the Company may undergo another type of Change in Control. In the event such a merger or consolidation or other Change in Control is initiated prior to the end of the Term or any extension or renewal thereof, then the provisions of this paragraph 11 shall be applicable. (b) In the event of a Change in Control wherein the Company and Executive have not received written notice at least five (5) business days prior to the date of the event giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business -10- and/or assets that such successor is willing as of the closing to assume and agrees to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company is hereby required to perform, then Executive may, at Executive's sole discretion, elect to terminate Executive's employment on such Change in Control by providing written notice to the Company prior to the closing of the transaction giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(a)(iv) will apply as though the Company had terminated Executive without cause during the Initial Term; however, the amount of the lump sum severance payment due Executive pursuant to this paragraph 11(b) shall be triple the amount calculated under the terms of paragraph 4(a)(iv), but shall in no event exceed four times Executive's base salary. (c) In any Change in Control situation, Executive may, at Executive's sole discretion, elect to terminate Executive's employment upon the effective date of such Change in Control by providing written notice to the Company at least ten (10) business days prior to the closing of the transaction (or ten (10) business days after receipt of notice of such transaction, whichever is later) giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(a)(iv) will apply as though the Company had terminated Executive without cause during the Initial Term; however, the amount of the lump sum severance payment due Executive pursuant to this paragraph 11(c) shall be double the amount calculated under the terms of paragraph 4(a)(iv), but shall in no event exceed three times Executive's base salary. (d) If, on or within one year following the effective date of a Change in Control the Company terminates Executive's employment other than for cause or if Executive's employment with the Company is terminated by the Company within three months before the effective date of a Change in Control other than for cause and it is reasonably demonstrated that such termination (i) was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or anticipation of a Change in Control, then Executive shall receive from Company, in a lump sum payment due on the effective date of termination, the same amount which Executive would have received pursuant to a termination under paragraph 11(b) above. (e) Solely for purposes of applying paragraph 4 under the circumstances described in (b) above, the effective date of termination will be the closing date of the transaction giving rise to the Change in Control and all compensation, reimbursements and lump-sum payments due Executive must be paid in full by the Company at or prior to such closing. (f) A "Change in Control" shall be deemed to have occurred if: (i) any person, other than the Company or benefit plan of the Company, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended) of any voting security of the Company and immediately after such acquisition such person is, directly or indirectly, the beneficial owner of voting -11- securities representing thirty (30%) or more of the total voting power of all of the then-outstanding voting securities of the Company; (ii) the stockholders of the Company shall approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least seventy-five (75%) of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by at least seventy-five (75%) of the holders of outstanding voting securities of the Company immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iii) the stockholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or a substantial portion of the Company's assets (i.e., fifty (50%) or more of the total assets of the Company). (g) Executive shall be fully "grossed up" by the Company or its successor for any excise taxes that Executive incurs under Section 4999 of the Internal Revenue Code of 1986 (as well as for income tax on the "gross up" amount, as a result of any Change in Control. Such amount will be due and payable by the Company on the date of the Change of Control. (h) Upon the occurrence of a Change of Control, any unvested portion of any awards of stock options or stock grants pursuant to this Agreement or otherwise shall immediately vest and become exercisable to their fullest extent (notwithstanding any vesting periods specified elsewhere) and Executive shall be entitled to all rights and privileges associated with such awards (subject to applicable securities laws and regulations). With respect to option awards which vest pursuant to this paragraph, Executive shall have a period of twelve (12) months from the date of vesting in which to exercise such options. 12. COMPLETE AGREEMENT. This Agreement is not a promise of future employment. Executive has no oral representations, understandings or agreements with the Company or any of its officers, directors or representatives covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between the Company and Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by a writing signed by the party waiving the benefit of such Term. -12- 13. NOTICE. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: c/o Pentacon, Inc. 9821 Katy Freeway, Suite 500 Houston, Texas 77024 To Executive: Mark E. Baldwin 14306 Carolcrest Houston, Texas 77079 Notice shall be deemed given and effective on the earlier of three (3) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 13. 14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof. 15. ARBITRATION. With the exception of paragraphs 3, 7 and 8, any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three (3) arbitrators in Houston, Texas, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") then in effect, provided that the parties may agree to use arbitrators other than those provided by the AAA. The arbitrators shall not have the authority to add to, detract from or modify any provision hereof nor to award punitive damages to any injured party. The arbitrators shall have the authority to order back pay, severance compensation, vesting of options and grants (or cash compensation in lieu of vesting of options), reimbursement of legal fees and costs, including those incurred to enforce this Agreement, and interest thereon in the event the arbitrators determine that Executive was terminated without disability or good cause, as described in paragraphs 4(a)(ii) and 4(a)(iii), respectively, or that the Company has otherwise materially breached this Agreement. A decision by a majority of the arbitration panel shall be final and binding. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. 16. GOVERNING LAW. This Agreement shall in all respects be construed according to the laws of the State of Texas. -13- 17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "EXECUTIVE" MARK E. BALDWIN Mark E. Baldwin "COMPANY:" PENTACON, INC. By: BRIAN FONTANA Name: BRIAN FONTANA Title: SENIOR VICE PRESIDENT -14- EX-10.7 8 EXHIBIT 10.7 CONFORMED GENERAL COUNSEL'S EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between Pentacon, Inc., a Delaware corporation (the "Company"), and Bruce M. Taten ("Executive") is hereby entered into and effective as of the 2nd day of December, 1997. This Agreement hereby supersedes any other employment agreements or understandings, written or oral, between the Company and Executive. RECITALS The following statements are true and correct: As of the date of this Agreement, the Company is engaged primarily in the acquisition and operation of companies engaged in the distribution of fasteners and provision of related inventory services. Executive is employed hereunder by the Company in a confidential relationship wherein Executive, in the course of his employment with the Company, has and will continue to become familiar with and aware of confidential and proprietary information as to the Company's customers and specific manner of doing business, including the processes, techniques and trade secrets utilized by the Company, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company. This confidential and proprietary information is a trade secret and constitutes the valuable goodwill of the Company. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: AGREEMENTS 1. EMPLOYMENT AND DUTIES. (a) The Company hereby employs Executive as Senior Vice President, Chief Administrative Officer, General Counsel and Secretary of the Company. As such, Executive shall have responsibilities, duties and authority reasonably accorded to, expected of and consistent with Executive's position as Senior Vice President, Chief Administrative Officer, General Counsel, and Secretary of the Company and will report directly to the Chief Executive Officer of the Company (the "CEO"). Executive hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(c), agrees to devote substantially all of his business-related time, attention and efforts to promote and further the business and interests of the Company and its affiliates. (b) Executive shall faithfully adhere to all lawful policies established by the Company. -1- (c) Executive shall not, during the term of his employment hereunder, be engaged in any other business activity pursued for gain, profit or other pecuniary advantage if such activity interferes in any material respect with Executive's duties and responsibilities hereunder. The foregoing limitations shall not be construed as prohibiting Executive from (i) making personal investments in such form or manner as will neither require his services in the operation or affairs of the companies or enterprises in which such investments are made nor violate the terms of paragraph 3 hereof; (ii) participating in professional development activities; or (iii) acting as a director of not more than one other corporation which does not compete with the Company provided such representation does not adversely impact the Executive's duties hereunder. (d) Executive cannot be required by the Company to relocate unless the Executive consents to such relocation. The Executive's refusal to relocate shall not be considered "cause" for termination. Furthermore, Executive shall not be required to commute to another location or travel extensively in lieu of relocation. 2. COMPENSATION. For all services rendered by Executive, the Company shall compensate Executive beginning upon the consummation of the initial public offering of the common stock of Pentacon (the "IPO") as follows: (a) BASE SALARY. The base salary payable to Executive shall be $150,000 per year commencing upon the consummation of the IPO, and payable on a regular basis in accordance with the Company's standard payroll procedures but not less than monthly. Such base salary may be increased (but not decreased) from time to time, at the discretion of the Board of Directors of Pentacon ("the Board"), in light of Executive's annual review, position, responsibilities and performance. (b) STOCK OPTION GRANT. Executive shall receive 100,000 options to purchase shares of stock of the Company, exercisable at the price the stock is issued in the IPO. Such options shall vest as follows: 30% shall vest at the end of the second anniversary hereof and 100% shall vest at the end of the third anniversary hereof. (c) BONUS. Executive shall receive an annual bonus to be determined by the Board. Such bonus shall be targeted at 30% of Executive's base salary, subject to yet to-be-determined performance criteria. (d) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Executive shall be entitled to receive additional benefits and compensation from the Company in such form and to such extent as specified below: (i) Payment of all premiums for coverage for Executive and his dependent family members under health, hospitalization, disability, dental, life and other insurance plans that -2- the Company may have in effect from time to time (all in an amount not less than such benefits provided to other Company executives). (ii) Reimbursement for all business travel and other out-of-pocket expenses and professional dues and fees reasonably incurred by Executive in the performance of his services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy. (iii) The Company shall provide Executive with other executive perquisites as may be available to or deemed appropriate for Executive by the Board and Executive shall be eligible for participation in all other Company-wide employee benefits as are available from time to time. (iv) The Executive shall be entitled to three weeks paid vacation per year. 3. NON-COMPETITION AGREEMENT. (a) Executive recognizes that the Company's willingness to enter into this Agreement is based in material part on Executive's agreement to the provisions of this paragraph 3 and that Executive's breach of the provisions of this paragraph 3 could materially damage the Company. Subject to and so long as the Company is not in violation of its obligations under this Agreement, Executive will not, during the period of his employment by or with the Company, and for a period of two (2) years immediately following the termination of his employment under this Agreement, for any reason whatsoever (other than a termination by the Company without cause, or a termination by Executive with Good Reason (as hereinafter defined)), directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business in direct competition with the Company or its subsidiaries, within one hundred (100) miles of where the Company or any of its subsidiaries conduct business, including any territory serviced by the Company or any of its subsidiaries (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of the Company or its subsidiaries (including the respective subsidiaries thereof) in a managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of the Company or its subsidiaries; -3- (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to that time, a customer of the Company or its subsidiaries within the Territory for the purpose of soliciting or selling products or services in direct competition with the Company or its subsidiaries within the Territory; or (iv) call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was, to Executive's knowledge after due inquiry, either called upon by the Company or its subsidiaries or for which the Company or its subsidiaries made an acquisition analysis, for the purpose of acquiring such entity. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Executive from acquiring as an investment not more than two percent (2%) of the capital stock of a competing business, whose stock is traded on a national securities exchange or on an over-the-counter or similar market. (b) Because of the difficulty of measuring economic losses to the Company and its subsidiaries as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to the Company and its subsidiaries for which they would have no other adequate remedy, Executive agrees that the foregoing covenant may be enforced by the Company or its subsidiaries, in the event of breach by him, by injunctions and restraining orders. (c) It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Executive in light of the activities and business of the Company or its subsidiaries, as the case may be, on the date of the execution of this Agreement and the current plans of the Company and its subsidiaries; but it is also the intent of the Company and Executive that such covenants be construed and enforced in accordance with the changing activities, business and locations of the Company and its subsidiaries, as the case may be, throughout the term of this covenant, whether before or after the date of termination of the employment of Executive. For example, if, during the term of this Agreement, the Company or its subsidiaries, as the case may be, engage in new and different activities, enter a new business or establish new locations for their current activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefor, then Executive will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business within 100 miles of its then- established operating location(s) through the term of this covenant. It is further agreed by the parties hereto that, in the event that Executive shall cease to be employed hereunder, and shall enter into a business or pursue other activities not in competition with the Company or its subsidiaries, or similar activities or business in locations the operation of which, under such circumstances, does not violate clause (a) of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Executive's obligations -4- under this paragraph 3, if any, Executive shall not be chargeable with a violation of this paragraph 3 if the Company or its subsidiaries shall thereafter enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. (d) The covenants in this paragraph 3 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. (e) All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Executive against the Company or its subsidiaries, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company or its subsidiaries of such covenants. It is specifically agreed that the period of two (2) years following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Executive made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Executive is in violation of any provision of this paragraph 3. 4. TERM; TERMINATION; RIGHTS ON TERMINATION. (a) The term of this Agreement shall begin on the consummation of the IPO and continue for three (3) years (the "Term"), and, unless terminated sooner as herein provided, shall continue thereafter on a year-to-year basis on the same terms and conditions contained herein in effect as of the time of renewal. This Agreement and Executive's employment may be terminated in any one of the followings ways: (i) DEATH. The death of Executive shall immediately terminate this Agreement with no severance compensation due to Executive's estate. (ii) DISABILITY. If, as a result of incapacity due to physical or mental illness or injury, Executive shall have been absent from his full-time duties hereunder for four (4) consecutive months, then thirty (30) days after receiving written notice (which notice may occur before or after the end of such four (4) month period, but which shall not be effective earlier than the last day of such four (4) month period), the Company may terminate Executive's employment hereunder, provided that Executive is unable to resume his full-time duties at the conclusion of such notice period. Also, Executive may terminate his employment hereunder if his health should become impaired to an extent that makes the continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request made within thirty (30) days of the date of such written statement, Executive shall submit to an examination by a doctor selected by the Company who is reasonably acceptable -5- to Executive or Executive's doctor and such doctor shall have concurred in the conclusion of Executive's doctor. In the event this Agreement is terminated as a result of Executive's disability, Executive shall receive from the Company, in a lump-sum payment due within ten (10) days of the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Initial Term (as hereinafter defined) of this Agreement, provided that such period shall not exceed one (1) year. (iii) GOOD CAUSE. The Company may terminate the Agreement ten (10) days after written notice to Executive for good cause, which shall be: (i) Executive's breach of any material provision of this Agreement (continuing for ten (10) days after receipt of notice of need to cure); (ii) Executive's gross negligence in the performance or intentional nonperformance (continuing for ten (10) days after receipt of written notice of need to cure) of any of Executive's material duties and responsibilities hereunder which is harmful or injurious to the Company; (iii) Executive's dishonesty, fraud or misconduct with respect to the business or affairs of the Company or its subsidiaries which materially and adversely affects the operations or reputation of the Company or its subsidiaries; (iv) Executive's conviction of a felony crime; or (v) alcohol abuse or a confirmed positive illegal drug test result. In the event of a termination for good cause, as enumerated above, Executive shall have no right to any severance compensation but shall receive all compensation due and payable through the date of termination. (iv) WITHOUT CAUSE. At any time after the commencement of employment, Executive may, without cause, and without Good Reason terminate this Agreement and Executive's employment, effective thirty (30) days after written notice is provided to the Company. Executive may only be terminated without cause by the Company during the Term hereof if such termination is approved by at least eighty percent (80%) of the members of the Board of Directors of the Company. Should Executive be terminated by the Company without cause or should Executive terminate with Good Reason during the first three (3) years of the Term (the "Initial Term"), Executive shall receive from the Company, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Initial Term of this Agreement or for two (2) years, whichever amount is greater. Should Executive be terminated by the Company without cause or should Executive terminate with Good Reason after the Initial Term, Executive shall receive from the Company, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect equivalent to one (1) year of salary. Further, any termination without cause by the Company shall operate to shorten the period set forth in paragraph 3(a) and during which the terms of paragraph 3 apply to one (1) year from the date of termination of employment. If Executive resigns or otherwise terminates his employment without cause, rather than the Company terminating his employment pursuant to this paragraph 4(a)(iv), or if Executive terminates without Good Reason, Executive shall receive no severance compensation. -6- Executive shall have "Good Reason" to terminate this Agreement and his employment hereunder upon the occurrence of any of the following events: (a) Executive experiences a reduction in authority, responsibilities or duties to a position of less stature or importance within the Company than the position described in paragraph 1 hereof (b) a material breach of this Agreement by the Company which continues for thirty (30) days after receipt of written notice of breach is received by the Company from the Employee or (c) Executive is required to support (by action or silence) conduct which constitutes dishonesty, fraud or willful misconduct with respect to the business or affairs of the Company or its subsidiaries. Upon termination of this Agreement for any reason provided above, Executive shall be entitled to receive all compensation earned and/or accrued and all benefits and reimbursements due and/or accrued through the effective date of termination. Additional compensation subsequent to termination, if any, will be due and payable to Executive only to the extent and in the manner expressly provided above or in paragraph 11. All other rights and obligations of the Company and Executive under this Agreement shall cease as of the effective date of termination, except that the Executive's obligations under paragraphs 3, 5, 6, 7, 8 and 9 herein and the Company's obligations with respect to stock grants, stock options, and severance shall survive such termination in accordance with their terms. (b) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in Control" of the Company (as defined below) during the Term or any extension or renewal thereof, refer to paragraph 11 below. (c) TREATMENT OF STOCK OPTIONS AND STOCK OPTION GRANTS. Any unvested portion of any awards of stock options or stock grants pursuant to this Agreement in connection with Executive's employment shall be treated in the following manner in the event of a termination of Executive's employment. (i) If Executive's employment is terminated by the Company for cause or if Executive resigns or terminates his employment other than for Good Reason, then any unvested portion of any awards of stock options or stock grants shall lapse or shall be forfeited. (ii) If Executive's employment is terminated by the Company without cause or if Executive terminates his employment for Good Reason, then any unvested portion of any awards of stock options or stock grants shall immediately vest to their fullest extent (notwithstanding any vesting provisions to the contrary) and Executive shall be entitled to all rights and privileges associated with such awards (subject to applicable securities laws and regulations). -7- (iii) If Executive's employment is terminated pursuant to a "Change in Control," then the stock options and stock awards shall be treated in the manner provided in paragraph 11 hereof. 5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Executive by or on behalf of the Company, its subsidiaries or their representatives, vendors or customers which pertain to the business of the Company or its subsidiaries shall be and remain the property of the Company or its subsidiaries, as the case may be, and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the Company or its subsidiaries which is collected by Executive shall be delivered promptly to the Company without request by it upon termination of Executive's employment. 6. INVENTIONS. Executive shall disclose promptly to the Company any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not, which are conceived or made by Executive, solely or jointly with another, during the period of employment, and which are directly related to the business or activities of the Company and which Executive conceives as a result of his employment by the Company. Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. 7. TRADE SECRETS. Executive agrees that he will not, during or after the Term of this Agreement with the Company, disclose the specific terms of the Company's or its subsidiaries' relationships or agreements with their respective significant vendors or customers or any other significant and material trade secret of the Company or its subsidiaries, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except in connection with (a) any legal proceeding of the Company in which such disclosure is required to be made by the Company (b) obtaining the advice of outside consultants engaged by the Company (c) discussions with the Company's outside auditors (d) obtaining or maintenance of the Company's credit facility or (e) otherwise with the consent of the Company's CEO or the Board of Directors. 8. CONFIDENTIALITY. (a) Executive acknowledges and agrees that all Confidential Information (as defined below) of the Company is confidential and a valuable, special and unique asset of the Company that gives the Company an advantage over its actual and potential, current and future competitors. Executive further acknowledges and agrees that Executive owes the Company a fiduciary duty to -8- preserve and protect all Confidential Information from unauthorized disclosure or unauthorized use, that certain Confidential Information constitutes "trade secrets" under applicable laws, and that unauthorized disclosure or unauthorized use of the Company's Confidential Information would irreparably injure the Company. (b) Both during the term of Executive's employment and after the termination of Executive's employment for any reason (including wrongful termination), Executive shall hold all Confidential Information in strict confidence, and shall not use any Confidential Information except for the benefit of the Company, in accordance with the duties assigned to Executive. Executive shall not, at any time (either during or after the term of Executive's employment), disclose any Confidential Information to any person or entity (except other employees of the Company who have a need to know the information in connection with the performance of their employment duties), or copy, reproduce, modify, decompile or reverse engineer any Confidential Information, or remove any Confidential Information from the Company's premises, without the prior consent of the CEO of the Company or the Board of Directors of the Company, or permit any other person to do so. In the event Executive is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or other process) to disclose any Confidential Information, Executive will provide the Company with immediate written notice of any such request or requirement so that the Company may seek an appropriate protective order and/or seek with Executive's cooperation to narrow the request or demand or waive Executive's compliance with the provisions of this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, Executive is, in the opinion of his counsel, compelled to disclose Confidential Information, Executive may disclose only that portion of the Confidential Information which Executive's counsel advises Executive in writing that Executive is compelled to disclose and Executive will exercise his or her best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. In any event, Executive will not oppose action by the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. Executive shall take reasonable precautions to protect the physical security of all documents and other material containing Confidential Information (regardless of the medium on which the Confidential Information is stored). This Agreement applies to all Confidential Information, whether now known or later to become known to Executive. (c) Upon the termination of Executive's employment with the Company for any reason, and upon request of the Company at any other time, Executive shall promptly surrender and deliver to the Company all documents and other written material of any nature containing or pertaining to any Confidential Information and shall not retain any such document or other material. Within five days of any such request, Executive shall certify to the Company in writing that all such materials have been returned. -9- (d) As used in this Agreement, the term "Confidential Information" shall mean any information or material known to or used by or for the Company (whether or not owned or developed by the Company and whether or not developed by Executive) that is not generally known to the public. Confidential information includes, but is not limited to, the following: all trade secrets of the Company; all information that the Company has marked as confidential or has otherwise described to Executive (either in writing or orally) as confidential; all nonpublic information concerning the Company's products, services, prospective products or services, research, product designs, prices, discounts, costs, marketing plans, marketing techniques, market studies, test data, customers, customer lists and records, suppliers and contracts; all Company business records and plans; all Company personnel files; all financial information of or concerning the Company; all information relating to operating system software, application software, software and system methodology, hardware platforms, technical information, inventions, computer programs and listings, source codes, object codes, copyrights and other intellectual property; all technical specifications; any proprietary information belonging to the Company; all computer hardware or software manual; all training or instruction manuals; and all data and all computer system passwords and user codes. 9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his employment by the Company and the performance of his duties hereunder will not violate or be a breach of any agreement with a former employer, client or any other person or entity. Further, Executive agrees to indemnify the Company for any claim, including, but not limited to, attorneys' fees and expenses of investigation, by any such third party that such third party may now have or may hereafter come to have against the Company based upon or arising out of any non-competition agreement, invention or secrecy agreement between Executive and such third party which was in existence as of the date of this Agreement. 10. ASSIGNMENT; BINDING EFFECT. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two (2) sentences and the express provisions of paragraph 11 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. 11. CHANGE IN CONTROL. (a) Unless he elects to terminate this Agreement pursuant to subsections b, c or d below, Executive understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder or that the Company may undergo another type of Change in Control. In the event such a merger or consolidation or other Change in Control is initiated prior to the end -10- of the Term or any extension or renewal thereof, then the provisions of this paragraph 11 shall be applicable. (b) In the event of a Change in Control wherein the Company and Executive have not received written notice at least five (5) business days prior to the date of the event giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business and/or assets that such successor is willing as of the closing to assume and agrees to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company is hereby required to perform, then Executive may, at Executive's sole discretion, elect to terminate Executive's employment on such Change in Control by providing written notice to the Company prior to the closing of the transaction giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(a)(iv) will apply as though the Company had terminated Executive without cause during the Initial Term; however, the amount of the lump sum severance payment due Executive pursuant to this paragraph 11(b) shall be triple the amount calculated under the terms of paragraph 4(a)(iv), but shall in no event exceed four times Executive's base salary. (c) In any Change in Control situation, Executive may, at Executive's sole discretion, elect to terminate Executive's employment upon the effective date of such Change in Control by providing written notice to the Company at least ten (10) business days prior to the closing of the transaction (or ten (10) business days after receipt of notice of such transaction, whichever is later) giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(a)(iv) will apply as though the Company had terminated Executive without cause during the Initial Term; however, the amount of the lump sum severance payment due Executive pursuant to this paragraph 11(c) shall be double the amount calculated under the terms of paragraph 4(a)(iv), but shall in no event exceed three times Executive's base salary. (d) If, on or within one year following the effective date of a Change in Control the Company terminates Executive's employment other than for cause or if Executive's employment with the Company is terminated by the Company within three months before the effective date of a Change in Control other than for cause and it is reasonably demonstrated that such termination (i) was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or anticipation of a Change in Control, then Executive shall receive from Company, in a lump sum payment due on the effective date of termination, the same amount which Executive would have received pursuant to a termination under paragraph 11(b) above. (e) Solely for purposes of applying paragraph 4 under the circumstances described in (b) above, the effective date of termination will be the closing date of the transaction giving rise to the Change in Control and all compensation, reimbursements and lump-sum payments due Executive must be paid in full by the Company at or prior to such closing. -11- (f) A "Change in Control" shall be deemed to have occurred if: (i) any person, other than the Company or benefit plan of the Company, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended) of any voting security of the Company and immediately after such acquisition such person is, directly or indirectly, the beneficial owner of voting securities representing thirty (30%) or more of the total voting power of all of the then-outstanding voting securities of the Company; (ii) the stockholders of the Company shall approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least seventy-five (75%) of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by at least seventy-five (75%) of the holders of outstanding voting securities of the Company immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iii) the stockholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or a substantial portion of the Company's assets (i.e., fifty (50%) or more of the total assets of the Company). (g) Executive shall be fully "grossed up" by the Company or its successor for any excise taxes that Executive incurs under Section 4999 of the Internal Revenue Code of 1986 (as well as for income tax on the "gross up" amount, as a result of any Change in Control. Such amount will be due and payable by the Company on the date of the Change of Control. (h) Upon the occurrence of a Change of Control, any unvested portion of any awards of stock options or stock grants pursuant to this Agreement or otherwise shall immediately vest and become exercisable to their fullest extent (notwithstanding any vesting periods specified elsewhere) and Executive shall be entitled to all rights and privileges associated with such awards (subject to applicable securities laws and regulations). With respect to option awards which vest pursuant to this paragraph, Executive shall have a period of twelve (12) months from the date of vesting in which to exercise such options. 12. COMPLETE AGREEMENT. This Agreement is not a promise of future employment. Executive has no oral representations, understandings or agreements with the Company or any of its officers, directors or representatives covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement -12- between the Company and Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by a writing signed by the party waiving the benefit of such Term. 13. NOTICE. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: c/o Pentacon, Inc. 9821 Katy Freeway, Suite 500 Houston, Texas 77024 To Executive: Bruce M. Taten 3783 Elmora Houston, Texas 77005 Notice shall be deemed given and effective on the earlier of three (3) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 13. 14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof. 15. ARBITRATION. With the exception of paragraphs 3, 7 and 8, any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three (3) arbitrators in Houston, Texas, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") then in effect, provided that the parties may agree to use arbitrators other than those provided by the AAA. The arbitrators shall not have the authority to add to, detract from or modify any provision hereof nor to award punitive damages to any injured party. The arbitrators shall have the authority to order back pay, severance compensation, vesting of options and grants (or cash compensation in lieu of vesting of options), reimbursement of legal fees and costs, including those incurred to enforce this Agreement, and interest thereon in the event the arbitrators determine that Executive was terminated without disability or good cause, as described in paragraphs 4(a)(ii) and 4(a)(iii), respectively, or that the Company has otherwise materially breached this Agreement. -13- A decision by a majority of the arbitration panel shall be final and binding. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. 16. GOVERNING LAW. This Agreement shall in all respects be construed according to the laws of the State of Texas. 17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "EXECUTIVE" BRUCE M. TATEN Bruce M. Taten "COMPANY:" PENTACON, INC. By: MARK E. BALDWIN Name: MARK E. BALDWIN Title: CHIEF EXECUTIVE OFFICER -14- EX-10.8 9 EXHIBIT 10.8 CONFORMED CHIEF FINANCIAL OFFICER'S EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between Pentacon, Inc., a Delaware corporation (the "Company"), and Brian Fontana ("Executive") is hereby entered into and effective as of the 2nd day of December, 1997. This Agreement hereby supersedes any other employment agreements or understandings, written or oral, between the Company and Executive. RECITALS The following statements are true and correct: As of the date of this Agreement, the Company is engaged primarily in the acquisition and operation of companies engaged in the distribution of fasteners and provision of related inventory services. Executive is employed hereunder by the Company in a confidential relationship wherein Executive, in the course of his employment with the Company, has and will continue to become familiar with and aware of confidential and proprietary information as to the Company's customers and specific manner of doing business, including the processes, techniques and trade secrets utilized by the Company, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company. This confidential and proprietary information is a trade secret and constitutes the valuable goodwill of the Company. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: AGREEMENTS 1. EMPLOYMENT AND DUTIES. (a) The Company hereby employs Executive as Chief Financial Officer of the Company. As such, Executive shall have responsibilities, duties and authority reasonably accorded to, expected of and consistent with Executive's position as Chief Financial Officer of the Company and will report directly to the Chief Executive Officer of the Company (the "CEO"). Executive hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(c), agrees to devote substantially all of his business-related time, attention and efforts to promote and further the business and interests of the Company and its affiliates. (b) Executive shall faithfully adhere to all lawful policies established by the Company. -1- (c) Executive shall not, during the term of his employment hereunder, be engaged in any other business activity pursued for gain, profit or other pecuniary advantage if such activity interferes in any material respect with Executive's duties and responsibilities hereunder. The foregoing limitations shall not be construed as prohibiting Executive from (i) making personal investments in such form or manner as will neither require his services in the operation or affairs of the companies or enterprises in which such investments are made nor violate the terms of paragraph 3 hereof; (ii) participating in professional development activities; or (iii) acting as a director of not more than one other corporation which does not compete with the Company provided such representation does not adversely impact the Executive's duties hereunder. (d) Executive cannot be required by the Company to relocate unless the Executive consents to such relocation. The Executive's refusal to relocate shall not be considered "cause" for termination. Furthermore, Executive shall not be required to commute to another location or travel extensively in lieu of relocation. 2. COMPENSATION. For all services rendered by Executive, the Company shall compensate Executive beginning upon the consummation of the initial public offering of the common stock of Pentacon (the "IPO") as follows: (a) BASE SALARY. The base salary payable to Executive shall be $150,000 per year commencing upon the consummation of the IPO, and payable on a regular basis in accordance with the Company's standard payroll procedures but not less than monthly. Such base salary may be increased (but not decreased) from time to time, at the discretion of the Board of Directors of the Company (the "Board"), in light of Executive's annual review, position, responsibilities and performance. (b) STOCK OPTION GRANT. Executive shall receive 85,000 options to purchase shares of stock of the Company, exercisable at the price the stock is issued in the IPO. Such options shall vest as follows: 30% shall vest at the end of the second anniversary hereof and 100% shall vest at the end of the third anniversary hereof. (c) BONUS. Executive shall receive an annual bonus to be determined by the Board. Such bonus shall be targeted at 30% of Executive's base salary, subject to yet to-be-determined performance criteria. (d) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Executive shall be entitled to receive additional benefits and compensation from the Company in such form and to such extent as specified below: (i) Payment of all premiums for coverage for Executive and his dependent family members under health, hospitalization, disability, dental, life and other insurance plans that -2- the Company may have in effect from time to time (all in an amount not less than such benefits provided to other Company executives). (ii) Reimbursement for all business travel and other out-of-pocket expenses and professional dues and fees reasonably incurred by Executive in the performance of his services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy. (iii) The Company shall provide Executive with other executive perquisites as may be available to or deemed appropriate for Executive by the Board and Executive shall be eligible for participation in all other Company-wide employee benefits as are available from time to time. (iv) The Executive shall be entitled to three weeks paid vacation per year. 3. NON-COMPETITION AGREEMENT. (a) Executive recognizes that the Company's willingness to enter into this Agreement is based in material part on Executive's agreement to the provisions of this paragraph 3 and that Executive's breach of the provisions of this paragraph 3 could materially damage the Company. Subject to and so long as the Company is not in violation of its obligations under this Agreement, Executive will not, during the period of his employment by or with the Company, and for a period of two (2) years immediately following the termination of his employment under this Agreement, for any reason whatsoever (other than a termination by the Company without cause, or a termination by Executive with Good Reason (as hereinafter defined)), directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business in direct competition with the Company or its subsidiaries, within one hundred (100) miles of where the Company or any of its subsidiaries conduct business, including any territory serviced by the Company or any of its subsidiaries (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of the Company or its subsidiaries (including the respective subsidiaries thereof) in a managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of the Company or its subsidiaries; -3- (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to that time, a customer of the Company or its subsidiaries within the Territory for the purpose of soliciting or selling products or services in direct competition with the Company or its subsidiaries within the Territory; or (iv) call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was, to Executive's knowledge after due inquiry, either called upon by the Company or its subsidiaries or for which the Company or its subsidiaries made an acquisition analysis, for the purpose of acquiring such entity. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Executive from acquiring as an investment not more than two percent (2%) of the capital stock of a competing business, whose stock is traded on a national securities exchange or on an over-the-counter or similar market. (b) Because of the difficulty of measuring economic losses to the Company and its subsidiaries as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to the Company and its subsidiaries for which they would have no other adequate remedy, Executive agrees that the foregoing covenant may be enforced by the Company or its subsidiaries, in the event of breach by him, by injunctions and restraining orders. (c) It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Executive in light of the activities and business of the Company or its subsidiaries, as the case may be, on the date of the execution of this Agreement and the current plans of the Company and its subsidiaries; but it is also the intent of the Company and Executive that such covenants be construed and enforced in accordance with the changing activities, business and locations of the Company and its subsidiaries, as the case may be, throughout the term of this covenant, whether before or after the date of termination of the employment of Executive. For example, if, during the term of this Agreement, the Company or its subsidiaries, as the case may be, engage in new and different activities, enter a new business or establish new locations for their current activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefor, then Executive will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business within 100 miles of its then- established operating location(s) through the term of this covenant. It is further agreed by the parties hereto that, in the event that Executive shall cease to be employed hereunder, and shall enter into a business or pursue other activities not in competition with the Company or its subsidiaries, or similar activities or business in locations the operation of which, under such circumstances, does not violate clause (a) of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Executive's obligations -4- under this paragraph 3, if any, Executive shall not be chargeable with a violation of this paragraph 3 if the Company or its subsidiaries shall thereafter enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. (d) The covenants in this paragraph 3 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. (e) All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Executive against the Company or its subsidiaries, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company or its subsidiaries of such covenants. It is specifically agreed that the period of two (2) years following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Executive made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Executive is in violation of any provision of this paragraph 3. 4. TERM; TERMINATION; RIGHTS ON TERMINATION. (a) The term of this Agreement shall begin on the consummation of the IPO and continue for three (3) years (the "Term"), and, unless terminated sooner as herein provided, shall continue thereafter on a year-to-year basis on the same terms and conditions contained herein in effect as of the time of renewal. This Agreement and Executive's employment may be terminated in any one of the followings ways: (i) DEATH. The death of Executive shall immediately terminate this Agreement with no severance compensation due to Executive's estate. (ii) DISABILITY. If, as a result of incapacity due to physical or mental illness or injury, Executive shall have been absent from his full-time duties hereunder for four (4) consecutive months, then thirty (30) days after receiving written notice (which notice may occur before or after the end of such four (4) month period, but which shall not be effective earlier than the last day of such four (4) month period), the Company may terminate Executive's employment hereunder, provided that Executive is unable to resume his full-time duties at the conclusion of such notice period. Also, Executive may terminate his employment hereunder if his health should become impaired to an extent that makes the continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request made within thirty (30) days of the date of such written statement, Executive shall submit to an examination by a doctor selected by the Company who is reasonably acceptable -5- to Executive or Executive's doctor and such doctor shall have concurred in the conclusion of Executive's doctor. In the event this Agreement is terminated as a result of Executive's disability, Executive shall receive from the Company, in a lump-sum payment due within ten (10) days of the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Initial Term (as hereinafter defined) of this Agreement, provided that such period shall not exceed one (1) year. (iii) GOOD CAUSE. The Company may terminate the Agreement ten (10) days after written notice to Executive for good cause, which shall be: (i) Executive's breach of any material provision of this Agreement (continuing for ten (10) days after receipt of notice of need to cure); (ii) Executive's gross negligence in the performance or intentional nonperformance (continuing for ten (10) days after receipt of written notice of need to cure) of any of Executive's material duties and responsibilities hereunder which is harmful or injurious to the Company; (iii) Executive's dishonesty, fraud or misconduct with respect to the business or affairs of the Company or its subsidiaries which materially and adversely affects the operations or reputation of the Company or its subsidiaries; (iv) Executive's conviction of a felony crime; or (v) alcohol abuse or a confirmed positive illegal drug test result. In the event of a termination for good cause, as enumerated above, Executive shall have no right to any severance compensation but shall receive all compensation due and payable through the date of termination. (iv) WITHOUT CAUSE. At any time after the commencement of employment, Executive may, without cause, and without Good Reason terminate this Agreement and Executive's employment, effective thirty (30) days after written notice is provided to the Company. Executive may only be terminated without cause by the Company during the Term hereof if such termination is approved by at least eighty percent (80%) of the members of the Board of Directors of the Company. Should Executive be terminated by the Company without cause or should Executive terminate with Good Reason during the first three (3) years of the Term (the "Initial Term"), Executive shall receive from the Company, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect for whatever time period is remaining under the Initial Term of this Agreement or for two (2) years, whichever amount is greater. Should Executive be terminated by the Company without cause or should Executive terminate with Good Reason after the Initial Term, Executive shall receive from the Company, in a lump-sum payment due on the effective date of termination, the base salary at the rate then in effect equivalent to one (1) year of salary. Further, any termination without cause by the Company shall operate to shorten the period set forth in paragraph 3(a) and during which the terms of paragraph 3 apply to one (1) year from the date of termination of employment. If Executive resigns or otherwise terminates his employment without cause, rather than the Company terminating his employment pursuant to this paragraph 4(a)(iv), or if Executive terminates without Good Reason, Executive shall receive no severance compensation. -6- Executive shall have "Good Reason" to terminate this Agreement and his employment hereunder upon the occurrence of any of the following events: (a) Executive experiences a reduction in authority, responsibilities or duties to a position of less stature or importance within the Company than the position described in paragraph 1 hereof (b) a material breach of this Agreement by the Company which continues for thirty (30) days after receipt of written notice of breach is received by the Company from the Employee or (c) Executive is required to support (by action or silence) conduct which constitutes dishonesty, fraud or willful misconduct with respect to the business or affairs of the Company or its subsidiaries. Upon termination of this Agreement for any reason provided above, Executive shall be entitled to receive all compensation earned and/or accrued and all benefits and reimbursements due and/or accrued through the effective date of termination. Additional compensation subsequent to termination, if any, will be due and payable to Executive only to the extent and in the manner expressly provided above or in paragraph 11. All other rights and obligations of the Company and Executive under this Agreement shall cease as of the effective date of termination, except that the Executive's obligations under paragraphs 3, 5, 6, 7, 8 and 9 herein and the Company's obligations with respect to stock grants, stock options, and severance shall survive such termination in accordance with their terms. (b) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in Control" of the Company (as defined below) during the Term or any extension or renewal thereof, refer to paragraph 11 below. (c) TREATMENT OF STOCK OPTIONS AND STOCK OPTION GRANTS. Any unvested portion of any awards of stock options or stock grants pursuant to this Agreement in connection with Executive's employment shall be treated in the following manner in the event of a termination of Executive's employment. (i) If Executive's employment is terminated by the Company for cause or if Executive resigns or terminates his employment other than for Good Reason, then any unvested portion of any awards of stock options or stock grants shall lapse or shall be forfeited. (ii) If Executive's employment is terminated by the Company without cause or if Executive terminates his employment for Good Reason, then any unvested portion of any awards of stock options or stock grants shall immediately vest to their fullest extent (notwithstanding any vesting provisions to the contrary) and Executive shall be entitled to all rights and privileges associated with such awards (subject to applicable securities laws and regulations). -7- (iii) If Executive's employment is terminated pursuant to a "Change in Control," then the stock options and stock awards shall be treated in the manner provided in paragraph 11 hereof. 5. RETURN OF COMPANY PROPERTY. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Executive by or on behalf of the Company, its subsidiaries or their representatives, vendors or customers which pertain to the business of the Company or its subsidiaries shall be and remain the property of the Company or its subsidiaries, as the case may be, and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the Company or its subsidiaries which is collected by Executive shall be delivered promptly to the Company without request by it upon termination of Executive's employment. 6. INVENTIONS. Executive shall disclose promptly to the Company any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not, which are conceived or made by Executive, solely or jointly with another, during the period of employment, and which are directly related to the business or activities of the Company and which Executive conceives as a result of his employment by the Company. Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. 7. TRADE SECRETS. Executive agrees that he will not, during or after the Term of this Agreement with the Company, disclose the specific terms of the Company's or its subsidiaries' relationships or agreements with their respective significant vendors or customers or any other significant and material trade secret of the Company or its subsidiaries, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except in connection with (a) any legal proceeding of the Company in which such disclosure is required to be made by the Company (b) obtaining the advice of outside consultants engaged by the Company (c) discussions with the Company's outside auditors (d) obtaining or maintenance of the Company's credit facility or (e) otherwise with the consent of the Company's CEO or the Board of Directors. 8. CONFIDENTIALITY. (a) Executive acknowledges and agrees that all Confidential Information (as defined below) of the Company is confidential and a valuable, special and unique asset of the Company that gives the Company an advantage over its actual and potential, current and future competitors. Executive further acknowledges and agrees that Executive owes the Company a fiduciary duty to -8- preserve and protect all Confidential Information from unauthorized disclosure or unauthorized use, that certain Confidential Information constitutes "trade secrets" under applicable laws, and that unauthorized disclosure or unauthorized use of the Company's Confidential Information would irreparably injure the Company. (b) Both during the term of Executive's employment and after the termination of Executive's employment for any reason (including wrongful termination), Executive shall hold all Confidential Information in strict confidence, and shall not use any Confidential Information except for the benefit of the Company, in accordance with the duties assigned to Executive. Executive shall not, at any time (either during or after the term of Executive's employment), disclose any Confidential Information to any person or entity (except other employees of the Company who have a need to know the information in connection with the performance of their employment duties), or copy, reproduce, modify, decompile or reverse engineer any Confidential Information, or remove any Confidential Information from the Company's premises, without the prior consent of the CEO of the Company or the Board of Directors of the Company or permit any other person to do so. In the event Executive is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or other process) to disclose any Confidential Information, Executive will provide the Company with immediate written notice of any such request or requirement so that the Company may seek an appropriate protective order and/or seek with Executive's cooperation to narrow the request or demand or waive Executive's compliance with the provisions of this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, Executive is, in the opinion of his counsel, compelled to disclose Confidential Information, Executive may disclose only that portion of the Confidential Information which Executive's counsel advises Executive in writing that Executive is compelled to disclose and Executive will exercise his or her best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. In any event, Executive will not oppose action by the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. Executive shall take reasonable precautions to protect the physical security of all documents and other material containing Confidential Information (regardless of the medium on which the Confidential Information is stored). This Agreement applies to all Confidential Information, whether now known or later to become known to Executive. (c) Upon the termination of Executive's employment with the Company for any reason, and upon request of the Company at any other time, Executive shall promptly surrender and deliver to the Company all documents and other written material of any nature containing or pertaining to any Confidential Information and shall not retain any such document or other material. Within five days of any such request, Executive shall certify to the Company in writing that all such materials have been returned. -9- (d) As used in this Agreement, the term "Confidential Information" shall mean any information or material known to or used by or for the Company (whether or not owned or developed by the Company and whether or not developed by Executive) that is not generally known to the public. Confidential information includes, but is not limited to, the following: all trade secrets of the Company; all information that the Company has marked as confidential or has otherwise described to Executive (either in writing or orally) as confidential; all nonpublic information concerning the Company's products, services, prospective products or services, research, product designs, prices, discounts, costs, marketing plans, marketing techniques, market studies, test data, customers, customer lists and records, suppliers and contracts; all Company business records and plans; all Company personnel files; all financial information of or concerning the Company; all information relating to operating system software, application software, software and system methodology, hardware platforms, technical information, inventions, computer programs and listings, source codes, object codes, copyrights and other intellectual property; all technical specifications; any proprietary information belonging to the Company; all computer hardware or software manual; all training or instruction manuals; and all data and all computer system passwords and user codes. 9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his employment by the Company and the performance of his duties hereunder will not violate or be a breach of any agreement with a former employer, client or any other person or entity. Further, Executive agrees to indemnify the Company for any claim, including, but not limited to, attorneys' fees and expenses of investigation, by any such third party that such third party may now have or may hereafter come to have against the Company based upon or arising out of any non-competition agreement, invention or secrecy agreement between Executive and such third party which was in existence as of the date of this Agreement. 10. ASSIGNMENT; BINDING EFFECT. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two (2) sentences and the express provisions of paragraph 11 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. 11. CHANGE IN CONTROL. (a) Unless he elects to terminate this Agreement pursuant to subsections b, c or d below, Executive understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder or that the Company may undergo another type of Change in Control. In the event such a merger or consolidation or other Change in Control is initiated prior to the end -10- of the Term or any extension or renewal thereof, then the provisions of this paragraph 11 shall be applicable. (b) In the event of a Change in Control wherein the Company and Executive have not received written notice at least five (5) business days prior to the date of the event giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business and/or assets that such successor is willing as of the closing to assume and agrees to perform the Company's obligations under this Agreement in the same manner and to the same extent that the Company is hereby required to perform, then Executive may, at Executive's sole discretion, elect to terminate Executive's employment on such Change in Control by providing written notice to the Company prior to the closing of the transaction giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(a)(iv) will apply as though the Company had terminated Executive without cause during the Initial Term; however, the amount of the lump sum severance payment due Executive pursuant to this paragraph 11(b) shall be triple the amount calculated under the terms of paragraph 4(a)(iv), but shall in no event exceed four times Executive's base salary. (c) In any Change in Control situation, Executive may, at Executive's sole discretion, elect to terminate Executive's employment upon the effective date of such Change in Control by providing written notice to the Company at least ten (10) business days prior to the closing of the transaction (or ten (10) business days after receipt of notice of such transaction, whichever is later) giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(a)(iv) will apply as though the Company had terminated Executive without cause during the Initial Term; however, the amount of the lump sum severance payment due Executive pursuant to this paragraph 11(c) shall be double the amount calculated under the terms of paragraph 4(a)(iv), but shall in no event exceed three times Executive's base salary. (d) If, on or within one year following the effective date of a Change in Control the Company terminates Executive's employment other than for cause or if Executive's employment with the Company is terminated by the Company within three months before the effective date of a Change in Control other than for cause and it is reasonably demonstrated that such termination (i) was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or anticipation of a Change in Control, then Executive shall receive from Company, in a lump sum payment due on the effective date of termination, the same amount which Executive would have received pursuant to a termination under paragraph 11(b) above. (e) Solely for purposes of applying paragraph 4 under the circumstances described in (b) above, the effective date of termination will be the closing date of the transaction giving rise to the Change in Control and all compensation, reimbursements and lump-sum payments due Executive must be paid in full by the Company at or prior to such closing. -11- (f) A "Change in Control" shall be deemed to have occurred if: (i) any person, other than the Company or benefit plan of the Company, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended) of any voting security of the Company and immediately after such acquisition such person is, directly or indirectly, the beneficial owner of voting securities representing thirty (30%) or more of the total voting power of all of the then-outstanding voting securities of the Company; (ii) the stockholders of the Company shall approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least seventy-five (75%) of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by at least seventy-five (75%) of the holders of outstanding voting securities of the Company immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iii) the stockholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or a substantial portion of the Company's assets (i.e., fifty (50%) or more of the total assets of the Company). (g) Executive shall be fully "grossed up" by the Company or its successor for any excise taxes that Executive incurs under Section 4999 of the Internal Revenue Code of 1986 (as well as for income tax on the "gross up" amount, as a result of any Change in Control. Such amount will be due and payable by the Company on the date of the Change of Control. (h) Upon the occurrence of a Change of Control, any unvested portion of any awards of stock options or stock grants pursuant to this Agreement or otherwise shall immediately vest and become exercisable to their fullest extent (notwithstanding any vesting periods specified elsewhere) and Executive shall be entitled to all rights and privileges associated with such awards (subject to applicable securities laws and regulations). With respect to option awards which vest pursuant to this paragraph, Executive shall have a period of twelve (12) months from the date of vesting in which to exercise such options. 12. COMPLETE AGREEMENT. This Agreement is not a promise of future employment. Executive has no oral representations, understandings or agreements with the Company or any of its officers, directors or representatives covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement -12- between the Company and Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by a writing signed by the party waiving the benefit of such Term. 13. NOTICE. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: c/o Pentacon, Inc. 9821 Katy Freeway, Suite 500 Houston, Texas 77024 To Executive: Brian Fontana 303 Hunters Trail Houston, Texas 77024 Notice shall be deemed given and effective on the earlier of three (3) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 13. 14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof. 15. ARBITRATION. With the exception of paragraphs 3, 7 and 8, any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three (3) arbitrators in Houston, Texas, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") then in effect, provided that the parties may agree to use arbitrators other than those provided by the AAA. The arbitrators shall not have the authority to add to, detract from or modify any provision hereof nor to award punitive damages to any injured party. The arbitrators shall have the authority to order back pay, severance compensation, vesting of options and grants (or cash compensation in lieu of vesting of options), reimbursement of legal fees and costs, including those incurred to enforce this Agreement, and interest thereon in the event the arbitrators determine that Executive was terminated without disability or good cause, as described in paragraphs 4(a)(ii) and 4(a)(iii), respectively, or that the Company has otherwise materially breached this Agreement. -13- A decision by a majority of the arbitration panel shall be final and binding. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. 16. GOVERNING LAW. This Agreement shall in all respects be construed according to the laws of the State of Texas. 17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "EXECUTIVE" BRIAN FONTANA Brian Fontana "COMPANY:" PENTACON, INC. By: MARK E. BALDWIN Name: MARK E. BALDWIN Title: CHIEF EXECUTIVE OFFICER -14- EX-10.10 10 EXHIBIT 10.10 PENTACON, INC. 1998 STOCK PLAN SECTION 1. PURPOSE OF THE PLAN. The Pentacon, Inc. 1998 Stock Plan (the "Plan") is intended to promote the interests of Pentacon, Inc., a Delaware corporation (the "Company"), by encouraging officers, employees, directors and consultants of the Company, its subsidiaries and affiliated entities to acquire or increase their equity interest in the Company and to provide a means whereby they may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company thereby advancing the interests of the Company and its stockholders. The Plan is also contemplated to enhance the ability of the Company, its subsidiaries and affiliated entities to attract and retain the services of individuals who are essential for the growth and profitability of the Company. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: "Affiliate" shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee. "Award" shall mean any Option, Restricted Stock, Performance Award, Phantom Shares, Bonus Shares, Other Stock-Based Award or Cash Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Bonus Shares" shall mean an award of Shares granted pursuant to Section 6(e) of the Plan. "Cash Award" shall mean an award payable in cash granted pursuant to Section 6(g) of the Plan. "Change in Control" shall mean, and shall be deemed to have occurred if: (i) any person, other than the Company or any benefit plan of the Company, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the -1- Exchange Act) of any voting security of the Company and immediately after such acquisition such person is, directly or indirectly, the beneficial owner of voting securities representing 30% or more of the total voting power of all of the then-outstanding voting securities of the Company; (ii) the stockholders of the Company shall approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by at least 75% of the holders of outstanding voting securities of the Company immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iii) the stockholders of the Company shall approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or a substantial portion of the Company's assets (i.e., 50% or more of the total assets of the Company). "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations thereunder. "Committee" shall mean the Board or any committee of the Board designated, from time to time, by the Board to act as the Committee under the Plan. "Consultant" shall mean any individual who renders consulting services or advice to the Company or an Affiliate for a fee, excluding any individual who is a Director. "Director" shall mean each individual who is a member of the Board, other than an Employee. "Director Option" shall mean an NQO granted under Section 6(b) of the Plan. "Employee" shall mean any employee of the Company or an Affiliate or any person who has been extended an offer of employment by the Company or an Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, with respect to Shares, the closing price of a Share quoted on the Composite Tape, or if the Shares are not listed on the New York Stock Exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed, or if the Shares are not listed on any such stock exchange, the last sale price, or if none is -2- reported, the highest closing bid quotation on the National Association of Securities Dealers, Inc., Automated Quotations System or any successor system then in use on the date of grant, or if none are available on such day, on the next preceding day for which are available, or if no such quotations are available, the fair market value on the date of grant of a Share as determined in good faith by the Committee. In the event the Shares are not publicly traded at the time a determination of its fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee. "Incentive Stock Option" or "ISO" shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. "Non-Qualified Stock Option" or "NQO" shall mean an option granted under Sections 6(a) or 6(b) of the Plan that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Other Stock-Based Award" shall mean an award granted pursuant to Section 6(h) of the Plan that is not otherwise specifically provided for, the value of which is based in whole or in part upon the value of a Share. "Participant" shall mean any Employee, Consultant or Director granted an Award under the Plan. "Performance Award" shall mean any right granted under Section 6(d) of the Plan. "Person" shall mean individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Phantom Shares" shall mean an Award of the right to receive Shares issued at the end of a Restricted Period which is granted pursuant to Section 6(f) of the Plan. "Restricted Period" shall mean the period established by the Committee with respect to an Award during which the Award either remains subject to forfeiture or is not exercisable by the Participant. "Restricted Stock" shall mean any Share, prior to the lapse of restrictions thereon, granted under Sections 6(c) of the Plan. "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission, or any successor thereto. -3- "Shares" or "Common Shares" or "Common Stock" shall mean the common stock of the Company, $0.01 par value, and such other securities or property as may become the subject of Awards of the Plan. "Substitute Award" shall mean Awards granted in assumption of, or in substitution for, outstanding awards previously granted by (i) a company acquired by the Company or one or more of its Affiliates, or (ii) a company with which the Company or one or more of its Affiliates combines. SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of the members of the Committee who are present at any meeting thereof at which a quorum is present, or acts unanimously approved by the members of the Committee in writing, shall be the acts of the Committee. Subject to the following, the Committee, in its sole discretion, may delegate any or all of its powers and duties under the Plan, including the power to grant Awards under the Plan, to the Chief Executive Officer of the Company, subject to such limitations on such delegated powers and duties as the Committee may impose. Upon any such delegation all references in the Plan to the "Committee", other than in Section 7, shall be deemed to include the Chief Executive Officer; provided, however, that such delegation shall not limit the Chief Executive Officer's right to receive Awards under the Plan. Notwithstanding the foregoing, the Chief Executive Officer may not grant Awards to, or take any action with respect to any Award previously granted to, a person who is an officer or a member of the Board. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to a Participant; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to an Award made under the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder and any Employee. -4- SECTION 4. SHARES AVAILABLE FOR AWARDS. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 1,700,000. If any Award is forfeited or otherwise terminates or is canceled without the delivery of Shares or other consideration, then the Shares covered by such Award, to the extent of such forfeiture, termination or cancellation, shall again be Shares with respect to which Awards may be granted. (b) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. (c) ADJUSTMENTS. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that with respect to Awards of Incentive Stock Options and Awards intended to qualify as performance based compensation under Section 162(m)(4)(C) of the Code, no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or would cause such Award to fail to so qualify under Section 162(m) of the Code, as the case may be, or any successor provisions thereto; and provided, further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number. SECTION 5. ELIGIBILITY. Any Employee or Consultant shall be eligible to be designated a Participant; a Director shall automatically be a Participant pursuant to Section 6(b). SECTION 6. AWARDS. (a) OPTIONS. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Participants (other than Directors) to whom Options shall be granted, the number of Shares to be covered by each Option (no Employee or Consultant may receive Options with respect to more than 250,000 Shares during any calendar year), the purchase price therefor and the conditions and limitations applicable to the exercise of the Option, including the following terms and -5- conditions and such additional terms and conditions, as the Committee shall determine, that are not inconsistent with the provisions of the Plan. (i) EXERCISE PRICE. The purchase price per Share purchasable under an Option shall be determined by the Committee at the time the Option is granted. (ii) TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, and the method or methods by which, and the form or forms (which may include, without limitation, cash, check acceptable to the Company, Shares already-owned for more than six months, a "cashless-broker" exercise (through procedures approved by the Company), other securities or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price) in which payment of the exercise price with respect thereto may be made or deemed to have been made. (iii) INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. Incentive Stock Options may be granted only to employees of the Company and its "parent corporation" and "subsidiary corporations", as defined in Section 424 of the Code. (b) DIRECTOR OPTIONS. Each Director automatically shall be a Participant and receive Options as provided below. A Director shall not be eligible to receive any other Award under the Plan, other than the automatic Director Option grants pursuant to this Section 6(b). (i) INITIAL GRANTS. Each Director who serves in such capacity immediately following the closing of the initial public offering of the Shares shall automatically receive, on such date, an NQO for 15,000 Shares. Each individual who is elected or appointed as a Director for the first time after such date shall automatically receive, on the date of his or her election or appointment, an NQO for 15,000 Shares. (ii) ANNUAL GRANTS. Each Director who serves in such capacity on the day following the Annual Meeting of the Stockholders of the Company in each year that this Plan is in effect, beginning with the 1999 Annual Meeting (other than a Director who received a grant pursuant to Section 6(b)(i) on the preceding day), shall automatically receive on such day an NQO for 5,000 Shares. (iii) EXERCISE PRICE. Subject to adjustment pursuant to Section 4(c), the purchase price per Share purchasable under a Director Option shall be the Fair Market Value per Share at the time the Director Option is granted. -6- (iv) VESTING. Each Director Option shall be 100% vested (exercisable) on the date of grant of such Director Option. (v) METHOD OF EXERCISE. A Director Option may be exercised in whole or in part by cash, check acceptable to the Company, Shares already owned for more than six months, a "cashless-broker" exercise (through procedures approved by the Company), or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price. (vi) TERM. Each Director Option shall expire 10 years from its date of grant, but shall be subject to earlier termination as follows: Director Options, must be exercised within three months of the date the Participant ceases to serve as a member of the Board, unless such termination results from the Participant's death or disability, in which case the Participant's Director Options may be exercised by the Participant's legal representative or the person to whom the Participant's rights shall pass by will or the laws of descent and distribution, as the case may be, within one year from the date of termination; provided, however, that such event shall not extend the normal expiration date of such Director Options. (vii) AUTOMATIC LIMITS. In the event that the number of Shares available for grants under this Plan is insufficient to make all automatic grants provided for in paragraphs (i) or (ii) above on the applicable date, then all Directors who are entitled to a grant on such date shall share ratably in the number of Shares then available for grant under this Plan, and shall have no right to receive a grant with respect to the deficiencies in the number of available Shares and all future grants under this Section 6(b) shall terminate. (c) RESTRICTED STOCK. Subject to the provisions of the Plan, the Committee shall have the authority to determine the Participants (other than Directors) to whom Restricted Stock shall be granted, the number of Shares of Restricted Stock to be granted to each such Participant, the duration of the Restricted Period during which, and the conditions, including the performance criteria, if any, under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of such Awards. (i) DIVIDENDS. Dividends paid on Restricted Stock may be paid directly to the Participant, may be subject to risk of forfeiture and/or transfer restrictions during any period established by the Committee or sequestered and held in a bookkeeping cash account (with or without interest) or reinvested on an immediate or deferred basis in additional shares of Common Stock, which credit or shares may be subject to the same restrictions as the underlying Award or such other restrictions, all as determined by the Committee in its discretion. (ii) REGISTRATION. Any Restricted Stock may be evidenced in such manner as the Committee shall deem appropriate, including, without limitation, book-entry registration or -7- issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Restricted Stock granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. (iii) FORFEITURE AND RESTRICTIONS LAPSE. Except as otherwise determined by the Committee or the terms of the Award or other agreement that granted the Restricted Stock, upon termination of a Participant's employment (as determined under criteria established by the Committee) for any reason (other than a Change in Control) during the applicable Restricted Period, all Restricted Stock shall be forfeited by the Participant and re-acquired by the Company. The Committee may, when it finds that a waiver would be in the best interests of the Company and not cause such Award, if it is intended to qualify as performance based compensation under Section 162(m) of the Code, to fail to so qualify under Section 162(m) of the Code, waive in whole or in part any or all remaining restrictions with respect to such Participant's Restricted Stock. Unrestricted Shares, evidenced in such manner as the Committee shall deem appropriate, shall be issued to the holder of Restricted Stock promptly after the applicable restrictions have lapsed or otherwise been satisfied. (iv) TRANSFER RESTRICTIONS. During the Restricted Period, Restricted Stock will be subject to the limitations on transfer as provided in Section 6(j)(iii). (v) LIMIT. The maximum number of Shares of Restricted Stock that may be granted to any Participant during any year shall not exceed 250,000 Shares. (d) PERFORMANCE AWARDS. The Committee shall have the authority to determine the Participants (other than Directors) who shall receive a Performance Award, which shall be denominated as a cash amount at the time of grant and confer on the Participant the right to receive payment of such Award, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish with respect to the Award. (i) TERMS AND CONDITIONS. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount of any payment or transfer to be made pursuant to any Performance Award. (ii) PAYMENT OF PERFORMANCE AWARDS. Performance Awards may be paid (in cash and/or in Shares, in the sole discretion of the Committee) in a lump sum or in installments following the close of the performance period, in accordance with procedures established by the Committee with respect to such Award. (iii) LIMIT. The maximum number of Performance Awards that may be granted to any Participant during any year shall not exceed $2 million. -8- (e) BONUS SHARES. The Committee shall have the authority, in its discretion, to grant Bonus Shares to Participants (other than Directors). Each Bonus Share shall constitute a transfer of an unrestricted Share to the Participant, without other payment therefor. (f) PHANTOM SHARES. The Committee shall have the authority to grant Awards of Phantom Shares to Participants (other than Directors) upon such terms and conditions as the Committee may determine. (i) TERMS AND CONDITIONS. Each Phantom Share Award shall constitute an agreement by the Company to issue or transfer a specified number of Shares or pay an amount of cash equal to a specified number of Shares, or a combination thereof to the Participant in the future, subject to the fulfillment during the Restricted Period of such conditions, including performance objectives, if any, as the Committee may specify at the date of grant. During the Restricted Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Phantom Shares and shall not have any right to vote such shares. (ii) DIVIDENDS. Any Phantom Share award may provide that any or all dividends or other distributions paid on Shares during the Restricted Period be credited in a cash bookkeeping account (without interest) or that equivalent additional Phantom Shares be awarded, which account or shares may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine. (iii) LIMIT. The maximum number of Phantom Shares that may be awarded to any Participant during any year shall not exceed 250,000 Phantom Shares. (g) CASH AWARDS. The Committee shall have the authority to determine the Participants (other than Directors) to whom Cash Awards shall be granted, the amount, and the terms or conditions, if any, of such Award. A Cash Award may be granted (simultaneously or subsequently) separately or in tandem with another Award and may entitle a Participant to receive a specified amount of cash from the Company upon such other Award becoming taxable to the Participant, which cash amount may be based on a formula relating to the anticipated taxable income associated with such other Award and the payment of the Cash Award. (h) OTHER STOCK-BASED AWARDS. The Committee may also grant to Participants (other than Directors) an Other Stock-Based Award, which shall consist of a right which is an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares as is deemed by the Committee to be consistent with the purposes of the Plan. Subject to the terms of the Plan, the Committee shall determine the terms and conditions of any such Other Stock-Based Award. (i) REPLACEMENT GRANTS. Awards may be granted from time to time in substitution for similar awards held by employees of other corporations who become Participants as the result of a -9- merger or consolidation of the employing corporation with the Company or any subsidiary, or the acquisition by the Company or any subsidiary of the assets of the employing corporation, or the acquisition by the Company or any subsidiary or an affiliate of stock of the employing corporation. The terms and conditions of substitute Awards granted may vary from the terms and conditions set forth in the Plan, to the extent the Committee, at the time of grant, deems it appropriate to conform, in whole or in part, to the provisions of awards in substitution for which they are granted. (j) GENERAL. (i) AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (ii) FORMS OF PAYMENT BY COMPANY UNDER AWARDS. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments. (iii) LIMITS ON TRANSFER OF AWARDS. (A) Except as provided in (C) below, each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant's lifetime, or, if permissible under applicable law, by the Participant's guardian or legal representative as determined by the Committee. (B) Except as provided in (C) below, no Award and no right under any such Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution (or, in the case of Restricted Stock, to the Company) and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate. (C) Notwithstanding anything in the Plan to the contrary, to the extent specifically provided by the Committee with respect to a grant, a Nonqualified Stock -10- Option may be transferred to immediate family members or related family trusts, limited partnerships or similar entities or Persons or on such terms and conditions as the Committee may establish. (iv) TERM OF AWARDS. The term of each Award shall be for such period as may be determined by the Committee; provided, that in no event shall the term of any Award exceed a period of 10 years from the date of its grant. (v) SHARE CERTIFICATES. All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the SEC, any stock exchange upon which such Shares or other securities are then listed, and any applicable Federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (vi) CONSIDERATION FOR GRANTS. Awards may be granted for no cash consideration or for such consideration as the Committee determines including, without limitation, such minimal cash consideration as may be required by applicable law. (vii) DELIVERY OF SHARES OR OTHER SECURITIES AND PAYMENT BY PARTICIPANT OF CONSIDERATION. No Shares or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement (including, without limitation, any exercise price, tax payment or tax withholding) is received by the Company. Such payment may be made by such method or methods and in such form or forms as the Committee shall determine, including, without limitation, cash, Shares, other securities, other Awards or other property, withholding of Shares, cashless exercise with simultaneous sale, or any combination thereof; provided that the combined value, as determined by the Committee, of all cash and cash equivalents and the Fair Market Value of any such Shares or other property so tendered to the Company, as of the date of such tender, is at least equal to the full amount required to be paid pursuant to the Plan or the applicable Award Agreement to the Company. (viii)PERFORMANCE CRITERIA. The Committee shall establish performance goals applicable to those Awards (other than Options) the payment of which is intended by the Committee to qualify as "performance-based compensation" as described in Section 162(m)(4)(C) of the Code. The performance goals shall be based upon the attainment of such target levels of net income, cash flows, return on equity, profit margin or sales, stock price, return on assets, economic value added, and/or earnings per share as may be specified by the Committee. Which factor or factors to be used with respect to any grant, and the weight to be accorded thereto if more than one factor is used, shall be determined by the Committee at the time of grant. -11- SECTION 7. AMENDMENT AND TERMINATION. Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan: (i) AMENDMENTS TO THE PLAN. The Board or the Committee may amend, alter, suspend, discontinue, or terminate the Plan without the consent of any stockholder, Participant, other holder or beneficiary of an Award, or other Person; provided, however, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company no such amendment, alteration, suspension, discontinuation, or termination shall be made that would increase the total number of Shares available for Awards under the Plan, except as provided in Section 4(c) of the Plan. (ii) AMENDMENTS TO AWARDS. The Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted, provided no change in any Award shall reduce the benefit to Participant without the consent of such Participant. Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent such adjustment would cause the Award to fail to so qualify. SECTION 8. CHANGE IN CONTROL. Notwithstanding any other provision of this Plan to the contrary, in the event of a Change in Control of the Company all outstanding Awards automatically shall become fully vested immediately prior to such Change in Control (or such earlier time as set by the Committee), all restrictions, if any, with respect to such Awards shall lapse, including, without limitation, any service, longevity or year-end employment requirements, all performance criteria, if any, with respect to such Awards shall be deemed to have been met in full and all Performance Awards and Cash Awards shall be payable to the maximum extent possible without regard to Pro-ration. SECTION 9. GENERAL PROVISIONS. (a) NO RIGHTS TO AWARDS. Except as provided in Section 6(b), no Participant or other Person shall have any claim to be granted any Award, there is no obligation for uniformity of treatment of Participants, or holders or beneficiaries of Awards and the terms and conditions of Awards need not be the same with respect to each recipient. (b) WITHHOLDING. The Company or any Affiliate is authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, Shares that would otherwise be issued pursuant to such Award, other Awards or other property) of any applicable taxes payable in respect of an Award, its exercise, the lapse of restrictions thereon, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. -12- In addition, the Committee may provide, in an Award Agreement, that the Participant may direct the Company to satisfy such Participant's tax obligation through the withholding of Shares otherwise to be acquired upon the exercise or payment of such Award. (c) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (d) GOVERNING LAW. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable federal law. (e) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without , in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (f) OTHER LAWS. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance of transfer or such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder or beneficiary. (g) NO TRUST OR FUND CREATED. Neither the Plan nor the Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any general unsecured creditor of the Company or any Affiliate. (h) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. -13- (i) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (j) PARACHUTE TAX GROSS-UP. To the extent that the grant, payment, or acceleration of vesting or payment, whether in cash or stock, of any Award made to a Participant under the Plan (a "Benefit") is subject to an excise tax under Section 4999(a) of the Code (a "Parachute Tax"), the Company shall pay such person an amount of cash (the "Gross-up Amount") such that the "net" Benefit received by the person under this Plan, after paying all applicable Parachute Taxes (including those on the Gross-up Amount) and any taxes on the Gross-up Amount, shall be equal to the Benefit that such person would have received if such Parachute Tax had not been applicable. SECTION 10. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective as of the date of its approval by the Board. SECTION 11. TERM OF THE PLAN. No Award shall be granted under the Plan after the 10th anniversary of the effective date of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted prior to such termination, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or terminate any such Award or to waive any conditions or rights under such Award, shall extend beyond such termination date. -14- EX-23.2 11 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated October 16, 1997, with respect to the financial statements of Pentacon, Inc., dated November 21, 1997 (except for Note 3, as to which the date is November 26, 1997) with respect to the financial statements of Alatec Products, Inc., dated November 7, 1997 with respect to the financial statements of AXS Solutions, Inc., dated October 15, 1997 with respect to the financial statements of Maumee Industries, Inc., and dated October 20, 1997 with respect to the financial statements of Sales Systems, Limited included in the Amendment No. 1 to the Registration Statement (Form S-1) and related Prospectus of Pentacon, Inc. ERNST & YOUNG LLP Houston, Texas January 9, 1998 EX-23.3 12 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the use in this Amendment No. 1 to Registration Statement (No. 333-41383) and related prospectus on Form S-1 of our report, dated November 21, 1997 (except for Note 3, as to which the date is November 26, 1997), relating to the consolidated financial statements of Alatec Products, Inc. as of December 31, 1996 and for the year then ended. We also consent to the reference to our Firm under the caption "Experts" appearing in the prospectus. MCGLADREY & PULLEN, LLP Pasadena, California January 9, 1998 -----END PRIVACY-ENHANCED MESSAGE-----