-----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, ElYWTrNdUTCgd8v7BBAI/kyjCy/0Tux2LFsRZQ2Ilb+wZQ8yPnCKky9+FXapfLER rt6CE5+7acXICMOC2WNy4w== 0000890566-99-001125.txt : 19990816 0000890566-99-001125.hdr.sgml : 19990816 ACCESSION NUMBER: 0000890566-99-001125 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTACON INC CENTRAL INDEX KEY: 0001050504 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 760531585 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13931 FILM NUMBER: 99686506 BUSINESS ADDRESS: STREET 1: 10375 RICHMOND AVENUE STREET 2: SUITE 700 CITY: HOUSTON STATE: TX ZIP: 77042 BUSINESS PHONE: 7138601000 MAIL ADDRESS: STREET 1: 10375 RICHMOND AVENUE STREET 2: SUITE 700 CITY: HOUSTON STATE: TX ZIP: 77042 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO __________________ COMMISSION FILE NUMBER: 001-13931 ------------------------------------------------------- PENTACON, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0531585 - -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 10375 RICHMOND AVENUE, SUITE 700 HOUSTON, TEXAS 77042 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 713-860-1000 - -------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT, PAR VALUE $.01 PER SHARE, OUTSTANDING AT JULY 30, 1999 WAS 16,668,129. PENTACON, INC. FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999 INDEX Part I - Financial Information Item 1 - Financial Statements Historical Consolidated Balance Sheets - Pentacon, Inc. as of June 30, 1999 and December 31, 1998................................3 Consolidated Statements of Operations - Pentacon, Inc. Historical for the Three Months and Six Months ended June 30, 1999 and 1998 and Pro Forma for the Three Months and Six Months ended June 30, 1999 and 1998.........................4 Historical Consolidated Statements of Cash Flows - Pentacon, Inc. for the Six Months ended June 30, 1999 and 1998..........8 Notes to Consolidated Financial Statements.................9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......13 Part II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders....20 Item 6 - Exhibits and Reports on Form 8-K.......................21 Signature.......................................................21 2 PENTACON, INC. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PENTACON, INC. HISTORICAL CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash and cash equivalents .................................. $ 401 $ 744 Accounts receivable ........................................ 42,943 34,610 Inventories ................................................ 122,243 116,390 Deferred income taxes ...................................... 5,459 4,216 Other current assets ....................................... 540 897 -------- -------- Total current assets ................... 171,586 156,857 Property and equipment, net of accumulated depreciation..... 9,352 7,404 Goodwill, net of accumulated amortization .................. 134,712 134,528 Deferred income taxes ...................................... 672 672 Other assets ............................................... 4,625 1,892 -------- -------- Total assets ........................... $320,947 $301,353 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ........................................... $ 28,978 $ 33,895 Accrued expenses ........................................... 15,118 8,875 Income taxes payable ....................................... 1,383 3,384 Current maturities of long-term debt ....................... 423 31,957 -------- -------- Total current liabilities .............. 45,902 78,111 Long-term debt, net of current maturities .................. 157,146 106,632 -------- -------- Total liabilities ...................... 203,048 184,743 Commitments and contingencies Preferred stock, $.01 par value, 10,000,000 shares authorized , no shares issued and outstanding............. -- -- Common stock, $.01 par value, 51,000,000 shares authorized, 16,668,129 shares issued and outstanding...... 167 167 Additional paid in capital ................................. 100,631 100,501 Retained earnings .......................................... 17,101 15,942 -------- -------- Total stockholders' equity ............... 117,899 116,610 -------- -------- Total liabilities and stockholders' equity $320,947 $301,353 ======== ========
The accompanying notes are an integral part of these statements. 3 PENTACON, INC. HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED -------------------------- JUNE 30, -------------------------- 1999 1998 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues ............................. $ 71,197 $ 30,380 Cost of sales ........................ 48,561 46,428 -------- -------- Gross profit ............... 22,636 16,048 Operating expenses ................... 15,422 10,931 Goodwill amortization ................ 865 390 -------- -------- Operating income ........... 6,349 4,727 Other (income) expense, net .......... (32) (49) Interest expense ..................... 4,266 369 -------- -------- Income before taxes ....... 2,115 4,407 Income taxes ......................... 1,215 2,286 -------- -------- Net income ................. $ 900 $ 2,121 ======== ======== Net income per share: Basic ...................... $ 0.05 $ 0.13 Diluted .................... $ 0.05 $ 0.13 The accompanying notes are an integral part of these statements. 4 PENTACON, INC. HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED --------------------------- JUNE 30, --------------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues ............................... $ 137,747 $ 66,284 Cost of sales .......................... 93,209 42,767 --------- --------- Gross profit ................. 44,538 23,517 Operating expenses ..................... 30,434 18,150 Goodwill amortization .................. 1,723 469 --------- --------- Operating income ............. 12,381 4,898 Write-off of debt issuance costs ....... 2,308 -- Other (income) expense, net ............ (50) (54) Interest expense ....................... 7,458 681 --------- --------- Income before taxes .......... 2,665 4,271 Income taxes ........................... 1,506 2,241 --------- --------- Net income ................... $ 1,159 $ 2,030 ========= ========= Net income per share: Basic ........................ $ 0.07 $ 0.19 Diluted ...................... $ 0.07 $ 0.18 The accompanying notes are an integral part of these statements. 5 PENTACON, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JUNE 30, ------------------------- 1999 1998 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues ................................. $ 71,197 $ 46,428 Cost of sales ............................ 48,561 30,380 -------- -------- Gross profit ................... 22,636 16,048 Operating expenses ....................... 15,422 10,931 Goodwill amortization .................... 865 390 -------- -------- Operating income ............... 6,349 4,727 Other (income) expense, net .............. (32) (49) Interest expense ......................... 4,266 369 -------- -------- Income before taxes ............ 2,115 4,407 Income taxes ............................. 1,215 1,960 -------- -------- Net income ..................... $ 900 $ 2,447 ======== ======== Net income per share: Basic .......................... $ 0.05 $ 0.15 Diluted ........................ $ 0.05 $ 0.15 The accompanying notes are an integral part of these statements. 6 PENTACON, INC. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues ................................. $ 137,747 $ 87,725 Cost of sales ............................ 93,209 57,549 --------- --------- Gross profit ................... 44,538 30,176 Operating expenses ....................... 30,434 20,721 Goodwill amortization .................... 1,723 764 --------- --------- Operating income ............... 12,381 8,691 Write-off of debt issuance costs ......... 2,308 -- Other (income) expense, net .............. (50) (79) Interest expense ......................... 7,458 629 --------- --------- Income before taxes ............ 2,665 8,141 Income taxes ............................. 1,506 3,644 --------- --------- Net income ..................... $ 1,159 $ 4,497 ========= ========= Net income per share: Basic .......................... $ 0.07 $ 0.29 Diluted ........................ $ 0.07 $ 0.29 The accompanying notes are an integral part of these statements. 7 PENTACON, INC. HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ---------------------- JUNE 30, ---------------------- 1999 1998 --------- -------- (IN THOUSANDS) Cash Flows From Operating Activities: Net income ............................................. $ 1,159 $ 2,030 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization .......................... 2,836 849 Deferred income taxes .................................. 43 212 Compensation expense related to issuance of management shares .................................... -- 1,800 Write-off of debt issuance costs ....................... 2,308 -- Changes in operating assets and liabilities: Accounts receivable .............................. (8,395) 336 Inventories ...................................... (6,720) (6,204) Other current assets ............................. 64 140 Accounts payable and accrued expenses ............ (1,216) (4,273) Income taxes payable ............................. (2,001) (4,204) Other assets and liabilities, net ................ (908) 1,495 --------- -------- Net cash used in operating activities ................ (12,830) (7,819) Cash Flows From Investing Activities: Capital expenditures ................................... (2,826) (2,010) Cash paid for acquisitions, net of cash acquired ....... -- (3,917) Cash paid for Founding Companies, net of cash acquired . -- (21,948) Other .................................................. -- 19 --------- -------- Net cash used in investing activities ................ (2,826) (27,856) Cash Flows From Financing Activities: Principal payments on debt ............................. (171,916) (49,361) Borrowings of debt ..................................... 190,856 35,600 Proceeds from issuance of common stock, net of offering costs ....................................... -- 50,815 Debt issuance costs .................................... (3,627) (299) --------- -------- Net cash provided by financing activities ............ 15,313 36,755 (Decrease)Increase in cash and cash equivalents ............ (343) 1,080 Cash and cash equivalents, beginning of period ............. 744 -- --------- -------- Cash and cash equivalents, end of period ................... $ 401 $ 1,080 ========= ========
The accompanying notes are an integral part of these statements. 8 PENTACON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION Pentacon, Inc. ("Pentacon" or the "Company") was incorporated in March 1997. On March 10, 1998, Pentacon and separate wholly-owned subsidiaries acquired in separate transactions, simultaneously with the closing of its initial public offering (the "Offering") of its common stock, five businesses (the "Initial Acquisitions"): Alatec Products, Inc. (Alatec), AXS Solutions, Inc. (AXS), Capitol Bolt & Supply, Inc. (Capitol), Maumee Industries, Inc. (Maumee), and Sales Systems, Limited (SSL), collectively referred to as the "Founding Companies." The consideration for the Initial Acquisitions consisted of a combination of cash and common stock. Because (i) the stockholders of the Founding Companies owned a majority of the outstanding shares of Pentacon common stock following the Offering and the Initial Acquisitions, and (ii) the stockholders of Alatec received the greatest number of shares of Pentacon common stock among the stockholders of the Founding Companies, for financial statement presentation purposes, Alatec has been identified as the accounting acquiror. The acquisitions of the remaining Founding Companies have been accounted for using the purchase method of accounting. Therefore Alatec's historical financial statements for all periods prior to March 10, 1998 are presented as the historical financial statements of the registrant. Unless the context otherwise requires, all references herein to the Company include Pentacon, the Founding Companies and acquisitions subsequent to the Offering ("Subsequent Acquisitions"). In October 1998, the Company changed its year end from September 30 to December 31. A Transition Report on Form 10-Q was filed for the three-month transition period ended December 31, 1998. The accompanying unaudited interim financial statements are prepared pursuant to the Rules and Regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The Company believes all adjustments necessary for a fair presentation of these statements have been included and are of a normal and recurring nature. The statements should be read in conjunction with the financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and the Transition Report on Form 10-Q filed for the three-month transition period ended December 31, 1998. The pro forma financial information for the three and six months ended June 30, 1998 includes the results of Pentacon combined with the Founding Companies as if the Initial Acquisitions had occurred at the beginning of the three- and six-month periods. The pro forma financial information includes the effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain reductions in salaries and benefits to the former owners of the Founding Companies to which they agreed prospectively (iv) certain reductions in lease expense paid to the former owners of the Founding Companies to which they agreed prospectively (v) elimination of non-recurring, non-cash compensation charges related to common stock issued to management (vi) amortization of goodwill resulting from the Initial Acquisitions and (vii) advances under the Bank Credit Facility (see Note 4) including decreases in interest expense resulting from the repayment or refinancing of the Founding Companies' debt and (viii) adjustments to the provisions for federal and state income taxes. Subsequent Acquisitions are included in the Historical and Pro Forma Consolidated Statements of Operations only for those periods subsequent to the dates of acquisition. The pro forma financial information may not be comparable to and may not be indicative of the Company's post-acquisition results of operations because the Founding Companies were not under common control or management. 9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES There has been no significant change in the accounting policies of the Company during the periods presented. For a description of these policies, refer to Note 1 of the Notes to Consolidated Financial Statements of Pentacon included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998. 3. ACQUISITIONS During the year ended December 31, 1998, the Company completed four acquisitions in addition to the acquisitions of the Founding Companies. In May 1998, the Company acquired Pace Products, Inc., a distributor of fasteners and other small parts which also provides inventory procurement and management services primarily to the telecommunications industry. In June 1998, the Company acquired D-Bolt Company Inc., a distributor of fasteners and other small parts primarily to the fabrication, construction and mining industries. In July 1998, the Company acquired Texas International Aviation, Inc., a distributor of fasteners and other small parts which provides inventory procurement and management services primarily to the aerospace industry. In September 1998, the Company acquired ASI Aerospace Group, Inc., a distributor of fasteners and other small parts which provides inventory procurement and management services primarily to the aerospace industry. The consideration paid for the Subsequent Acquisitions consisted of an aggregate of 1,134,010 shares of common stock and approximately $77.0 million in cash. The acquisitions were accounted for using the purchase method of accounting and the results of operations of the acquired companies are included from the date of acquisition. The allocations of purchase price to the Founding Companies' assets acquired and liabilities assumed was assigned and recorded based on fair market values. The allocation of purchase price to the Subsequent Acquisitions' assets acquired and liabilities assumed has been initially assigned and recorded based on preliminary estimates of fair market value and may be revised as additional information concerning the valuation of such assets and liabilities becomes available. If all completed acquisitions, including the Founding Companies, were effective on the first day of the period being reported, the unaudited pro forma revenues, gross margin, operating income and net income would have been: SIX MONTHS ENDED JUNE 30, --------------------------- 1999 1998 --------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Revenues ........................ $137,747 $145,133 Gross margin .................... 44,538 48,842 Operating income ................ 12,381 17,857 Write-off of debt issuance costs ......................... 2,308 -- Interest expense ................ 7,458 5,248 Net income ...................... 1,159 6,784 Net income per share: Basic ......................... $ 0.07 $ 0.41 Diluted ....................... $ 0.07 $ 0.40 10 4. LONG-TERM DEBT In March 1999, the Company sold $100 million of Senior Subordinated Notes (the "Notes") due April 1, 2009. The net proceeds of $94.2 million, after the original issue discount and paying underwriter's commissions, from the offering of the Notes were used to repay indebtedness under the Company's credit agreement (the "Bank Credit Facility"). The Notes accrue interest at 12 1/4% which is payable on April 1 and October 1 of each year. The Notes are publicly-registered and subordinated to all existing and future senior subordinated obligations and will rank senior to all subordinated indebtedness. The indenture governing the Notes contains covenants that limit the Company's ability to incur additional indebtedness, pay dividends, make investments and sell assets. At June 30, 1999, the Company was in compliance with the covenants. Each of the Company's subsidiaries which are wholly-owned, fully, unconditionally and jointly and severally guarantees the Notes on a senior subordinated basis. In connection with the issuance of the Notes in March 1999, the Company amended its Bank Credit Facility to provide a revolving line of credit of up to $85 million (subject to a borrowing base limitation) to be used for general corporate purposes, future acquisitions, capital expenditures and working capital. The Bank Credit Facility is secured by Company stock and assets. Advances under the Bank Credit Facility bear interest at the banks' designated variable rate plus a margin of 25 to 150 basis points. At the Company's option, the loans may bear interest based on a designated London interbank offered rate plus a margin of 175 to 325 basis points. Commitment fees of 25 to 50 basis points per annum are payable on the unused portion of the line of credit. The Bank Credit Facility contains a provision for standby letters of credit up to $5.0 million. The Bank Credit Facility prohibits the payment of dividends by the Company, restricts the Company's incurring or assuming other indebtedness and requires the Company to comply with certain financial covenants including a minimum net worth, senior debt leverage ratio, total debt leverage ratio, and minimum fixed charge ratio. At June 30, 1999, the Company was in compliance with the covenants. The Bank Credit Facility will terminate and all amounts outstanding thereunder, if any, will be due and payable December 31, 2001. At June 30, 1999, the Company has approximately $21.5 million available under the Bank Credit Facility. In connection with the amendment of and reduction in the Bank Credit Facility, the Company recorded a $2.3 million ($.07 impact on earnings per share) noncash charge for the write-off of debt issuance costs. 5. EARNINGS PER SHARE Pro forma and historical net income per share for the period ended June 30, 1998 is computed based on the weighted average shares of common stock outstanding. The pro forma calculation assumes the Initial Acquisitions and Offering occurred at the beginning of the period. The computation of historical and pro forma net income per share for the three- and six-month periods ended June 30, 1999 is based on the weighted average shares of common stock outstanding. 11 Basic and diluted historical net income per share is computed based on the following information:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- -------------------- JUNE 30, JUNE 30, -------------------- -------------------- 1999 1998 1999 1998 ------- ------- ------- ------- (IN THOUSANDS) BASIC: Net income ........................... $ 900 $ 2,121 $ 1,159 $ 2,030 ======= ======= ======= ======= Average common shares ................ 16,668 15,721 16,668 10,907 ======= ======= ======= ======= DILUTED: Net income ........................... $ 900 $ 2,121 $ 1,159 $ 2,030 ======= ======= ======= ======= Average common shares ................ 16,668 15,721 16,668 10,907 Common share equivalents: Warrants ......................... -- 25 -- 16 Options .......................... 1 188 -- 115 ------- ------- ------- ------- Total common share equivalents 1 213 -- 131 ------- ------- ------- ------- Average common shares and common share equivalents ..... 16,669 15,934 16,668 11,038 ======= ======= ======= =======
Basic and diluted pro forma net income per share is computed based on the following information:
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- --------------------- JUNE 30, JUNE 30, -------------------- --------------------- 1999 1998 1999 1998 ------- ------- -------- ------- (IN THOUSANDS) BASIC: Net income ......................... $ 900 $ 2,447 $ 1,159 $ 4,497 ======= ======= ======== ======= Average common shares .............. 16,668 15,721 16,668 15,626 ======= ======= ======== ======= DILUTED: Net income ......................... $ 900 $ 2,447 $ 1,159 $ 4,497 ======= ======= ======== ======= Average common shares .............. 16,668 15,721 16,668 15,626 Common share equivalents: Warrants ....................... -- 25 -- 16 Options ........................ 1 188 -- 114 ------- ------- -------- ------- Total common share equivalents 1 213 -- 130 ------- ------- -------- ------- Average common shares and common share equivalents ..... 16,669 15,934 16,668 15,756 ======= ======= ======== =======
12 6. INCOME TAXES The provision for income taxes included in the Historical Consolidated Statement of Operations for the three- and six-month periods ended June 30, 1999 assumes the application of statutory federal and state income tax rates and the non-deductibility of goodwill amortization. The provision for income taxes included in the Historical Consolidated Statement of Operations for the three- and six-month periods ended June 30, 1998 reflects the activity of the accounting acquiror prior to the Initial Acquisitions, the non-deductibility of goodwill amortization and the non-deductibility of compensation related to common stock sold to management. The provision for income taxes included in the Pro Forma Consolidated Statements of Operations for the three- and six-month periods ended June 30, 1999 and 1998 assumes the application of statutory federal and state income tax rates and the non-deductibility of goodwill amortization. Interim period income tax provisions are based upon estimates of annual effective tax rates and events may occur which will cause such rates to vary. 7. COMMITMENTS AND CONTINGENCIES The Company is involved in various legal proceedings that have arisen in the ordinary course of business. While it is not possible to predict the outcome of such proceedings with certainty, in the opinion of the Company, all such proceedings are either adequately covered by insurance or, if not so covered, should not ultimately result in any liability which would have a material adverse effect on the financial position, liquidity or results of operations of the Company. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with the financial statements of the Company and related notes thereto and management's discussion and analysis of financial condition and results of operations related thereto which are included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and the Transition Report on Form 10-Q filed for the three-month transition period ended December 31, 1998. As noted in the transition report, the Company's year end has been changed to December 31 from September 30. This discussion contains forward-looking statements that are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Key factors that could cause actual results to differ materially from expectations include, but are not limited to (i) estimates of costs or projected or anticipated changes to cost estimates relating to entering new markets or expanding in existing markets (ii) changes in economic and industry conditions (iii) changes in regulatory requirements (iv) changes in interest rates (v) levels of borrowings under the Company's Bank Credit Facility (vi) accumulation of excess inventories by certain customers in the aerospace industry and (vii) volume or price adjustments with respect to sales to major customers. These and other risks and assumptions are described in the Company's reports that are available from the United States Securities and Exchange Commission. RESULTS OF OPERATIONS In October 1998, the Company changed its year end from September 30 to December 31. A 13 Transition Report on Form 10-Q has been filed for the three-month transition period ended December 31, 1998. The pro forma financial information for the three- and six- months ended June 30, 1999 and 1998 includes the results of Pentacon combined with the Founding Companies as if the Initial Acquisitions had occurred at the beginning of each respective three- and six-month period. The pro forma financial information includes the effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain reductions in salaries and benefits to the former owners of the Founding Companies to which they agreed prospectively (iv) certain reductions in lease expense paid to the former owners of the Founding Companies to which they agreed prospectively (v) elimination of non-recurring, non-cash compensation charges related to common stock issued to management (vi) amortization of goodwill resulting from the Initial Acquisitions and (vii) advances under the Bank Credit Facility (see Note 4 to the Financial Statements) including decreases in interest expense resulting from the repayment or refinancing of the Founding Companies' debt and (viii) adjustments to the provisions for federal and state income taxes. Subsequent Acquisitions are included in the Pro Forma Consolidated Statements of Operations only for those periods subsequent to the dates of acquisition. The pro forma financial information may not be comparable to and may not be indicative of the Company's post-acquisition results of operations because the Founding Companies were not under common control or management. Quarterly results may also be materially affected by the timing and magnitude of acquisitions, assimilation costs, costs of opening new facilities, gain or loss of a material customer and variation in product mix. Accordingly, the operating results for any three-month period are not necessarily indicative of the results that may be achieved for any subsequent three- or six-month period or for a full year. PRO FORMA THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 The following table sets forth certain selected pro forma financial data and the related amounts as a percentage of pro forma revenues for the periods indicated: PRO FORMA THREE MONTH PERIOD ENDED JUNE 30, -------------------------------------------- 1999 1998 ------------------- ------------------- (DOLLARS IN THOUSANDS) Revenues ........................ $71,197 100.0% $46,428 100.0% Cost of sales ................... 48,561 68.2 30,380 65.4 ------- ----- ------- ----- Gross profit .......... 22,636 31.8 16,048 34.6 Operating expenses .............. 15,422 21.7 10,931 23.6 Goodwill amortization ........... 865 1.2 390 0.8 ------- ----- ------- ----- Operating income ...... $ 6,349 8.9% $ 4,727 10.2% ======= ===== ======= ===== REVENUES Pro forma revenues increased 53.4% to $71.2 million for the three months ended June 30, 1999 from $46.4 million for the three months ended June 30, 1998. The increase in pro forma revenues was attributable primarily to the Subsequent Acquisitions and, to a lesser extent, internal revenue growth of 3.3% experienced by the Founding Companies. The modest internal revenue growth resulted from increased revenues in the industrial business offset by a decline in our aerospace business and lower pricing to a major industrial customer. 14 COST OF SALES Pro forma cost of sales increased $18.2 million, or 59.9%, to $48.6 million for the three months ended June 30, 1999 from $30.4 million for the three months ended June 30, 1998. As a percentage of pro forma revenues, pro forma cost of sales increased from 65.4% in the three months ended June 30, 1998 to 68.2% in the three months ended June 30, 1999. The increase in pro forma cost of sales as a percentage of pro forma revenues was a result of lower margins historically attained by the Subsequent Acquisitions and lower margins on new business with an existing customer in our industrial business. OPERATING EXPENSES Pro forma operating expenses increased $4.5 million, or 41.3%, to $15.4 million for the three months ended June 30, 1999 from $10.9 million for the three months ended June 30, 1998. As a percentage of pro forma revenues, pro forma operating expenses decreased to 21.7% for the three months ended June 30, 1999 from 23.6% for the three months ended June 30, 1998. The decrease was primarily attributable to lower operating expenses as a percentage of revenues historically attained by the Subsequent Acquisitions partially offset by additional costs associated with additional sales to an existing customer in our industrial business. OPERATING INCOME Due to the factors discussed above, pro forma operating income increased $1.6 million to $6.3 million for the three months ended June 30, 1999 from $4.7 million for the three months ended June 30, 1998. As a percentage of pro forma revenues, pro forma operating income decreased to 8.9% for the three months ended June 30, 1999 from 10.2% for the three months ended June 30, 1998. NON-OPERATING COSTS AND EXPENSES Interest expense for the three months ended June 30, 1999 totaled $4.3 million compared to $0.4 million for the three months ended June 30, 1998. The increase in interest expense primarily results from additional debt incurred for the Subsequent Acquisitions and the higher rate of interest on the Senior Subordinated Notes issued in March 1999. PROVISION FOR INCOME TAXES The provision for income taxes for the three months ended June 30, 1999 was $1.2 million (an effective rate of 57.4%) compared with $2.0 million (an effective rate of 44.5%) for the three months ended June 30, 1998. The higher effective tax rate for the quarter ended June 30, 1999 primarily related to the increase in non-deductible goodwill amortization that resulted from the Subsequent Acquisitions. 15 PRO FORMA SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 The following table sets forth certain selected pro forma financial data and the related amounts as a percentage of pro forma revenues for the periods indicated: PRO FORMA SIX MONTH PERIOD ENDED JUNE 30, --------------------------------------------- 1999 1998 ------------------- ------------------- (DOLLARS IN THOUSANDS) Revenues ...................... $137,747 100.0% $ 87,725 100.0% Cost of sales ................. 93,209 67.7 57,549 65.6 -------- ----- -------- ----- Gross profit ....... 44,538 32.3 30,176 34.4 Operating expenses ............ 30,434 22.0 20,721 23.6 Goodwill amortization ......... 1,723 1.3 764 0.9 -------- ----- -------- ----- Operating income $ 12,381 9.0% $ 8,691 9.9% ======== ===== ======== ===== REVENUES Pro forma revenues increased 57.0% to $137.7 million for the six months ended June 30, 1999 from $87.7 million for the six months ended June 30, 1998. The increase in pro forma revenues was attributable primarily to the Subsequent Acquisitions and, to a lesser extent, internal revenue growth of 3.6% experienced by the Founding Companies. The modest internal revenue growth resulted from increased revenues in the industrial business offset by a decline in our aerospace business and lower pricing to a major industrial customer. COST OF SALES Pro forma cost of sales increased $35.7 million, or 62.1%, to $93.2 million for the six months ended June 30, 1999 from $57.5 million for the six months ended June 30, 1998. As a percentage of pro forma revenues, pro forma cost of sales increased from 65.6% in the six months ended June 30, 1998 to 67.7% in the six months ended June 30, 1999. The increase in pro forma cost of sales as a percentage of pro forma revenues was a result of lower margins historically attained by the Subsequent Acquisitions as compared to the Initial Acquisitions and lower margins on new business with an existing customer in our industrial business. OPERATING EXPENSES Pro forma operating expenses increased $9.7 million, or 46.9%, to $30.4 million for the six months ended June 30, 1999 from $20.7 million for the six months ended June 30, 1998. As a percentage of pro forma revenues, pro forma operating expenses decreased to 22.0% for the six months ended June 30, 1999 from 23.6% for the six months ended June 30, 1998. The decrease was primarily attributable to lower operating expenses as a percentage of revenues historically attained by the Subsequent Acquisitions partially offset by additional costs associated with additional sales to an existing customer in our industrial business. OPERATING INCOME Due to the factors discussed above, pro forma operating income increased $3.7 million to $12.4 million for the six months ended June 30, 1999 from $8.7 million for the six months ended June 16 30, 1998. As a percentage of pro forma revenues, pro forma operating income decreased to 9.0% for the six months ended June 30, 1999 from 9.9% for the six months ended June 30, 1998. NON-OPERATING COSTS AND EXPENSES The write-off of debt issuance costs during the six months ended June 30, 1999 resulted from the amendment of the Company's Bank Credit Facility in connection with the Senior Subordinated Notes issued in March 1999. Interest expense for the six months ended June 30, 1999 totaled $7.5 million compared to $0.6 million for the six months ended June 30, 1998. The increase in interest expense primarily results from additional debt incurred for the Subsequent Acquisitions and the higher rate of interest on the Senior Subordinated Notes issued in March 1999. PROVISION FOR INCOME TAXES The provision for income taxes for the six months ended June 30, 1999 was $1.5 million (an effective rate of 56.5%) compared with $3.6 million (an effective rate of 44.8%) for the six months ended June 30, 1998. The higher effective tax rate for the six months ended June 30, 1999 primarily related to the increase in non-deductible goodwill amortization that resulted from the Subsequent Acquisitions. HISTORICAL THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 The historical financial information represents the results of Pentacon subsequent to the Initial Acquisitions and the Offering on March 10, 1998. The historical financial information for the three-month period ended June 30, 1999 is the same as the pro forma financial information discussed in the preceding section. However, the provision for income taxes in the three-month period ended June 30, 1998 differed as a result of non-deductible goodwill amortization and the non-deductible $1.8 million compensation expense related to the sale of common stock to management. HISTORICAL SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 The historical financial information represents the information of Alatec prior to the Initial Acquisitions and the Offering and the consolidated results of Pentacon Subsequent to the Initial Acquisitions and the Offering on March 10, 1998. The following table sets forth certain selected historical financial data and the related amounts as a percentage of historical revenues for the periods indicated: HISTORICAL SIX MONTH PERIOD ENDED JUNE 30, ---------------------------------------------- 1999 1998 -------------------- -------------------- (DOLLARS IN THOUSANDS) Revenues ................... $137,747 100.0% $ 66,284 100.0% Cost of sales .............. 93,209 67.7 42,767 64.5 -------- ----- -------- ----- Gross profit ......... 44,538 32.3 23,517 35.5 Operating expenses ......... 30,434 22.0 18,150 27.4 Goodwill amortization ...... 1,723 1.3 469 0.7 -------- ----- -------- ----- Operating income ...... $ 12,381 9.0% $ 4,898 7.4% ======== ===== ======== ===== 17 REVENUES Revenues increased $71.4 million, or 107.7%, from $66.3 million for the six months ended June 30, 1998 to $137.7 million for the six months ended June 30, 1999. The increase in revenues primarily results from the Initial Acquisitions on March 10, 1998 and the Subsequent Acquisitions. COST OF SALES Cost of sales increased $50.4 million, or 117.8%, from $42.8 million for the six months ended June 30, 1998 to $93.2 million for the six months ended June 30, 1999. The increase in cost of sales primarily results from the Initial Acquisitions on March 10, 1998 and the Subsequent Acquisitions. OPERATING EXPENSES Operating expenses increased $12.2 million, or 67.0%, from $18.2 million for the six months ended June 30, 1998 to $30.4 million for the six months ended June 30, 1999. The increase in operating expenses primarily results from the Initial Acquisitions and the Offering on March 10, 1998 and the Subsequent Acquisitions. OPERATING INCOME Operating income increased $7.5 million, or 153.1%, from $4.9 million for the six months ended June 30, 1998 to $12.4 million for the six months ended June 30, 1999 due to the factors noted above. NON OPERATING COSTS AND EXPENSES The write-off of debt issuance costs during the six months ended June 30, 1999 resulted from the amendment of the Company's Bank Credit Facility in connection with the Senior Subordinated Notes issued in March 1999. Interest expense for the six months ended June 30, 1999 totaled $7.5 million compared to $0.7 million for the six months ended June 30, 1998. The increase in interest expense primarily results from additional debt incurred for the Subsequent Acquisitions and the higher rate of interest on the Senior Subordinated Notes issued in March 1999. PROVISION FOR INCOME TAXES The provision for income taxes for the six months ended June 30, 1999 was $1.5 million (an effective rate of 56.5%) compared with $2.2 million (an effective rate of 52.3%) for the six months ended June 30, 1998. The higher effective tax rate for the quarter ended June 30, 1999 primarily related to the increase in non-deductible goodwill amortization that resulted from the Subsequent Acquisitions. LIQUIDITY AND CAPITAL RESOURCES The Company used $12.8 million of net cash in operating activities during the six months ended June 30, 1999; resulting primarily from increases in working capital. Net cash used in investing activities was $2.8 million for capital expenditures. Net cash provided by financing activities was $15.3 million for the six months ended June 30, 1999 and primarily consisted of $171.9 million 18 repayment of debt offset by $190.9 million of borrowings on debt. At June 30, 1999, the Company had cash of $0.4 million, working capital of $125.7 million and total debt of $157.6 million. In March 1999, the Company sold $100 million of Notes due April 1, 2009. The net proceeds of $94.2 million, after the original issue discount and paying underwriter's commissions, from the offering of the Notes were used to repay indebtedness under the Company's Bank Credit Facility. The Notes accrue interest at 12 1/4% which is payable on April 1 and October 1 of each year. The Notes are publicly-registered and subordinated to all existing and future senior subordinated obligations and will rank senior to all subordinated indebtedness. The indenture governing the Notes contains covenants that limit the Company's ability to incur additional indebtedness, pay dividends, make investments and sell assets. At June 30, 1999, the Company was in compliance with the covenants. Each of the Company's subsidaries which are wholly-owned, fully, unconditionally and jointly and severally guarantees the Notes on a senior subordinated basis. In connection with the issuance of the Notes in March 1999, the Company amended its Bank Credit Facility to provide a revolving line of credit of up to $85 million (subject to a borrowing base limitation) to be used for general corporate purposes, future acquisitions, capital expenditures and working capital. The Bank Credit Facility is secured by Company stock and assets. Advances under the Bank Credit Facility bear interest at the banks' designated variable rate plus a margin of 25 to 150 basis points. At the Company's option, the loans may bear interest based on a designated London interbank offered rate plus a margin of 175 to 325 basis points. Commitment fees of 25 to 50 basis points per annum are payable on the unused portion of the line of credit. The Bank Credit Facility contains a provision for standby letters of credit up to $5.0 million. The Bank Credit Facility prohibits the payment of dividends by the Company, restricts the Company's incurring or assuming other indebtedness and requires the Company to comply with certain financial covenants including a minimum net worth, senior debt leverage ratio, total debt leverage ratio and minimum fixed charge ratio. At June 30, 1999, the Company was in compliance with the covenants. The Bank Credit Facility will terminate and all amounts outstanding thereunder, if any, will be due and payable December 31, 2001. At June 30, 1999, the Company has approximately $21.5 million available under the Bank Credit Facility. In connection with the amendment of and reduction in the Bank Credit Facility, the Company recorded a $2.3 million ($.07 impact on earnings per share) noncash charge for the write-off of debt issuance costs. The Company currently operates in a decentralized information systems environment and uses a variety of software, computer systems and related technologies for accounting and reporting purposes and for revenue-generating activities. The Pentacon companies which primarily serve the aerospace industry are in the process of migrating to a common information system which will facilitate product ordering, pricing and reporting among the companies. The total expenditures for these information systems are expected to be approximately $3.0 million (of which $2.3 million has been incurred at June 30, 1999), the majority of which will be capitalized as computer hardware and software as it is installed and depreciated over the estimated useful life of the assets. Funding for these expenditures has come from operating cash flows and the Company's Bank Credit Facility. YEAR 2000 The Company is working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's computerized information systems and other infrastructure that contains embedded technology. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the 19 Company's programs that have time-sensitive software may recognize a date using "00" as the Year 1900 rather than the Year 2000, which could result in miscalculations or system failures. The Company believes that substantially all of its computerized information systems and other infrastructure that contains embedded technology are Year 2000 compliant or have been modified so as to be Year 2000 compliant. The Company's only significant computerized information system which is not Year 2000 compliant is being replaced in the quarter ended September 30, 1999. Remaining costs of addressing potential problems are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could have a significant impact on the Company's ability to conduct its business and result in a material financial risk. In addition, the Company is continually attempting to assess the level of Year 2000 preparedness of its key suppliers, distributors, customers and service providers. The Company has sent, and will continue to send, letters, questionnaires and surveys to its significant business partners inquiring about their Year 2000 efforts. If a significant supplier or customer of the Company fails to be Year 2000 compliant, the Company could suffer a material loss of business or incur material expenses. As of June 30, 1999, the Company has spent $0.4 million in costs that are directly attributable to addressing Year 2000 issues. Management currently estimates that the Company will not incur significant additional costs during 1999 relating to Year 2000 issues. The Company expects that it will spend approximately $3.0 million (of which $2.3 million has been incurred at June 30, 1999) to purchase software and hardware and on implementation expenses associated with the migration to a common information technology system in the Pentacon companies which primarily serve the aerospace industry. The Company believes that these costs are not, for the most part, directly related to Year 2000 issues, but are required for the implementation of its new system in the Pentacon companies which primarily serve the aerospace industry. The Company is developing and evaluating contingency plans in the event that the Company has not completed all of its remediation plans in a timely manner or if third parties who provide goods or services to the Company fail to address their Year 2000 issues appropriately. These plans include identification of alternative suppliers and service providers, depletion of safety stocks of inventory and identification of important areas of record retention. PART II -OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Registrant was held on May 12, 1999 in Houston, Texas. At the meeting, three director-nominees were elected to three-year terms as Class I Directors. With respect to such election, proxies were solicited pursuant to Regulation 14 under the Exchange Act and there was no solicitation in opposition to such nominees. Of the Company's 16,666,115 shares of common stock of record on March 29, 1999, 15,533,017 shares were entitled to vote on the election of Mr. Baldwin and Ms. McClure, and 1,133,098 shares were restricted shares entitled to vote only on the election of Mr. Grossman. Of the 15,533,017 shares of common stock entitled to vote with respect to the election of Mr. Baldwin and Ms. McClure, 12,922,021 were voted at the meeting in person or by proxy. Of the Company's 1,133,098 shares of restricted common stock entitled to vote with respect to the election of Mr. Grossman, 649,207 were voted at the meeting in person or by proxy. The following number of 20 votes were cast as to the Class I Director nominees: Mark E. Baldwin, 12,832,180 votes for and 89,841 votes withheld; Cary M. Grossman, 649,207 votes for and no votes withheld; and Mary E. McClure, 12,916,621 votes for and 5,400 votes withheld. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 10.17 Director Indemnification Agreement with Nishan Teshoian 27 Financial Data Schedule (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K dated May 6, 1999 concerning its results of operations for the quarter ended March 31, 1999. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENTACON, INC. Dated: August 13, 1999 By: /s/ BRIAN FONTANA BRIAN FONTANA Senior Vice President & Chief Financial Officer EX-10.17 2 EXHIBIT 10.17 INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT is made as of July 20, 1999, and is entered into by and between Pentacon, Inc., a Delaware corporation (the "Company"), and Nishan Teshoian ("Indemnitee"). R E C I T A L S: WHEREAS, the certificate of incorporation and bylaws of the Company provide for the indemnification of the Company's directors and executive officers to the maximum extent permitted from time to time under applicable law and, along with the Delaware General Corporation Law, contemplate that the Company may enter into agreements with respect to such indemnification; and WHEREAS, the Board of Directors of the Company has concluded that it is reasonable, prudent and in the best interests of the Company's stockholders for the Company to contractually obligate itself to indemnify certain of its Authorized Representatives (defined below) so that they will serve or continue to serve with greater certainty that they will be adequately protected. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "Authorized Representative" means (i) a director, officer, employee, agent or fiduciary of the Company or any Subsidiary and (ii) a person serving at the request of the Company or any Subsidiary as a director, officer, employee, fiduciary or other representative of another Enterprise. "Enterprise" means any corporation, partnership, limited liability company, association, joint venture, trust, employee benefit plan or other entity. "Expenses" means all expenses, including (without limitation) reasonable fees and expenses of counsel. "Liabilities" means all liabilities, including (without limitation) the amounts of any judgments, fines, penalties, excise taxes and amounts paid in settlement. "Proceeding" means any threatened, pending or completed claim, action (including any action by or in the right of the Company), suit or proceeding (whether formal or informal, or civil, criminal, administrative, legislative, arbitrative or investigative) in respect of which Indemnitee is, was or at any time becomes, or is threatened to be made, a party, witness, subject or target, by reason of the fact that Indemnitee is or was an Authorized Representative or a prospective Authorized Representative. "Subsidiary" means, at any time, (i) any corporation of which at least a majority of the outstanding voting stock is owned by the Company at such time, directly or indirectly through subsidiaries, and (ii) any other Enterprise in which the Company, directly or indirectly, owns more than a 50% equity interest at such time. 2. INTERPRETATION. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and VICE VERSA; (ii) reference to any gender includes each other gender; (iii) the words "HEREIN," "HEREOF" and "HEREUNDER" and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision; (iv) unless the context indicates otherwise, reference to any Section means such Section hereof; and (v) the words "INCLUDING" (and with correlative meaning "INCLUDE") means including, without limiting the generality of any description preceding such term. (b) The Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. (d) In the event of any ambiguity, vagueness or other similar matter involving the interpretation or meaning of this Agreement, this Agreement shall be liberally construed so as to provide to Indemnitee the full benefits contemplated hereby. (e) If the indemnification to which Indemnitee is entitled as respects any aspect of any claim varies between two or more provisions of this Agreement, that provision providing the most comprehensive indemnification shall apply. 3. LIMITATION ON PERSONAL LIABILITY. To the fullest extent permitted by applicable law, Indemnitee shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director of the Company, PROVIDED that the foregoing shall not eliminate or limit the liability of Indemnitee (i) for any breach of Indemnitee's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve -2- intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law relating to unlawful dividend payments and unlawful stock purchases or redemptions or (iv) for any transaction from which Indemnitee derived an improper personal benefit. 3. INDEMNITY. (a) Subject to the following provisions of this Agreement, the Company shall hold harmless and indemnify Indemnitee to the fullest extent permitted by applicable law existing (now/or hereafter adopted) against all Expenses and Liabilities actually incurred by Indemnitee in connection with any Proceeding; PROVIDED, HOWEVER, that no indemnity shall be paid by the Company spursuant to this Agreement: (i) for amounts actually paid to Indemnitee pursuant to one or more policies of directors and officers liability insurance maintained by the Company or pursuant to a trust fund, letter of credit or other security or funding arrangement provided by the Company; PROVIDED, HOWEVER, that if it should subsequently be determined that Indemnitee is not entitled to retain any such amount, this clause (i) shall no longer apply to such amount; (ii) in respect of remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that payment of such remuneration was in violation of applicable law; (iii) on account of Indemnitee's conduct which is finally adjudged to constitute willful misconduct or to have been knowingly fraudulent, deliberately dishonest or from which the Indemnitee derives an improper personal benefit; or (iv) on account of any suit in which final judgment is rendered against Indemnitee for an accounting of profits made from the sale or purchase by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended. (b) If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for only a portion (but not, however, for the total amount) of any Expenses or Liabilities actually incurred by Indemnitee in connection with any Proceeding, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses and Liabilities to which Indemnitee is entitled. If the indemnification provided for herein in respect of any Expenses or Liabilities actually incurred by Indemnitee in connection with any Proceeding is finally determined by a court of competent jurisdiction to be prohibited by applicable law, then the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount paid or payable by Indemnitee as a result of such Expenses and Liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and Indemnitee on the other hand from the events, circumstances, conditions, happenings, actions or transactions from which such Proceeding arose, (ii) the relative fault of the Company (including its other Authorized Representatives) on the one hand and of Indemnitee on the other hand in connection with the events, circumstances and happenings which resulted in such Expenses and Liabilities, such relative fault to be determined by -3- reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the events, circumstances and/or happenings resulting in such Expenses and Liabilities, and (iii) any other relevant equitable considerations, it being agreed that it would not be just and equitable if such contribution were determined by pro rata or other method of allocation which does not take into account the foregoing equitable considerations. (c) The indemnification provided herein shall be applicable only to Proceedings commenced after the date hereof, regardless, however, of whether they arise from acts, omissions, facts or circumstances occurring before or after the date hereof. (d) The indemnification provided herein shall be applicable whether or not negligence of Indemnitee is alleged or proved, and regardless of whether such negligence be contributory or sole. (e) Amounts paid by the Company to Indemnitee under this Section 4 are subject to refund by Indemnitee as provided in Section 8. 4. NOTIFICATION AND DEFENSE OF CLAIMS. (a) Promptly after the receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement of such Proceeding; PROVIDED, HOWEVER, that the omission to so notify the Company will not relieve the Company (i) from any liability which it may have to Indemnitee under this Agreement unless, and then only to the extent that, such omission results in insufficient time being available to permit the Company or its counsel to effectively defend against or make timely response to any loss, claim, damage, liability or expense resulting from such Proceeding or otherwise has a material adverse effect on the Company's ability to promptly deal with such loss, claim, damage, liability or expense or (ii) from any liability which it may have to Indemnitee otherwise than under this Agreement. (b) The following provisions shall apply with respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (i) The Company shall be entitled to participate therein at its own expense. (ii) Except as otherwise provided below, to the extent it may elect to do so, the Company (jointly with any other indemnifying party similarly notified) will be entitled to assume the defense thereof, with counsel of its own selection reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ separate counsel in such Proceeding but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (1) the employment of separate counsel by Indemnitee has been authorized by the Company; (2) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the -4- Company and Indemnitee in the conduct of the defense of such Proceeding; or (3) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which cases the reasonable fees and expenses of Indemnitee's counsel shall be borne by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in (2) above. Nothing in this subparagraph (ii) shall affect the obligation of the Company to indemnify Indemnitee against Expenses and Liabilities paid in settlement for which it is otherwise obligated hereunder. (iii) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceedings or claims effected without its prior written consent. The Company shall not settle any Proceeding or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's prior written consent. Neither the Company nor Indemnitee will unreasonably withhold or delay its consent to any proposed settlement. 6. ADVANCEMENT OF EXPENSES, ETC. If requested to do so by Indemnitee with respect to any Proceeding, the Company shall advance to or for the benefit of Indemnitee, prior to the final disposition of such Proceeding, the Expenses actually incurred by Indemnitee in investigating, defending or appealing such Proceeding. Any judgments, fines or amounts to be paid in settlement of any Proceeding shall also be advanced by the Company upon request by Indemnitee. Advances made by the Company under this Section 6 are subject to refund by Indemnitee as provided in Section 8. 7. RIGHT OF INDEMNITEE TO BRING SUIT. (a) If a claim for indemnification or a claim for an advance under this Agreement is not paid in full by the Company within 30 days after receipt by the Company from Indemnitee of a written request or demand therefor, Indemnitee may bring suit against the Company to recover the unpaid amount of the claim. If, in any such action, Indemnitee makes a prima facie showing of entitlement to indemnification under this Agreement, the Company shall have the burden of proving that indemnification is not required under this Agreement. The only defense to any such action shall be that indemnification is not required by this Agreement. (b) In the event that any action is instituted by Indemnitee to enforce Indemnitee's rights or to collect monies due to Indemnitee under this Agreement and if Indemnitee is successful in such action, the Company shall reimburse Indemnitee for all Expenses incurred by Indemnitee with respect to such action. 8. REPAYMENT OBLIGATION OF INDEMNITEE. If the Company advances or pays any amount to Indemnitee under Section 4, 6 or 7 and if it shall thereafter be finally adjudicated that Indemnitee was not entitled to be indemnified hereunder for all or any portion of such amount, Indemnitee shall promptly repay such amount or such portion thereof, as the case may be, to the Company. If the Company advances or pays any amount to Indemnitee under Section 4, 6 or 7 and if Indemnitee shall thereafter receive all or a portion of such amount under one or more policies of directors and officers liability insurance maintained by the Company or pursuant to a trust fund, -5- letter of credit or other security or funding arrangement provided by the Company, Indemnitee shall promptly repay such amount or such portion thereof, as the case may be, to the Company. 9. CHANGES IN LAW. If any change after the date of this Agreement in any applicable law, statute or rule expands the power of the Company to indemnify Authorized Representatives, such change shall be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. If any change after the date of this Agreement in any applicable law, statute or rule narrows the right of the Company to indemnify an Authorized Representative, such change shall, to the fullest extent permitted by applicable law, leave this Agreement and the parties' rights and obligations hereunder unaffected. 10. CONTINUATION OF INDEMNITY. All agreements and obligations of the Company hereunder shall continue during the period Indemnitee is an Authorized Representative, and shall continue after Indemnitee has ceased to occupy such position or have such relationship so long as Indemnitee shall be subject to any possible Proceeding. 11. NONEXCLUSIVITY. The indemnification and other rights provided by any provision of this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under (i) any statutory or common law, (ii) the Company's certificate of incorporation, (iii) the Company's bylaws, (iv) any other agreement or (v) any vote of stockholders or disinterested directors or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while occupying any of the positions or having any of the relationships referred to in this Agreement. Nothing in this Agreement shall in any manner affect, impair or compromise any indemnification Indemnitee has or may have by virtue of any agreement previously entered into between Indemnitee and the Company. 12. SEVERABILITY. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable (i) the validity, legality or enforceability of the remaining provisions of this Agreement shall not be in any way affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Each provision of this Agreement is a separate and independent portion of this Agreement. 13. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties. No waiver of any of the provisions of this Agreement shall be binding unless executed in writing by the person making the waiver nor shall such waiver constitute a continuing waiver. 14. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be addressed (i) if to the Company, at its principal office address as shown on the signature page hereof or such other address as it may have designated by written notice to Indemnitee for purposes hereof, directed to the attention of the Secretary and (ii) if to Indemnitee, at Indemnitee's address as shown on the signature page hereof or to such other address as Indemnitee may have designated by written notice to the Company for purposes hereof. Each such notice or other communication shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) -6- transmitted by facsimile transmission, at the time that receipt of such transmission is confirmed, or (c) mailed by certified or registered mail with postage prepaid,on the third business day after the date on which it is so mailed. 15. GOVERNING LAW. This Agreement shall be deemed to be a contract made under, and shall be governed by and construed and enforced in accordance with, the internal laws of the State of Texas without regard to principles of conflicts of law. 16. HEIRS, SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon, inure to the benefit of and be enforceable by (i) Indemnitee and Indemnitee's personal or legal representatives, executors, administrators, heirs, devisees and legatees and (ii) the Company and its successors and assigns. This Agreement shall not inure to the benefit of any other person or Enterprise. (b) The Company agrees to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used herein, the term "Company" shall include any successor to its business and/or assets as aforesaid which executes and delivers the assumption and agreement provided for in this Section 16 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. ENTERED into on the day and year first above written. THE COMPANY: PENTACON, INC. By: /s/ MARK E. BALDWIN Name: MARK E. BALDWIN Title: CHAIRMAN & CHIEF EXECUTIVE OFFICER INDEMNITEE: /s/ NISHAN TESHOIAN Nishan Teshoian Address: 7208 Seton House Lane Charlotte, N.C. 28277 EX-27 3
5 3-MOS DEC-31-1999 JUN-30-1999 401 0 42,943 0 122,243 171,586 13,083 (3,731) 320,947 45,902 0 0 0 167 117,732 320,947 71,197 71,197 48,561 64,848 (32) 0 4,266 2,115 1,215 900 0 0 0 900 0.05 0.05
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