Pentacon Strikes Deal to Avert Bankruptcy

John Wolz

Pentacon Inc. announced it has reached an agreement in principle with key lenders to �significantly de-leverage the company.� If the deal is completed, lenders will get 90% of Pentacon�s common stock and current stockholders will be left with 10%.\
Pentacon said it has approved a proposal from a negotiating committee composed of holders of a majority of its $100 million of 12.25% senior notes due April 1, 2009.
The financing plan would avert a prenegoitated filing for bankruptcy.
A company statement said that in exchange for the $100 million of notes, noteholders would receive approximately 90% of the common stock of Pentacon and $35 million in principal of new senior notes due in 2007.
Shareholders would receive 10% of the restructured common stock of Pentacon. Up to 12.5% of the common stock would be reserved for management.
�In addition, the company has been involved in extensive negotiations with the lenders under its senior revolving bank credit facility and expects to receive a written proposal from the lenders to extend the maturity of the facility for one year.
CEO Rob Ruck said the proposed restructuring �will provide us with the financial flexibility we need to grow our business. Pentacon�s management team, our senior lenders and noteholders are committed to rapidly completing the restructuring so that the company can get on with the business of providing our customers with an ever-increasing array of inventory management solutions. Without restructuring of debt, Pentacon could be forced into bankruptcy by lenders.
�We greatly appreciate the confidence that the committee of our noteholders and our senior lenders have shown in Pentacon�s prospects,� Ruck acknowledged. �We also appreciate very much the continued support of our vendors, customers and employees.�
The restructuring is conditioned upon a number of factors, including execution of definitive documentation, due diligence and final approval of Pentacon�s board of directors, including receipt of a fairness opinion and consent of holders of 95% of the outstanding principal.
Bankruptcy Still Looms
Avoiding bankruptcy is far from certain. The company noted that lenders have notified the company that it is not in compliance with several covenants under the Bank Credit Facility, and lenders could demand immediate payment.
Pentacon has a forbearance agreement in which the lenders have agreed not to exercise their remedies under the Bank Credit Facility until April 29, 2002. Based upon the agreement in principle with its noteholders, the company intends to seek an additional extension of the forbearance to coincide with the expected closing of the restructuring transaction.
Pentacon did not make its April 1, 2002, scheduled interest payments. If the company does not pay within 30 days, the lenders could declare all interest and principal due immediately.
Due to the uncertainty of completing the financial restructuring, Pentacon�s auditor, Ernst & Young, has issued a �going concern� qualification to its opinion on the company�s financial statements.
Restructuring / Other Charges
In the fourth quarter of 2001 the company initiated a previously announced plan to restructure its business operations.
In addition, Pentacon conducted an assessment of its business in the aerospace and telecommunications industries in view of the impact of recent events, most notably the events of September 11 and the financial difficulties in the telecommunication industry.
Pentacon expects decreases in revenue in the aerospace industry and continued softness in the telecommunication sector.
After a fourth quarter inventory Pentacon took a noncash charge of $33.4 million for potentially excess aerospace ($31.8 million) and telecommunications ($1.6 million) inventory.
Pentacon is closing five distribution facilities and has reduced its workforce by approximately 14%.
For the quarter ended December 31, 2001, Pentacon reported revenues of $53.3 million, compared with $67.6 million in the prior-year period There was a $48.4 million net loss for the fourth quarter, compared with 1.2 million in the same period of 2000.
Revenue for 2001 totaled $259.4 million, compared with revenues of $283.7 million for 2000 and $273 million for 1999.
Pentacon reported a net loss of $1.7 million for 2001, excluding restructuring and other charges. Pentacon had a net loss of $0.9 million for 2000.
Aerospace Group
Pentacon Aerospace Group�s fourth quarter revenues decreased 17% to $25.0 million, and operating income before charges declined 20% to $2.1 million, compared to 2000.
Pentacon attributed the drops to overall reduction in aerospace activity levels resulting primarily from the events of September 11 and the related cancellation or delay of $5.4 million of orders during the fourth quarter.
Full-year revenues in the Aerospace Group were $129.6 million, a 5% increase from 2000. The Aerospace Group�s 2001 operating income before charges increased 17% compared with 2000.
The revenue increases in the first nine months resulted primarily from the implementation of new contracts.
Industrial Group
Pentacon Industrial Group�s revenues decreased 24% from the fourth quarter of 2000 to $9.1 million.
The industrial group reported decreased demand from its communications, power generation, heavy-duty truck and certain transportation customers.
Fourth quarter operating income before charges decreased 61%.
For the year, Pentacon Industrial Group�s revenue was down 19% from 2000 to $129.7 million and operating income before charges decreased 39% to $10.2 million.
Ruck said last year �was a turbulent one for the country as well as for our company. Given the consequences of the events of September 11 on our fourth quarter, I am very proud of our organization�s ability to react quickly to changing events.�
�Specifically, we moved promptly to reduce operating expenses, modify our inventory buying methodologies, preserve our customer relationships, work with our vendors to reschedule hardware shipments, reduce our senior credit facility debt balance and add several new contracts to our business portfolio,� Ruck pointed out.
�All things considered, the company and its employees turned in a stellar effort, given the business environment with which we were confronted,� Ruck summarized. �2002 FastenerNews.com