<PAGE>
As filed with the Securities and Exchange Commission on September 18, 1996
Registration No. 333-10833
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
PRE-EFFECTIVE
AMENDMENT
NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
MSC INDUSTRIAL DIRECT CO., INC.
(Exact Name of Registrant as Specified in its Charter)
New York 5084 11-3289165
(State of Incorporation) (Primary Standard Industrial (I.R.S.Employer
Classification Code Number) Identification Number)
151 Sunnyside Blvd.
Plainview, New York 11803-1592
(516) 349-7100
(Address and telephone number of
registrant's principal executive offices)
--------------------
Mitchell Jacobson
MSC Industrial Direct Co., Inc.
151 Sunnyside Blvd.
Plainview, New York 11803-1592
(516) 349-7100
(Name, address and telephone number of agent for service)
--------------------
Copies to:
Edward H. Cohen, Esq. Philip E. Coviello, Esq.
Rosenman & Colin LLP Latham & Watkins
575 Madison Avenue 885 Third Avenue, Suite 1000
New York, New York 10022 New York, New York 10022
(212) 940-8800 (212) 906-1200
--------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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 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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
----------------
Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K Showing
Location in Prospectus of Items Required in Form S-1
Form S-1 Item Location in Prospectus
------------- ----------------------
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus........................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus....................... Inside Front and Outside Back
Cover Pages; Additional
Information
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges................................... Prospectus Summary; The
Company; Risk Factors
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Not Applicable
6. Dilution.................................. Not Applicable
7. Selling Security Holders.................. Outside Front Cover Page;
Principal and Selling
Shareholders; Underwriting
8. Plan of Distribution...................... Outside Front Cover Page;
Underwriting
9. Description of Securities to Be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and
Counsel................................... Legal Matters; Experts
11. Information with Respect to the
Registrant................................ Front Cover Page; Prospectus
Summary; Risk Factors;
Dividend Policy; Selected
Financial and Operating Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business;
Management; Certain
Relationships and Related
Transactions; Principal and
Selling Shareholders;
Description of Capital Stock;
Exhibits and Financial
Statement Schedules
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities........................... Not Applicable
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1996
PROSPECTUS
_______, 1996
5,000,000 Shares
[LOGO]
Class A Common Stock
Of the 5,000,000 shares of Class A Common Stock offered hereby, 2,000,000
shares are being sold by the Company and 3,000,000 shares are being sold by the
Selling Shareholders. The Company will not receive any of the proceeds from the
sale of shares of Class A Common Stock by the Selling Shareholders. See
"Principal and Selling Shareholders."
The Company has two classes of common stock. Holders of the Class A Common
Stock, which is offered hereby, are entitled to one vote per share, and holders
of the Class B Common Stock are entitled to ten votes per share. See
"Description of Capital Stock." Upon completion of this Offering (assuming the
Underwriters' over-allotment option is not exercised), the principal
shareholders of the Company will own approximately 60.8% of the outstanding
shares of capital stock of the Company and will control approximately 93.9% of
the combined voting power of all outstanding shares of capital stock of the
Company. Consequently, such shareholders will be in a position to elect all of
the directors of the Company and to determine the outcome of any matter
submitted to a vote of the Company's shareholders for approval. See "Principal
and Selling Shareholders".
The Class A Common Stock is listed on the New York Stock Exchange under the
symbol "MSM." On August 29, 1996, the last reported sales price for the Class A
Common Stock on the New York Stock Exchange was $32.50. See "Price Range of
Class A Common Stock."
See "Risk Factors" beginning on page 7 for certain 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 Underwriting Proceeds Proceeds to
to the Discounts and to the the Selling
Public Commissions(1) Company(2) Shareholders
- --------------------------------------------------------------------------------
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 $600,000, of which approximately
$480,000 and $120,000 will be paid by the Company and the Selling
Shareholders, respectively.
(3) Certain of the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to an aggregate of 750,000 additional shares
of Class A Common Stock solely to cover over-allotments, if any. The
Company will not receive any of the proceeds upon exercise of such over-
allotment option. If such option is exercised in full, the total Price to
the Public, Underwriting Discounts and Commissions and Proceeds to the
Selling Shareholders will be $___________, $_________ and $___________,
respectively. See "Underwriting."
The shares are being offered by the several Underwriters, subject to prior
sale, 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 the shares will be made against payment
in New York, New York on or about _________________.
Donaldson, Lufkin & Jenrette Prudential Securities Incorporated
Securities Corporation
<PAGE>
[PHOTO OF COMPANY PRODUCTS TO BE INSERTED]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the Securities and Exchange Commission. Reports,
proxy statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices at Northwestern Atrium Center, 400 West Madison Street, Suite
140, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained from the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, and the address of such site is
http://www.sec.gov. Such reports, proxy statements and other information are
also available for inspection at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto) included
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, (i) all information in
this Prospectus, including all adjusted and pro forma financial information, has
been adjusted to give effect to the "Reorganization" (as such term is
hereinafter defined), (ii) all references to the "Company" or "MSC" are to MSC
Industrial Direct Co., Inc. and, unless the context otherwise requires, its
subsidiaries, and (iii) the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. See "The Company" and
"Underwriting." All references to a fiscal year are to the Company's fiscal year
which ends on the Saturday nearest August 31 of such year. References to "this
Offering" are to the offering of Class A Common Stock made by this Prospectus.
References to the "Initial Public Offering" are to the Company's initial public
offering of Class A Common Stock in December 1995.
THE COMPANY
MSC is one of the largest direct marketers of a broad range of industrial
products to small and mid-sized industrial customers throughout the United
States. The Company distributes a full line of industrial products, such as
cutting tools, abrasives, measuring instruments, machine tool accessories,
safety equipment, fasteners, welding supplies and electrical supplies, intended
to satisfy its customers' maintenance, repair and operations ("MRO") supplies
requirements. The Company offers over 300,000 stock keeping units through its
3,560 page master catalog and weekly, monthly and quarterly specialty and
promotional catalogs, newspapers and brochures, which are supported by 32
customer service locations. Most of the Company's products are carried in stock,
and orders for these products are typically fulfilled on the day on which the
order is received.
MSC has grown rapidly due to expanded product offerings, increased catalog
distribution and supplemental mailings and geographic expansion. The Company's
net sales have increased at a compound annual rate of 20%, from $118.9 million
in fiscal 1991 to $248.5 million in fiscal 1995. During this same period, income
from operations increased at a compound annual rate of 32% from $11.6 million to
$34.2 million. These growth trends have continued during fiscal 1996. For the
nine months ended June 1, 1996, net sales increased by $42.5 million, or 23.3%,
to $224.5 million from $182.0 million for the nine months ended May 27, 1995,
and income from operations, before taking into account the relocation costs
associated with the move of the Company's Long Island distribution center to
Harrisburg, Pennsylvania, increased by $6.7 million, or 26.4%, to $32.0 million
from $25.4 million for the nine months ended May 27, 1995. The Company also
expects to realize modest future growth from three acquisitions effected during
fiscal 1996.
MSC's business strategy is to provide an integrated, low cost solution to
the purchasing, management and administration of its customers' MRO needs. MSC
has positioned itself to add value to its customers' purchases by reducing their
total MRO supplies cost, taking into account both the direct cost of products
and the administrative, personnel and financial cost of obtaining and
maintaining MRO supplies. MSC's extensive product offerings allow customers to
reduce the administrative burden of dealing with many suppliers for their MRO
needs. The Company guarantees same-day shipping of products, approximately 95%
of which are generally kept in stock, thereby enabling its customers to reduce
their inventory investment and carrying costs. The Company reduces its
customers' administrative paperwork, costs of shipping and personnel costs
related to internal distribution and purchase order management.
The Company's customers include a wide range of purchasers of industrial
supply products, from one-man machine shops to Fortune 500 companies. The
Company focuses on selling relatively higher margin, lower volume products and
has an average order size of approximately $130. MSC has in excess of 125,000
active customers (companies that have purchased at least one item during the
past 12 months), which are typically small and mid-size companies. MSC's
customers select desired products from the Company's various publications and
place their orders by telephone, facsimile or direct computer link.
The Company operates primarily in the United States through a network of
three regional distribution centers and 32 branch offices. The Company's
existing distribution centers are located in Long Island, New York, Atlanta,
Georgia and Elkhart, Indiana. The Company has commenced plans to relocate its
Long Island
3
<PAGE>
distribution center to Harrisburg, Pennsylvania. The Harrisburg, Pennsylvania
distribution center is expected to commence shipping and be fully operational in
the first half of fiscal 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The strategic locations of the
Company's current distribution centers allow for next day delivery via low cost
ground carriers in 28 states located primarily in the eastern United States. The
Company's experience has been that areas accessible by next day delivery
generate significantly greater sales than areas where next day delivery is not
available. Accordingly, the Company's long-term strategy is to establish
additional distribution centers in the West and Southwest, supported by local
branch offices, to expand the Company's geographic coverage of next day delivery
throughout the continental United States.
The Company was formed as a holding company in October 1995 to hold all of
the outstanding capital stock of Sid Tool Co., Inc. (the "Operating
Subsidiary"), which has been in business since 1941. Immediately prior to the
Initial Public Offering, a total of 24,000,000 shares of Class B Common Stock
were issued to the then existing shareholders of the Operating Subsidiary in
exchange for all of the capital stock of the Operating Subsidiary (the
"Reorganization"). The Reorganization did not have any effect on the Company's
or the Operating Subsidiary's operations, financial position or outlook. See
Note 14 of Notes to Financial Statements. Prior to the Reorganization, the
Operating Subsidiary was treated as an S Corporation under subchapter S of the
Internal Revenue Code of 1986 and applicable state tax laws. Upon the
consummation of the Reorganization, the status of the Operating Subsidiary as an
S Corporation terminated and the Company and the Operating Subsidiary became
subject to federal and state income taxes at applicable corporate tax rates.
Prior to the Initial Public Offering, the Operating Subsidiary paid a dividend
(the "S Corporation Dividend") to its then existing shareholders in the
aggregate amount of approximately $62 million, which amount was equal to
substantially all previously taxed, undistributed S Corporation earnings.
The Company's principal executive office is located at 151 Sunnyside
Boulevard, Plainview, New York 11803-1592 and its telephone number is (516)
349-7100.
THIS OFFERING
Class A Common Stock Offered............... 5,000,000 shares
Capital Stock to be Outstanding
After this Offering
Class A Common Stock..................... 13,311,394 shares(1)
Class B Common Stock..................... 20,475,000 shares(2)
Total................................ 33,786,394 shares
==========
Voting Rights.............................. The Class A Common Stock, par value
$.001 per share (the "Class A
Common Stock"), is entitled to one
vote per share and the Class B
Common Stock, par value $.001 per
share (the "Class B Common Stock"),
is entitled to ten votes per share
on all matters requiring a
shareholder vote. See "Risk
Factors--Control of the Company"
and "Description of Capital Stock."
4
<PAGE>
Use of Proceeds............................ The net proceeds to the Company
from this Offering of approximately
$__ million will be used to reduce
outstanding indebtedness under the
Company's revolving credit facility
(the "Credit Facility") and for
general corporate and working
capital purposes. The Company will
not receive any of the proceeds
from the sale of the shares of
Class A Common Stock offered by
the Selling Shareholders. See
"Use of Proceeds."
Risk Factors............................... Certain factors should be
considered in connection with an
investment in the Class A Common
Stock. See "Risk Factors."
NYSE Symbol................................ "MSM"
- ----------
(1) Excludes 2,000,000 shares of Class A Common Stock reserved for issuance
under the Company's 1995 Stock Option Plan, of which options to purchase
791,941 shares of Class A Common Stock are outstanding. See
"Management--1995 Stock Option Plan."
(2) The Class B Common Stock is convertible into Class A Common Stock on a
one-for-one basis at the option of the holder and automatically upon
transfer of such shares to persons other than existing shareholders or
certain of their family members. See "Principal and Selling Shareholders."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
----------------------------------------------------------- ------------------
August 31, August 29, August 28, August 27, September 2,
1991 1992 1993 1994 1995 May 27, June 1,
(52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks) 1995 1996
----------------------------------------------------------- ------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ....................... $118,851 $125,454 $142,287 $174,682 $248,483 $182,025 $224,527
Gross profit .................... 52,309 55,385 61,796 74,852 103,288 75,534 93,263
Operating expenses .............. 40,722 42,454 44,376 50,234 69,049 50,170 61,214
Restructuring charge ............ -- -- -- -- -- -- 8,600
Income from operations .......... 11,587 12,931 17,420 24,618 34,239 25,364 23,449
Income taxes .................... 276 323 418 813 765 612 1,947
Net income ...................... 8,355 10,458 15,682 22,573 31,698 23,432 21,246
Pro forma net income(1) ......... 5,222 6,523 9,740 14,149 18,235 14,547 14,033(3)
Pro forma net income per share(2) $ 0.57 $ 0.46 $ 0.44(3)
======== ======== ========
Pro forma number of shares
outstanding(2) .................. 31,787 31,787 31,787
======== ======== ========
Selected Operating Data(4):
Active customers ................ 65 75 78 98 120 -- 125
Number of SKUs .................. 125 140 150 170 231 -- 302
Orders entered .................. N/A 967 1,103 1,348 1,833 -- 1,560
Number of publication titles (not
in thousands) ................... N/A 12 13 20 38 -- 61
Number of publications mailed ... N/A 2,447 2,688 4,794 6,604 -- 5,167
Revenues per employee ........... $ 185 $ 189 $ 201 $ 214 $ 249 -- $ 262
</TABLE>
<TABLE>
<CAPTION>
September 2,
1995 June 1, 1996
----------- ------------------------
Actual As Adjusted(5)
------ --------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital ...................... $ 81,228 $143,735 $
Total assets ......................... 139,032 219,565
Short-term debt ...................... 9,208 51
Long-term debt, net of current portion 30,969 14,057
Shareholders' equity ................. 72,088 165,105
</TABLE>
- ----------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%, to the elimination of $677 of pretax officer's compensation
for fiscal 1995, and, for fiscal 1995, to a $3,000 adjustment for deferred
compensation expense, which will be recorded ratably over a five year
vesting period, attributable to the granting of restricted stock to certain
key employees. Assuming $600 of such ongoing annual deferred compensation
expense, pro forma net income in fiscal 1995 would have been $19,687 and
pro forma net income per share would have been $0.62. See Note 14 of Notes
to Financial Statements.
(2) Pro forma net income per share is calculated by dividing pro forma net
income by pro forma shares outstanding, which gives effect to (i)
23,475,000 shares of Class B Common Stock, (ii) 8,050,000 shares of Class A
Common Stock sold in the Initial Public Offering, (iii) 156,657 shares of
Class A Common Stock issued prior to the Initial Public Offering to certain
of the Company's employees pursuant to the Company's 1995 Restricted Stock
Plan and (iv) 105,263 shares of Class A Common Stock issued prior to the
Initial Public Offering to shareholders of an affiliated corporation
acquired by MSC.
(3) Excluding the tax-effected impact of the restructuring charge of $8,600 in
the nine month period ended June 1, 1996, pro forma net income for that
period would have been $19,233, or $0.61 per share.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
(5) Gives effect to this Offering and the use of proceeds therefrom.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered in evaluating the Company and its business before
purchasing the shares of Class A Common Stock offered hereby. Certain
information set forth in this Prospectus contains forward-looking statements, as
such term is defined in Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Certain factors discussed herein could cause actual results to
differ materially from those in the forward-looking statements.
Changing Industry Environment
The industrial supply industry is undergoing significant change driven by
pressure from industry participants and by customer objectives. Traditional
industrial suppliers are consolidating operations and acquiring or merging with
other industrial suppliers to achieve economies of scale and increase
efficiency. This consolidation trend could cause the industry to become more
competitive and make it more difficult for the Company to maintain its operating
margins.
Customers are increasingly aware of the total costs of fulfilling their
purchasing requirements and are seeking low cost alternatives to traditional
methods of purchasing and sources of supply. MSC believes that the current trend
is to reduce the number of suppliers and rely more on lower cost alternatives
such as direct mail and/or integrated supply arrangements. Although the Company
believes it provides a competitive solution to customers' MRO purchasing needs
and it is well positioned to take advantage of this trend, there can be no
assurance that it will be able to do so effectively or that it will be able to
establish relationships with integrated supply providers. See
"Business--Industry Overview."
Management of Rapid Growth
MSC's sales have grown from $118.9 million in fiscal 1991 to $248.5 million
in fiscal 1995. This growth trend has continued during fiscal 1996. For the nine
months ended June 1, 1996, net sales increased by $42.5 million, or 23.3%, to
$224.5 million from $182.0 million for the nine months ended May 27, 1995. This
growth has placed increasing demands on the Company's management resources and
facilities. While there can be no assurance that the Company's historical growth
rates will continue in the future, the Company's success will, in part, be
dependent upon the ability of the Company to continue to manage internal growth
effectively.
Dependence on Systems
The Company believes that its proprietary computer software programs are an
integral part of its business and growth strategies. MSC depends upon its
information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, to maintain cost-effective operations and to provide
superior service to its customers. While the Company has taken precautions
against certain events that could disrupt the operation of its information
systems, there can be no assurance that such a disruption will not occur. Any
such disruption could have a material adverse effect on MSC's business and
results of operations. See "Business--Information Systems."
Distribution Center Expansion/Move
During the current fiscal year, the Company commenced shipping from its new
Elkhart, Indiana distribution center, which is now fully operational. Also
during the current fiscal year, the Company announced plans to relocate its Long
Island distribution center to Harrisburg, Pennsylvania. That distribution center
is expected to commence shipping in the beginning of fiscal 1997 and to be fully
operational during the first half of fiscal 1997.
In addition, MSC expects to open new distribution centers to improve the
Company's efficiency, geographic distribution and market penetration. Moving or
opening distribution centers requires a substantial capital investment,
including expenditures for real estate and construction, and a substantial
investment in inventory. In addition, new distribution centers will have an
adverse impact on distribution expenses as a percentage of sales, inventory
turnover and return on investment in the periods prior to and for some time
following the commencement of operations of each new distribution center.
Additionally, until sales volumes mature at new distribution centers, expenses
as a percentage of sales may be adversely impacted. Further, substantial or
unanticipated delays in the commencement of operations at new distribution
centers, as a result of inadequate financing, construction difficulties or
otherwise, will have a material adverse effect on the Company's planned
geographic expansion and may impact results of operations. See
"Business--Distribution Centers."
Integration of Prospective Acquisitions
Acquisitions have played a limited role in the growth of MSC to date. An
element of the Company's future growth strategy is to pursue selected
acquisitions that either expand or complement its business in new or existing
7
<PAGE>
markets. In furtherance of this strategy, the Company made three acquisitions
during fiscal 1996. However, there can be no assurance that in the future the
Company will be able to identify and to acquire acceptable acquisition
candidates on terms favorable to the Company and in a timely manner to the
extent necessary to fulfill the Company's growth strategy. The failure to
complete or successfully integrate prospective acquisitions may have an adverse
impact on the Company's growth strategy. The Company is not currently a party to
any oral or written acquisition agreement or engaged in any negotiations with
respect to any material acquisition candidate. See "Business--Growth Strategy"
and "--Acquisitions."
Competition
The MRO supply industry is a large, fragmented industry that is highly
competitive. The Company faces competition from traditional channels of
distribution such as retail outlets, small dealerships and regional or national
distributors utilizing direct sales forces, from manufacturers of MRO supplies,
from large warehouse stores and from larger direct mail distributors. The
Company believes that sales of MRO supplies will become more concentrated over
the next few years, which may increase the competitiveness of the industry.
Certain of the Company's competitors offer a greater variety of products and
have substantially greater financial and other resources than the Company. See
"Business--Competition."
Dependence on Key Personnel
The Company's success depends largely on the efforts and abilities of
certain key management employees, in particular the Company's three senior
executive officers, Mitchell Jacobson, James Schroeder and Shelley Boxer. The
loss of the services of one or more of such key personnel could have a material
adverse effect on the Company's business and financial results. The Company does
not maintain any key-man insurance policies with respect to any of its executive
officers. See "Management."
Control of the Company
The Company's President and Chief Executive Officer, his sister, certain of
their family members and trusts established for their benefit (hereinafter
collectively referred to as the "Jacobson and Gershwind families") collectively
own 100% of the outstanding shares of Class B Common Stock and will control
approximately 93.9% of the combined voting power of the Company's capital stock
upon the closing of this Offering. Consequently, such shareholders will be in a
position to elect all of the directors of the Company and to determine the
outcome of any matter submitted to a vote of the Company's shareholders for
approval. See "Principal and Selling Shareholders," "Description of Capital
Stock" and "Certain Relationships and Related Transactions."
Possible Volatility of Stock Price
The Class A Common Stock has been trading only since the Initial Public
Offering in December 1995. The Company believes certain factors, such as sales
of Class A Common Stock into the market by existing shareholders, fluctuations
in operating results of the Company or its competitors and market conditions
generally could cause the market price of the Class A Common Stock to fluctuate
substantially. Such market volatility may adversely affect the market price of
the Class A Common Stock.
Shares Eligible for Future Sale
Sales of a substantial number of shares of Class A Common Stock in the
public market, whether by purchasers in this Offering or other shareholders of
the Company, could adversely affect the prevailing market price of the Class A
Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. There will be 13,311,394 shares of
Class A Common Stock outstanding immediately after completion of this Offering
(14,061,394 if the over-allotment option is exercised in full), of which the
5,000,000 shares sold in this Offering (5,750,000 if the over-allotment option
is exercised in full) and the 8,050,000 sold in connection with the Initial
Public Offering will be freely tradeable. All of the shares of Class B Common
Stock (and the shares of Class A Common Stock into which such shares are
convertible) are "restricted securities" for purposes of the Securities Act.
Subject to the volume and other limitations set forth in Rule 144 promulgated
under the Securities Act, all of such restricted securities are eligible for
public sale. The 156,657 shares of Class A Common Stock issued under the 1995
Restricted Stock Plan and the 105,263 shares of Class A Common Stock issued in
connection with the acquisition of an affiliated corporation prior to the
Initial Public Offering are also deemed "restricted securities" and cannot be
sold in the absence of an effective registration statement covering such shares
for a period of two years from the date of the Initial Public Offering. See
"Management--1995 Restricted Stock Plan," "Principal and Selling Shareholders,"
"Certain Relationships and Related Transactions," and "Underwriting."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Class A
Common Stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$__ million. The Company intends to use approximately $44.0 million of such net
proceeds to reduce outstanding indebtedness under the Credit Facility (as
defined), which amount will be available for reborrowing under the Credit
Facility. The remainder of the net proceeds received by the Company from this
Offering will be used for general corporate purposes. Pending such uses, the net
proceeds will be invested in short term, investment grade, interest-bearing
securities. While the Company is not currently a party to any oral or written
acquisition agreement or engaged in any negotiations with respect to any
material acquisition candidate, the Company periodically evaluates potential
opportunities for acquisitions. The Company has completed three acquisitions
during fiscal 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Relationships and Related
Transactions." The Company will not receive any of the proceeds from the sale of
the shares of Class A Common Stock offered by the Selling Shareholders.
The Credit Facility, which will remain in place following this Offering,
provides for unsecured borrowings of up to $80 million and bears interest at the
lead bank's prime or reference rate (8.25% at June 1, 1996), or, alternatively,
at the bankers' acceptance rate or LIBOR rate plus, in each case, margins, which
vary from .45% to .75% per annum.
PRICE RANGE OF CLASS A COMMON STOCK
The Class A Common Stock has been listed on the New York Stock Exchange
under the symbol "MSM" since December 15, 1995. Prior to that date, there was no
trading market for the Class A Common Stock. The following table lists, for the
periods indicated, the high and low sales prices of the Class A Common Stock as
reported on the New York Stock Exchange.
Common Stock
Price of Class A
----------------
High Low
---- ---
Second Quarter (beginning December 15, 1995) ......... 28-3/8 22-1/4
Third Quarter ........................................ 37 27-5/8
Fourth Quarter (through August 29, 1996) ............. 37-1/8 27-7/8
On August 29, 1996, the last reported sales price for the Class A Common
Stock on the New York Stock Exchange was $32.50 per share.
DIVIDEND POLICY
The Company intends to retain its future earnings to finance the
development, expansion and growth of its existing business and does not expect
to pay cash dividends in the foreseeable future. The payment of future
dividends, if any, will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, operations, capital
requirements, the general financial condition of the Company and general
business conditions. The payment of dividends is subject to certain restrictions
contained in the Company's revolving credit facility (the "Credit Facility").
9
<PAGE>
CAPITALIZATION
The following table sets forth (i) the short-term debt and capitalization
of the Company as of June 1, 1996, and (ii) the capitalization of the Company as
adjusted, giving effect to the sale of the 2,000,000 shares of Class A Common
Stock offered by the Company and the application of the net proceeds therefrom.
See "Use of Proceeds."
<TABLE>
<CAPTION>
June 1, 1996
---------------------------
(dollars in thousands)
Actual Adjusted
<S> <C> <C>
Debt:
Short-term debt .......................................................... $ 51
=========
Long-term debt, net of current portion ................................... $ 14,057
---------
Shareholders' equity:
Preferred Stock, $.001 par value; 5,000,000
shares authorized; no shares outstanding .......................... 0
Class A Common Stock, $.001 par value; 100,000,000 shares
authorized; 8,311,394 shares outstanding;
13,313,158 shares outstanding as adjusted(1) ...................... 8
Class B Common Stock, $.001 par value; 50,000,000 shares authorized;
23,475,000 shares outstanding; 20,475,000
shares outstanding as adjusted .................................... 24
Additional paid-in capital .......................................... 144,471
Deferred compensation ............................................... (2,711)
Retained earnings ................................................... 23,313
---------
Total shareholders' equity ................................... 165,105
---------
Total capitalization ................................... $ 179,162
=========
</TABLE>
- ----------
(1) Excludes 2,000,000 shares of Class A Common Stock reserved for issuance
under the Company's 1995 Stock Option Plan, of which options to purchase
791,941 shares of Class A Common Stock are outstanding. See
"Management--Executive Compensation," "--1995 Stock Option Plan,"
"Description of Capital Stock" and Note 14 of Notes to Financial
Statements.
10
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the Company's Financial Statements and
the notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this Prospectus. The
selected income statement data for the fiscal years ended August 28, 1993,
August 27, 1994 and September 2, 1995 and the selected balance sheet data as of
August 27, 1994 and September 2, 1995 are derived from the Company's audited
financial statements which are included elsewhere herein. The selected income
statement data and balance sheet data for the nine month periods ended May 27,
1995 and June 1, 1996 have been derived from, and are qualified by reference to,
the Company's unaudited interim financial statements included elsewhere herein
and include all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for a fair presentation of the results of
the Company for such periods. Results for interim periods are not necessarily
indicative of results that may be achieved for the full fiscal year. The
selected balance sheet data as of August 31, 1991, August 29, 1992 and August
28, 1993 and the selected income statement data for the fiscal years ended
August 31, 1991 and August 29, 1992 are derived from audited financial
statements of the Company not included herein.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
----------------------------------------------------------- ------------------
August 31, August 29, August 28, August 27, September 2,
1991 1992 1993 1994 1995 May 27, June 1,
(52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks) 1995 1996
----------------------------------------------------------- ------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales .................. $118,851 $125,454 $142,287 $174,682 $248,483 $182,025 $224,527
Gross profit ............... 52,309 55,385 61,796 74,852 103,288 75,534 93,263
Operating expenses ......... 40,722 42,454 44,376 50,234 69,049 50,170 61,214
Restructuring charge ....... -- -- -- -- -- -- 8,600
Income from operations ..... 11,587 12,931 17,420 24,618 34,239 25,364 23,449
Income taxes ............... 276 323 418 813 765 612 1,947
Net income ................. 8,355 10,458 15,682 22,573 31,698 23,432 21,246
Pro forma net income(1) .... 5,222 6,523 9,740 14,149 18,235 14,547 14,033(3)
Pro forma Net income per ...
share(2) ................... $ 0.57 $ 0.46 $ 0.44(3)
Pro forma Number of
shares outstanding(4) ...... 31,787 31,787 31,787
Selected Operating Data(4):
Active customers ........... 65 75 78 98 120 -- 125
Number of SKUs ............. 125 140 150 170 231 -- 302
Orders entered ............. N/A 967 1,103 1,348 1,833 -- 1,560
Number of publication titles
(not in thousands) ......... N/A 12 13 20 38 -- 61
Number of publications
mailed ..................... N/A 2,447 2,688 4,794 6,604 -- 5,167
Revenues per employee....... $ 185 $ 189 $ 201 $ 214 $ 249 -- $ 262
</TABLE>
<TABLE>
<CAPTION>
August 31, August 29, August 28, August 27, September 2, June 1,
1991 1992 1993 1994 1995 1996
----------- ---------- ---------- ---------- ------------ --------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at period end):
Working capital ........ $ 30,242 $ 54,158 $ 57,335 $ 48,726 $ 81,228 $143,735
Total assets ........... 81,442 75,745 80,853 91,307 139,032 219,565
Short-term debt ........ 31,577 498 665 12,728 9,208 51
Long-term debt, net of
current portion ........ 0 23,762 18,374 3,220 30,969 14,057
Shareholders' equity ... 39,229 40,187 49,708 55,750 72,088 165,105
</TABLE>
(Footnotes on next page)
11
<PAGE>
(Footnotes from previous page)
- ----------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%, to the elimination of $677 of pretax officer's compensation
for fiscal 1995, and, for fiscal 1995, to a $3,000 deferred compensation
expense, which in the future will be recorded ratably over a five year
vesting period, attributable to the granting of restricted stock to certain
key employees. Assuming $600 of such ongoing annual deferred compensation
expense, pro forma net income in fiscal 1995 would have been $19,687 and
pro forma net income per share would have been $0.62. See Note 14 of Notes
to Financial Statements.
(2) Pro forma net income per share is calculated by dividing pro forma net
income by pro forma shares outstanding, which gives effect to (i)
23,475,000 shares of Class B Common Stock, (ii) 8,050,000 shares of the
Class A Common Stock offered in the Initial Public Offering, (iii) 156,394
shares of Class A Common Stock issued to certain of the Company's employees
pursuant to the Company's 1995 Restricted Stock Plan and (iv) 105,263
shares of Class A Common Stock issued to shareholders of an affiliated
corporation acquired by MSC.
(3) Excluding the tax-effected impact of the restructuring charge of $8,600 in
the nine month period ended June 1, 1996, pro forma net income for that
period would have been $19,233, or $0.61 per share.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
In recent years, the Company made the strategic decision to leverage its
strength as a low-cost value-added MRO provider by adding new categories of MRO
supplies, such as welding and electrical supplies, which has increased sales to
existing customers and allowed the Company access to new customers. The Company
believes that revenues have increased, in part, as a result of the increase in
the number of stock keeping units ("SKUs"); however, the Company is unable to
quantify precisely the impact of such increase. The Company intends to continue
to add new product categories and increase the number of products offered in
existing product categories in its efforts to gain new customers and increase
sales from existing customers. During fiscal 1996, the Company added over 70,000
SKUs and expects to add approximately 25,000 SKUs during each of the next two
fiscal years. The Company generally adds SKUs in response to the feedback it
receives from its existing customers. In this way, the Company seeks to increase
purchases from existing customers through increased product offerings that it
knows are desired by its customers. While adding new product categories is
important to increasing volume and profits, this expansion will result in
increases in the Company's inventory purchases. The Company also seeks to expand
its customer base by offering its increased product lines and product offerings
to customers who have not previously purchased merchandise from the Company.
There can be no assurance that the Company will be able to increase the number
of SKUs offered or that the correlation between the number of SKUs offered and
revenues will continue.
The Company significantly expanded its direct mail marketing program from
approximately 2.4 million pieces in fiscal 1993 to 6.6 million pieces in fiscal
1995. In fiscal 1996, the Company adopted a more focused strategy for targeting
mailing pieces and increased its level of investment in new products and
distribution capabilities. Accordingly, in fiscal 1996, mailings remained
relatively flat at 6.3 million pieces. Targeted mailings to customers or
potential customers are designed to maximize the Company's return in relation to
its marketing expenditures. The Company utilizes its customer databases to match
specific customer profiles with an expanding selection of catalog titles which
emphasize specific product categories. The Company believes that increasing
mailings to more targeted customer segments has resulted in increased marketing
productivity.
In fiscal 1997, the Company intends to take advantage of the additional
products offered and its expanded distribution capabilities by further
increasing its direct marketing efforts. Such increases in direct marketing
expenditures are expected to benefit from the expanded products offerings and
improved distribution capabilities; however, the costs associated with this
program will be incurred substantially in advance of increased sales and may
negatively impact operating margins in the short term. Such costs are expected
to be offset, in part, by increases in vendor funded co-op payments which will
offset a portion of the catalog and mailing expenses. There can be no assurance
that continued expansion of the Company's direct mail marketing program will
result in new customers or an increase in sales from existing customers.
Revenues per employee increased from $185,000 in fiscal 1991 to an
annualized rate of $262,000 during the first nine months of fiscal 1996. The
Company believes that this increase in revenues per employee is indicative of
its efforts to achieve higher levels of efficiency and cost savings at the
employee level. Commencement of shipping operations at the Elkhart, Indiana
distribution center has had a negative impact on revenues per employee. Further,
commencement of shipping operations at the Harrisburg, Pennsylvania distribution
center may have a negative impact on revenues per employee until such time as
this facility is fully operational. The Company will continue to improve the
efficiency and performance of its employees, although there can be no assurance
that this can be accomplished.
The number of annual orders entered and processed has increased from
approximately 1.0 million in fiscal 1992 to an annualized rate of approximately
2.1 million per year during the first nine months of fiscal 1996. The average
order size of approximately $130 has remained relatively constant throughout
this period. The Company believes that its targeted marketing campaign strategy
to continue to add new product categories and new products within existing
categories and increased efficiencies in order processing have been significant
contributing factors to the Company's increase in orders and, accordingly,
sales, both from existing customers
13
<PAGE>
and from new customers. However, there can be no assurance that the Company will
be able to continue to grow at rates recently experienced or at all.
In fiscal 1996 and through the first half of fiscal 2001, the Company will
record a non-cash deferred compensation charge at a rate of approximately
$600,000 per year as a result of the issuance of 156,657 shares of Class A
Common Stock to certain of the Company's employees pursuant to the Company's
1995 Restricted Stock Plan.
MSC commenced shipping operations at its new distribution center in
Elkhart, Indiana during fiscal 1996 in order to improve the Company's
efficiency, geographic distribution and market penetration. The opening of this
new distribution center required a substantial capital investment, including
expenditures for real estate and construction, and substantial investment for
inventory. The opening has also adversely impacted distribution expenses as a
percentage of sales, inventory turnover and return on investment in the periods
prior to and since the commencement of operations. Additionally, until sales
volumes mature at this new distribution center, expenses as a percentage of
sales may be adversely impacted. During fiscal 1996, the Company also incurred
substantial capital investment in commencing its relocation of its Long Island
distribution center to Harrisburg, Pennsylvania. The relocation is likely to
have the same adverse effects as the opening of the Elkhart, Indiana
distribution center on distribution expenses as a percentage of sales, inventory
turnover and return on investment over the next two fiscal years.
Results of Operations
The following table represents the Company's net sales and statement of
income data expressed as a percentage of net sales for the three most recent
fiscal years and the nine months ended May 27, 1995 and June 1, 1996:
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
----------------------------------------- -------------------------
August 28, August 27, September 2, May 27, June 1,
1993 1994 1995 1995 1996
---------- ---------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Net sales (dollars in thousands) $ 142,287 $ 174,682 $ 248,483 $ 182,025 $ 224,527
========== ========== ========== ========== ==========
Net sales ...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit ................... 43.4 42.9 41.6 41.5 41.5
Operating expenses ............. 31.2 28.8 27.8 27.6 27.3
Restructuring charge ........... -- -- -- -- 3.8
Income from operations ......... 12.2 14.1 13.8 13.9 10.4
Net interest expense ........... (0.7) (0.4) (0.7) (0.7) (0.2)
Net income ..................... 11.0 12.9 12.8 12.9 9.5
Pro forma net income ........... 6.8 8.1 7.3 8.0 6.3
</TABLE>
Thirty-Nine Weeks Ended June 1, 1996 Compared to Thirty-Nine Weeks Ended May 27,
1995
Net sales increased by $42.5 million, or 23.3%, to $224.5 million in the
first nine months of 1996, from $182.0 million in the first nine months of 1995.
This increase was primarily attributable to an increase in sales to the
Company's existing customers and, to a lesser extent, to an increase in the
number of active customers. The increase in sales to existing customers was
derived primarily from an increase in the number of SKUs offered.
Gross profit increased by $17.7 million, or 23.5%, to $93.2 million in the
first nine months of 1996, from $75.5 million in the first nine months of 1995.
The increase in gross profit was attributable to increased sales. As a
percentage of sales, gross profit remained constant at 41.5% for each of the
respective periods.
Operating expenses, exclusive of the restructuring charge, increased by
$11.0 million, or 22.0%, to $61.2 million in the first nine months of 1996 from
$50.2 million in the first nine months of 1995. This increase was attributable
to increased sales volume, which required added staffing and support. As a
percentage of sales, operating expenses declined slightly from 27.6% to 27.3%.
Income from operations decreased by $1.9 million, or 7.6%, to $23.5 million
in the first nine months of 1996, from $25.4 million in the first nine months of
1995. This decrease was attributable to the aforementioned restructuring charge
and increases in operating expenses, offset in part by increased sales and gross
profit. Before
14
<PAGE>
taking into account the restructuring charge, income from operations would have
increased by $6.7 million, or 26.4%, to $32.0 million.
Net income decreased by $2.2 million, or 9.3%, to $21.2 million in the
first nine months of 1996, from $23.4 million in the first nine months of 1995.
The decrease in net income is primarily attributable to the restructuring charge
and taxation at "C" corporation rates, partially offset by increased sales and
gross profit. Before taking into account the restructuring charge, net income
would have increased by $6.4 million, or 27.4%, to $29.9 million. Fiscal Year
Ended September 2, 1995 Compared to Fiscal Year Ended August 27, 1994
Net sales increased by $73.8 million, or 42.2%, to $248.5 million in fiscal
1995 from $174.7 million in fiscal 1994. This increase was attributable to a 20%
increase in the number of SKUs offered by MSC, a 19% increase in revenues per
SKU and the inclusion of an extra week in fiscal 1995 (the Company's fiscal
years contain either 52 or 53 weeks). These increases also reflect a 24%
increase in the average number of active customers and a 15% increase in average
annual sales per customer. The Company believes that the new customers were
attracted as a result of direct marketing expenditures of $6.5 million in fiscal
1995 compared to expenditures of $3.9 million in fiscal 1994 (net of cooperative
advertising revenues of approximately $1.1 million in fiscal 1995 and
approximately $0.5 million in fiscal 1994), as well as the addition of 24 new
sales representatives and the opening of 4 new branch offices. The Company
believes that average sales per customer increased primarily as a result of the
increased selection of merchandise available as reflected by the increased SKU
count, as well as increased direct marketing efforts.
Gross profit increased by $28.4 million, or 38.0%, to $103.3 million in
fiscal 1995 from $74.9 million in fiscal 1994. As a percentage of sales, gross
profit margins in fiscal 1995 declined to 41.6% from 42.9% in fiscal 1994. The
absolute increase in gross profit was attributable to increased sales and the
inclusion of an extra week in fiscal 1995, offset in part by decreasing margins.
Gross profit margins declined, in part, due to the introduction of approximately
61,000 new SKUs in fiscal 1995. New SKUs are typically introduced at slightly
reduced prices in order to establish such products in the marketplace. The
Company believes that new product introductions will ultimately result in
increased gross margins when new product volumes reach levels that are customary
for mature products. Operating software improvements allowing better control
over buying and pricing decisions were implemented during fiscal 1995 and are
expected to have a positive impact on margins for fiscal 1996 and beyond.
Operating expenses increased by $18.8 million, or 37.5%, to $69.0 million
in fiscal 1995 from $50.2 million in fiscal 1994. As a percentage of sales,
operating expenses in fiscal 1995 declined to 27.8% from 28.8% in fiscal 1994.
The absolute increase in operating expenses was attributable to increased sales
volumes which required added staffing and support and the inclusion of an extra
week in fiscal 1995. The decline in operating expenses as a percentage of sales
was attributable to leveraging of fixed costs over a larger revenue base, the
realization of economies of scale and installed technological improvements such
as increased automation of order processing and improvements in fulfillment
processes. The improvements were offset, in part, by increased direct marketing
expenditures necessary to expand the Company's customer base and product
development, marketing and stocking costs necessary to support the increased SKU
count. The Company expects to incur approximately $3.5 million of additional
operating, personnel and depreciation expenses during fiscal 1996 with respect
to its new Elkhart, Indiana distribution facility. This facility will continue
to incur similar expenses until commencement of full scale operations in fiscal
1997.
Income from operations increased by $9.6 million, or 39.1%, to $34.2
million in fiscal 1995 from $24.6 million in fiscal 1994. As a percentage of
sales, income from operations in fiscal 1995 decreased to 13.8% from 14.1% in
fiscal 1994. This decrease reflects the cumulative effects of a 1.3% decline in
gross profit margins offset by a 1.0% improvement in operating expenses as a
percentage of sales.
Net interest expense increased by $1.1 million, or 160.8%, to $1.8 million
in fiscal 1995 from $0.7 million in fiscal 1994. This increase was primarily
attributable to additional borrowings necessary to fund increased investments in
inventory. Additionally, the Company experienced a small increase in its average
interest rates paid during fiscal 1995.
15
<PAGE>
Net income increased by $9.1 million, or 40.4%, to $31.7 million in fiscal
1995 from $22.6 million in fiscal 1994. As a percentage of sales, net income in
fiscal 1995 decreased to 12.8% from 12.9% in fiscal 1994. This decrease reflects
the cumulative effects of a 1.3% decline in gross profit margins and a 0.3%
increase in net interest expense as a percentage of sales, offset by a 1.0%
improvement in operating expenses as a percentage of sales.
Pro forma net income increased by $4.1 million, or 28.9%, to $18.2 million
in fiscal 1995 from $14.1 million in fiscal 1994. As a percentage of sales, pro
forma net income in fiscal 1995 decreased to 7.3% from 8.1% in fiscal 1994. This
change in pro forma net income reflects the cumulative effects of the changes in
net income plus the elimination for purposes of calculating pro forma results of
$677,000 of pretax officer's compensation in fiscal 1995. Additionally, the
fiscal 1995 pro forma net income reflects the impact of a $3 million adjustment
for deferred compensation expense attributable to the granting of an equivalent
amount of restricted stock to certain key employees. The Company will record
compensation expense associated with these restricted stock grants of
approximately $600,000 per year in each of the next five years.
Fiscal Year Ended August 27, 1994 Compared to Fiscal Year Ended August 28, 1993
Net sales increased by $32.4 million, or 22.8%, to $174.7 million in fiscal
1994 from $142.3 million in fiscal 1993. This increase was directly attributable
to an 13.0% increase in the number of SKUs offered and an 8.3% increase in
revenues per SKU. These increases were driven by a 15% increase in the average
number of active customers and a 7% increase in average annual sales per
customer. The Company believes that the new customers were attracted as a result
of direct marketing expenditures of $3.9 million in fiscal 1994 compared to $3.1
million in fiscal 1993 (net of cooperative advertising revenues of approximately
$0.5 million in fiscal 1994 and $0.3 million in fiscal 1993) as well as the
addition of 25 new sales representatives and the opening of 2 new branch
offices.
Gross profit increased by $13.1 million, or 21.1%, to $74.9 million in
fiscal 1994 from $61.8 million in fiscal 1993. As a percentage of sales, gross
profit margins declined to 42.9% in fiscal 1994 from 43.4% in fiscal 1993. The
absolute increase in gross profit was attributable to increased sales, offset in
part by decreasing margins. Gross profit margins declined, in part, due to the
introduction of 20,000 new SKUs in fiscal 1994. New SKUs are typically
introduced at slightly reduced prices in order to establish such products in the
marketplace. The Company believes that new product introductions will ultimately
result in increased gross margins when new product volumes reach levels that are
customary for mature products.
Operating expenses increased by $5.9 million, or 13.2%, to $50.2 million in
fiscal 1994 from $44.4 million in fiscal 1993. As a percentage of sales,
operating expenses declined to 28.8% in fiscal 1994 from 31.2% in fiscal 1993.
The absolute increase in operating expenses was attributable to increased sales
volumes that required added staffing and support. The decline in operating
expenses as a percentage of sales was attributable to leveraging of fixed costs
over a larger revenue base, the realization of economies of scale and installed
technological improvements such as increased automation of order processing and
improvements in fulfillment processes. These improvements were offset, in part,
by increased direct marketing expenditures necessary to expand the Company's
customer base and product development, marketing and stocking costs necessary to
support the increased SKU count.
Income from operations increased by $7.2 million, or 41.3%, to $24.6
million in fiscal 1994 from $17.4 million in fiscal 1993. As a percentage of
sales, income from operations in fiscal 1994 increased to 14.1% from 12.2% in
fiscal 1993. This 1.9% improvement reflects the cumulative effects of a 0.5%
decline in gross profit margins offset by a 2.4% improvement in operating
expenses as a percentage of sales.
Net interest expense decreased by $0.3 million, or 30.3%, to $0.7 million
in fiscal 1994 from $1.0 million in fiscal 1993. This decrease was primarily
attributable to a reduction in borrowings necessary to fund inventory. During
this period, inventory levels as a percentage of sales decreased as a result of
the implementation of a program to improve inventory productivity which resulted
in inventory turns increasing from 1.7x to 1.9x. Additionally, during fiscal
1994, the Company experienced a small increase in its average interest rates
paid compared to fiscal 1993.
16
<PAGE>
Net income increased by $6.9 million, or 43.9%, to $22.6 million in fiscal
1994 from $15.7 million in fiscal 1993. As a percentage of sales, net income in
fiscal 1994 increased to 12.9% from 11.0% in fiscal 1993.
Pro forma net income increased by $4.4 million, or 45.3%, to $14.1 million
in fiscal 1994 from $9.7 million in fiscal 1993. As a percentage of sales, pro
forma net income in fiscal 1994 increased to 8.1% from 6.8% in fiscal 1993. This
change in pro forma net income reflects the cumulative effects of changes in net
income.
Quarterly Results and Seasonality
The following table sets forth unaudited financial data for each of the
Company's last eleven fiscal quarters.
<TABLE>
<CAPTION>
Year Ended August 27, 1994 Year Ended September 2, 1995
-------------------------------------------- ------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales.................. $38,877 $43,232 $47,952 $44,621 $54,118 $61,187 $66,719 $66,459
Income from operations..... 5,091 6,147 6,948 6,432 6,640 8,473 10,248 8,878
Net income................. 4,524 5,648 6,666 5,785 6,210 7,880 9,311 8,297
Pro forma net income(1).... 2,851 3,540 4,189 3,569 3,845 4,900 5,782 3,708(2)
</TABLE>
<TABLE>
<CAPTION>
Year Ending August 31, 1996
-------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
<S> <C> <C> <C>
Income Statement Data:
Net sales.................. $69,681 $74,631 80,215
Income from operations..... 8,766 10,305 4,378
Net income................. 7,988 10,950 2,758
Pro forma net income(1).... 4,969 6,305
</TABLE>
- ----------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%.
(2) Gives pro forma effect to the elimination of $677 of pre-tax officer's
compensation and the impact of a $3,000 adjustment for deferred
compensation expense attributable to the granting of restricted stock to
certain key employees.
The Company has generally experienced slightly lower sales volumes during
the summer months and the Company expects this trend to continue in the
foreseeable future. As a result, net income in its fourth fiscal quarter is
somewhat lower than in the third fiscal quarter, due largely to the continuation
of the Company's fixed costs during slower sales periods. The Company's
quarterly results of operations may also fluctuate as a result of a variety of
other factors, including the timing of commencement of operations at new
distribution centers.
Liquidity and Capital Resources
The Company's primary capital needs have been to fund (i) the working
capital requirements necessitated by its sales growth and (ii) prior to the
Reorganization distributions to its existing shareholders, primarily to satisfy
their tax liabilities resulting from the S Corporation status of the Operating
Subsidiary. The Company's primary sources of financing have been cash from
operations, bank borrowings under the Credit Facility, subordinated loans from
shareholders and, during fiscal 1996, a portion of the proceeds from the Initial
Public Offering. The Company anticipates that the proceeds from this Offering,
its cash flows from operations and available lines of credit will be adequate to
support its operations for the immediate future and for at least the next 24
months.
In March 1996, the Company commenced shipments from its Elkhart, Indiana
distribution center, which will provide next day service to most of the
midwestern United States. The increases in inventory reflected in the June 1,
1996 balance sheet are substantially the result of the opening of this facility.
Under the terms of the Credit Facility, the Company has available unsecured
borrowings of up to $80 million. Interest on amounts borrowed may be paid at the
option of the Company at a rate per annum equal to the lead bank's prime or
reference rate (8.25% at June 1, 1996), or alternatively at the bankers'
acceptance rate or LIBOR rate plus margins, which vary from .45% to .75% per
annum. The Credit Facility contains certain covenants limiting mergers, use of
proceeds, indebtedness, liens, investments, sale of assets and acquisitions. The
Credit Facility also contains certain financial covenants which require the
Company to maintain a minimum net
17
<PAGE>
worth, ratio of current assets to current liabilities, ratio of liabilities to
effective net worth, minimum interest coverage ratio and positive net income, to
refrain from capital expenditures in excess of certain amounts and to limit the
issuance of dividends. The Company is currently in compliance with these
financial covenants and has been in compliance with all applicable financial
covenants during the term of the Credit Facility. As of June 1, 1996, the
Company had outstanding borrowings under the Credit Facility of approximately
$13.5 million, a portion of which was used in connection with inventory
purchases for the Elkhart, Indiana distribution center.
Net cash used in operating activities increased $23.5 million to $27.3
million from $3.8 million for the thirty-nine week periods ended June 1, 1996
and May 27, 1995, respectively, primarily due to purchases of inventory in
connection with the stocking of the Elkhart distribution center and introduction
of new products. Net cash provided by (used in) operating activities was $13.6
million, $21.0 million and $(1.2) million in fiscal 1993, 1994 and 1995,
respectively. The increase from fiscal 1993 to fiscal 1994 was primarily due to
increased net income, an increase in accounts payable and accrued expenses and a
reduction in prepaid catalog expense partially offset by increased inventory and
accounts receivable levels. The decrease from fiscal 1994 to fiscal 1995
resulted principally from an increase in inventory due to investments in the new
Elkhart, Indiana distribution center and a build-up of inventory for the
introduction of approximately 70,000 new SKUs in September 1995. Net cash used
in investing activities for the thirty-nine week periods ended June 1, 1996 and
May 27, 1995 was approximately $15.4 million and $7.7 million, respectively. The
increase substantially represents costs associated with the construction of the
distribution centers in Elkhart, Indiana and Harrisburg, Pennsylvania. Net cash
used in investing activities in fiscal 1995 of $9.5 million was primarily as a
result of purchases of property, plant and equipment. Net cash used in investing
activities in fiscal 1994 of $2.8 million was primarily attributable to
purchases of property, plant and equipment, as well as the acquisition of a
business for $629,000. In fiscal 1993, net cash used in investing activities was
$1.5 million as a result of purchases of property, plant and equipment. Net cash
provided by financing activities during the thirty-nine week periods ended June
1, 1996 and May 27, 1995 was approximately $43.7 million and $8.1 million,
respectively. The increase is primarily attributable to proceeds received from
the Company's Initial Public Offering, net of repayments of borrowings and
distributions to "S" corporation shareholders. Net cash provided by (used in)
financing activities was $(12.3) million, $(15.0) million and $7.9 million in
fiscal 1993, 1994 and 1995, respectively, primarily reflecting the Company's
borrowings in connection with the Credit Facility and additional bank borrowings
in fiscal 1995 principally to fund the growth in inventory.
Prior to the Reorganization, the Operating Subsidiary was treated as an S
Corporation under subchapter S of the Internal Revenue Code of 1986 and
applicable state tax laws. Upon the consummation of the Reorganization, the
status of the Operating Subsidiary as an S Corporation was terminated and the
Operating Subsidiary and the Company are now subject to federal and state income
taxes at applicable corporate tax rates. Prior to the Initial Public Offering,
the Operating Subsidiary paid the S Corporation Dividend to the then existing
shareholders in the aggregate amount of approximately $62 million, which amount
was equal to substantially all previously taxed, undistributed S Corporation
earnings.
18
<PAGE>
BUSINESS
General
MSC is one of the largest direct marketers of a broad range of industrial
products to small and mid-sized industrial customers throughout the United
States. The Company distributes a full line of industrial products, such as
cutting tools, abrasives, measuring instruments, machine tool accessories,
safety equipment, fasteners, welding supplies and electrical supplies, intended
to satisfy its customers' maintenance, repair and operations ("MRO") supplies
requirements. The Company offers over 300,000 SKUs through its 3,560 page master
catalog and weekly, monthly and quarterly specialty and promotional catalogs,
newspapers and brochures, which are supported by 32 customer service locations.
Most of the Company's products are carried in stock, and orders for these
products are typically fulfilled on the day on which the order is received.
MSC has grown rapidly due to expanded product offerings, increased catalog
distribution and supplemental mailings and geographic expansion. The Company's
net sales have increased at a compound annual rate of 20% from $118.9 million in
fiscal 1991 to $248.5 million in fiscal 1995. During this same period, income
from operations increased at a compound annual rate of 32% from $11.6 million to
$34.2 million. These growth trends have continued during fiscal 1996. For the
nine months ended June 1, 1996, net sales increased by $42.5 million, or 23.3%,
to $224.5 million from $182.0 million for the nine months ended May 27, 1995,
and income from operations, before taking into account the relocation costs
associated with the move of the Company's Long Island distribution center to
Harrisburg, Pennsylvania increased by $6.7 million, or 26.4%, to $32.0 million
from $25.4 million for the nine months ended May 27, 1995. The Company also
expects to realize modest future growth from three acquisitions effected during
fiscal 1996.
MSC's business strategy is to provide an integrated, low cost solution to
the purchasing, management and administration of its customers' MRO needs. MSC
has positioned itself to add value to its customers' purchases by reducing their
total MRO supplies costs, taking into account both the direct cost of products
and the administrative, personnel and financial cost of obtaining and
maintaining MRO supplies. MSC's extensive product offerings allow customers to
reduce the administrative burden of dealing with many suppliers for their MRO
needs. The Company guarantees same-day shipping of products, approximately 95%
of which are generally kept in stock, thereby enabling customers to reduce their
inventory investment and carrying costs. The Company reduces its customers'
administrative paperwork, costs of shipping and personnel costs related to
internal distribution and purchase order management by consolidating multiple
purchases into a single shipment, providing a single invoice relating to
multiple purchases over varying periods of time and offering the ability to
direct shipments to specific departments and personnel within a single facility
or multiple facilities.
The Company's customers include a wide range of purchasers of industrial
supply products, from one-man machine shops to Fortune 500 companies. The
Company focuses on selling relatively higher margin, lower volume products and
has an average order size of approximately $130. MSC has in excess of 125,000
active customers (companies that have purchased at least one item during the
past 12 months), which are typically small and mid-size companies. MSC's
customers select desired products from the Company's various publications and
place their orders by telephone, facsimile or direct computer link.
The Company operates primarily in the United States, with customers in all
50 states, through a network of three regional distribution centers and 32
branch offices. The Company's existing distribution centers are located in Long
Island, New York, Atlanta, Georgia and Elkhart, Indiana. The Company has
commenced plans to relocate its Long Island distribution center to Harrisburg,
Pennsylvania. The Harrisburg, Pennsylvania distribution center is expected to
commence shipping and be fully operational in the first half of fiscal 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The strategic locations of the Company's current distribution
centers allow for next day delivery via low cost ground carriers in 28 states
located primarily in the eastern United States. The Company's experience has
been that areas accessible by next day delivery generate significantly greater
sales than areas where next day delivery is not available. Accordingly, the
Company's long-term strategy is to establish additional distribution centers in
the West and Southwest, supported by local branch offices, to expand the
Company's geographic coverage of next day delivery throughout the continental
United States.
19
<PAGE>
Industry Overview
The Company operates in a large, fragmented industry characterized by
multiple channels of distribution. The total United States market for MRO
supplies of the categories of industrial products sold by MSC is estimated to be
in excess of $140 billion annually, with the top 50 industrial distributors
accounting for approximately 12% of the market. The Company believes that
approximately 135,000 small retailers, dealerships and distributors,
substantially all of which have annual sales of less than $10 million, supply
over 65% of the market. The distribution channels in the industrial products
market include retail outlets, small distributorships, national, regional and
local distributors, direct mail suppliers, large warehouse stores and
manufacturers' own sales forces.
Almost every industrial, manufacturing and service business has an ongoing
need for MRO supplies. The Company believes that because most businesses focus
primarily on their manufacturing processes or services provided, relatively
little attention is given to MRO purchasing. Except in the largest industrial
plants, MRO supplies inventories may not be effectively managed or monitored,
resulting in higher purchasing costs and increased administrative burdens. MRO
items are generally purchased by personnel whose primary functions involve areas
other than the acquisition of MRO supplies. Within larger facilities, such items
are frequently stored in multiple locations, resulting in excess inventories and
duplicative purchase orders. MRO items are frequently purchased by multiple
personnel in uneconomic quantities and a substantial portion of most facilities'
MRO supplies are "one-time purchases," resulting in higher purchasing costs and
time-consuming administrative efforts by multiple plant personnel.
The Company believes that the administrative costs associated with placing
a MRO purchase order can be in excess of $100 per order. Awareness of these high
costs and purchasing inefficiencies as referenced above has been driving large
companies to streamline the purchasing process by utilizing a limited number of
suppliers who can provide adequate selection, prompt delivery and superior
customer service. Customized billing practices and report generation
capabilities tailored to customer objectives are also becoming an increasingly
important feature of the total cost reduction model to customers and has
significantly reduced the need for purchasing agents and administrative
personnel. The Company believes that the mid-size customer has begun to respond
to industry and economic pressures and is moving more rapidly toward the more
efficient, cost saving, single supply source offered by the Company. The Company
also believes that the small shop customer is just beginning to realize the
value of suppliers such as MSC in reducing overall costs through reductions in
paperwork, multiple sources of supply, inventory stocks and delivery times.
Despite the apparent inefficiencies of the traditional MRO purchasing
process, long-standing relationships with local retailers and distributors have
generally perpetuated the status quo. Due to limited capital availability, high
operating cost structures and relatively small sales volumes, suppliers to the
industrial market are experiencing increasing pressure to consolidate and
curtail services and certain product lines in order to remain competitive. Even
large suppliers with extensive field sales forces are finding it increasingly
difficult to visit all buyers cost-effectively and provide the support necessary
to satisfy customer demands for control of costs and improved efficiency. The
Company believes that the relative inability of traditional distribution
channels to respond to these changing industry dynamics has created a continuing
opportunity for the growth of direct marketing organizations such as MSC. As a
result of these dynamics, large warehouse stores and direct mail marketers have
captured an increasing share of sales by providing lower total purchasing costs,
better product selection and a higher level of service.
MSC has developed a low cost solution to the purchasing inefficiencies and
high costs described above. Customers that purchase products from MSC will
generally find that their total purchasing costs are reduced through
consolidation of multiple sources of supply into a single supplier,
consolidation of multiple purchase orders into a single purchase order,
consolidation of multiple invoices into a single invoice, significant reduction
in tracking of invoices, significant reduction in stocking decisions and
elimination of purchases for inventory and, through the Company's electronic
ordering system, the elimination of paper orders and invoices. The Company's
customers will generally notice a reduction in purchasing costs, inventory
carrying costs and administrative inefficiency.
20
<PAGE>
Business Strategy
The Company's business strategy is to provide its customers with a low cost
means for obtaining and maintaining MRO supplies, which strategy includes the
following key elements: (i) having a broad selection of in-stock products; (ii)
providing prompt response and same-day shipping; (iii) providing superior,
value-added customer services; (iv) engaging in targeted direct mail marketing;
and (v) a commitment to technological innovation. As a result of this strategy,
the Company is able to lower its customers' overall MRO supplies costs by
reducing administrative paperwork, shipping costs, internal distribution costs
and inventory investment and carrying costs.
o Breadth of Products. The Company believes that its ability to offer
its customers a broad spectrum of brand name and generic MRO products
and a "good-better-best" product selection alternative (similar
product offerings with varying degrees of name recognition, quality
and price, thus permitting the customer to choose the appropriate
product for a specific task at the lowest cost), has been critical to
its success. The Company's customers are increasingly consolidating
their purchasing into fewer suppliers to reduce the administrative
burden of ordering from multiple suppliers. By offering for sale over
300,000 products, approximately 95% of which are in stock and
available for immediate shipment, the Company aims to provide a broad
range of merchandise in order to become its customers' preferred
supplier of MRO products.
o Same-Day Shipping. The Company's guaranteed same-day shipping of
products results in delivery the next day or second day for customers
in most of the continental United States. This prompt delivery allows
customers to reduce the administrative burden of dealing with many
suppliers and reduces inventory investment and carrying costs. The
Company fulfills its same-day shipment of orders guarantee more than
99.9% of the time. The Company's experience has been that areas
accessible by next day delivery will generate significantly greater
sales than areas where next day delivery is not available. The
strategic locations of the Company's distribution centers allow next
day delivery via low cost ground carriers in 28 states located in the
eastern United States.
o Superior Customer Service. Customer service is a key element in
becoming a customer's preferred provider of MRO supplies. The Company
emphasizes customer service and supports this superior service with
sophisticated information systems and extensive training. Utilizing
its proprietary customer support software, the Company's in-bound
telemarketing representatives implement the Company's "one call does
it all" philosophy. Telemarketing representatives are able to inform
customers on a real time basis of the Company's in-stock inventory
availability, recommend substitute products, verify credit
information, receive special, custom or manufacturer direct orders,
cross-check inventory items using customer product codes previously
entered into the Company's information systems and provide technical
product information. The Company believes that its simple, one-call
method of fulfilling all purchasing needs of a customer through a
single highly trained telemarketing representative supported by the
Company's proprietary information systems results in greater
efficiency for customers and increased customer satisfaction. To
complement its superior customer service, the Company seeks to ease
the administrative burdens on its customers by offering electronic
data interchange ("EDI") ordering, customized billing services,
customer savings reports, bulk discounts, stocking of specialty items
specifically requested by customers and other customized report
features.
o Targeted Direct Mail Marketing Strategy. MSC's primary tool for
marketing and product reference is a master catalog containing over
3,560 pages and 300,000 items, which is distributed twice per year
(once per year prior to fiscal 1996). The Company's catalog was
supplemented by approximately 70 specialty and promotional catalog,
brochure and newspaper titles in fiscal 1996, covering such specialty
areas as welding, cutting tools, measuring instruments, abrasives,
industrial supply, and hose and tubing. The Company uses its database
of approximately 180,000 companies and 685,000 individuals, and also
purchases mailing lists of prospective customers, to target the
distribution of these various publications to specific individuals
within an organization whose purchasing history or other criteria
suggest receptivity to mailings of specific publication titles. The
use of specialty and promotional publications, which are produced
in-house, increases productivity through lower costs, increased
response rates and more efficient use of advertising space. MSC's
publications mailings have increased from 2.4 million in fiscal
21
<PAGE>
1992 to approximately 6.6 million in fiscal 1995. The number of
targeted marketing pieces mailed in fiscal 1996 decreased to 6.3
million as the Company adopted a more focused strategy for
distributing targeted marketing pieces. In fiscal 1997, the Company
intends to take advantage of the additional products offered and its
expanded distribution capabilities by substantially increasing its
direct marketing efforts. The Company's expenditures on direct mail
has increased from $3.8 million in fiscal 1992 to approximately $10
million in fiscal 1996, and are budgeted to grow to $12 million in
fiscal 1997.
o Commitment to Technological Innovation. The Company uses technology to
improve customer service and to reduce its operating costs through
more effective buying practices, automated inventory replenishment and
efficient order fulfillment operations. MSC's proprietary software
tracks all 300,000 SKUs and enables the customer and the telemarketing
representative to determine the availability of products in stock on a
real time basis and to evaluate alternative products and pricing. The
Company's EDI system allows a customer to order products directly, set
purchase limits for particular buyers, run customized reports of
purchasing history and select from a variety of billing options. The
information systems developed by the Company enhance inventory
management and turnover, customer service and cost reduction for both
MSC and its customers. In addition to internal and customer
information systems, the Company continually upgrades its distribution
methods and systems to improve productivity and efficiency. The
Company has also developed a World Wide Web information site in
anticipation of increased commerce on the Internet.
The Company believes that direct mail is one of the most effective, low
cost methods of reaching customers. The Company continually seeks to reduce its
own costs in order to continue to be the integrated low cost solution for its
customers. MSC's call centers are a lower cost and more effective alternative to
maintaining a large direct sales force. The Company produces its various product
and promotional publications in-house, thereby significantly reducing marketing
costs. MSC's increasing volume purchasing power has resulted in lower prices
from vendors on many of the products it sells and dispersion of central costs
over a wider revenue base.
Growth Strategy
The Company's objective is to become the preferred supplier of industrial
products for small and mid-size companies throughout the United States. The
Company intends to increase sales to existing and new customers in existing
geographic markets served by next day delivery by (i) increasing the number of
product lines and SKUs offered; (ii) increasing the circulation of the master
catalog and expanding its targeted direct mail campaign; and (iii) acquiring
smaller local distributors to gain access to customers while consolidating the
acquired operations into existing Company distribution facilities. The Company
also intends to increase sales to customers in regions not currently served by
next day delivery by increasing the geographic availability of next day
delivery.
o Increased Penetration of Existing Markets. The Company believes that
its most significant current opportunity to increase profits results
from the incremental revenues which can be realized from existing
customers and new customers in existing geographic areas. MSC believes
that continuing to increase the breadth of its product line and
providing high levels of customer service are the two primary methods
for increasing sales to existing customers and attracting new
customers. Providing a broader product selection is the most effective
way to increase sales to existing customers. Accordingly, MSC has
added in excess of 130,000 SKUs over the past two years while
simultaneously increasing the Company's inventory turns. By expanding
the product lines offered, the Company seeks to satisfy an increasing
percentage of the MRO supplies purchases of its customers.
Additionally, the Company's ability to deliver such expanding product
lines on a next day basis is an important service advantage that
results in lower costs to customers. The Company's commitment to
superior customer service and a broad product base adds to the
convenience and effectiveness of doing business with MSC.
In fiscal 1997, the Company intends to shift its growth emphasis from
increasing its offering of SKUs to increasing the size and diversity
of its customer basis. This shift will take advantage of the Company's
ability to service the industrial midwestern United States through its
Elkhart, Indiana facility. The Company has accumulated a buyer
database of approximately 685,000 individuals, and utilizes empirical
information from this database to prospect for new customers and
supplement its master catalog with directed mailings of specialty and
promotional publications intended to increase customer response and
22
<PAGE>
product purchases. MSC has increased the number of publication titles
distributed over the past several years from 13 in fiscal 1993 to 38
in fiscal 1995 and expects to distribute approximately 70 in fiscal
1996.
o Expansion into New Markets. The Company operates primarily in the
continental United States through a network of three regional
distribution centers and 32 branch offices. The strategic locations of
the Company's distribution centers allow next day delivery via low
cost ground carriers in 28 states located in the eastern United States
and second day delivery throughout the rest of the continental United
States. The Company's experience has been that sales in areas
accessible by next day delivery are significantly greater than in
areas with second day delivery. The Company's long-term goal is to
open distribution centers in the West and Southwest, supported locally
by branch offices, which will expand the Company's geographic coverage
of next day delivery throughout the United States.
o Selected Acquisitions. The Company believes that local market
acquisitions of small suppliers of industrial products provide a very
attractive opportunity for expanding its customer base in existing
markets. Two of the Company's three acquisitions completed during
fiscal 1996 operate in markets where the Company already was present.
In pursuing such acquisitions, the Company seeks to gain immediate
access to the acquired company's customer base while consolidating its
operations into existing distribution facilities, thus achieving
incremental revenues while incurring limited incremental operating
costs.
The Company will consider expansion into new markets through the
acquisition of industrial supply companies with existing distribution
facilities. The Company's third acquisition completed during fiscal 1996
operates in a market where the Company previously was not present. The
completion of such acquisitions allows the Company to accelerate its growth
plans and immediately penetrate new markets in a more efficient manner without
the need for lengthy construction periods or significant capital expenditures
that will not yield a return on investment for several months or years.
Additionally, corporate and administrative infrastructures necessary to support
such acquisitions are already in place.
There can be no assurance that the Company will be able to implement this
phase of its growth strategy or that any such acquisitions, if made, will be
successfully integrated into the Company's existing operations.
Products
The Company currently offers in excess of 300,000 SKUs, which represents a
100% increase since 1991. The Company attributes a portion of its sales growth
to the total number of SKUs offered. In this regard, the Company intends to
continue to add new product categories and increase the number of products
offered in existing product categories in its efforts to gain new customers and
increase sales from existing customers. The Company's core products include
cutting tools, abrasives, measuring instruments, machine tool accessories,
machinery and safety products. As part of its strategy of supplying an
increasing portion of its customers' MRO needs, the Company has recently
expanded its product mix to include plumbing supplies, process instrumentation,
hardware, marking products, pumps and pneumatics and has significantly increased
its offering of flat stock raw materials and cutting tools. MSC seeks to
distinguish itself from its competition through offering both name brand and
generic products and significant depth in its core product lines while
maintaining competitive pricing. MSC plans to continue to expand its product
categories and add a number of new SKUs.
The Company's offering of specific products from multiple manufacturers at
different prices and quality levels permits MSC to offer a good-better-best
product selection alternative. This alternative provides the customer a choice
among similar product offerings with varying degrees of name recognition,
quality and price, thus permitting the customer to choose the appropriate
product for a specific task at the lowest cost. For example, if a customer
requires a drill bit to drill 100 holes, it would be inefficient to purchase the
top-of-the-line name brand which is capable of drilling 10,000 holes. MSC's
telemarketing representatives and technical support personnel are trained
specifically to assist customers in making intelligent cost-saving purchases.
The Company believes that its product alternative offerings and knowledgeable
customer service and technical support personnel result in significant amounts
of repeat business and are an integral part of MSC's overall customer cost
reduction strategy.
23
<PAGE>
The following table itemizes the product categories currently offered by
MSC and the number of SKUs available in each product category:
Number of
Category SKUs
-------- ---------
Cutting Tools 119,000
Machinery 27,500
Fasteners 24,500
Tooling 20,100
Measuring Instruments 15,700
Flat Stock Raw Materials 14,300
Electrical Supplies 10,900
Power Transmission 10,900
Plumbing Supplies 10,900
Material Handling 10,800
Hand and Power Tools 10,200
Abrasives 9,200
Hose Tube and Fittings 6,700
Safety Products 5,800
Process Instrumentation 5,000
Hardware 4,600
Welding 4,600
Marking Products 2,800
Janitorial/Maintenance 2,700
Lubricants 1,700
Pneumatics 1,100
Pumps 800
Miscellaneous 3,200
-------
Total 323,000
=======
The Company purchases substantially all of its products directly from
approximately 1,700 manufacturers located in the United States. Approximately
10% of products are purchased from manufacturers located overseas. The Company
is not materially dependent on any one supplier or small group of suppliers. No
single supplier accounted for more than 5% of the Company's total purchases in
fiscal 1996. Generic products, primarily machine tools, are manufactured by
third parties to the Company's specifications.
Distribution Centers
A significant number of the Company's products are carried in stock, and
approximately 95% of orders are fulfilled from the distribution centers or
branch offices. Certain products, such as specialty or custom items and some
very large orders, are shipped directly from the manufacturer. The operations of
the Company's distribution centers are managed via computer-based SKU tracking
systems and radio frequency devices that facilitate the location of specific
stock items to make the picking process more efficient. The Company has invested
significant resources in technology and automation to increase efficiency and
reduce costs, and continuously monitors its order fulfillment process and
endeavors to maintain its commitment to technological efficiencies and cost
reduction. The Company currently utilizes three distribution centers for product
shipment located in Long Island, New York, Atlanta, Georgia and Elkhart,
Indiana. The Company commenced shipping from the Elkhart, Indiana distribution
center during the current fiscal year. The Elkhart, Indiana distribution center
is now fully operational. During the current fiscal year, the Company announced
plans to relocate its Long Island distribution center to Harrisburg,
Pennsylvania. That distribution center is expected to commence shipping in the
beginning of fiscal 1997 and to be fully operational during the first half of
fiscal 1997. Over the next several years, the Company intends to open additional
distribution centers in the West and Southwest in order to achieve the Company's
goal of next day delivery throughout the continental United States.
24
<PAGE>
Sales and Marketing
The Company's customers include a broad range of purchasers of industrial
supply products, from one-man machine shops to Fortune 500 companies. The
Company focuses on selling relatively higher margin, lower volume products and
has an average order size of approximately $130. The Company focuses its
marketing efforts on the small shop segment, consisting of job shops and other
small industrial entities with fewer than 100 employees and usually less than
$500,000 of annual industrial supplies purchases, and the mid-size corporate
segment, consisting of industrial entities with 100-999 employees and annual MRO
purchases between $500,000 and $1,000,000. The Company's strategy to pursue the
large corporate segment is to develop relationships with, and supply MRO
products directly to, integrated supply providers that are hired by large
corporations to manage their MRO purchasing and administrative operations.
The Company believes that its expanded product offerings, rapid delivery
capabilities and total cost reduction strategy are critical to expanding its
market share. MSC has in excess of 125,000 active customers (companies which
have purchased at least one item during the past 12 months). Typically, a
customer's MRO purchases are managed by several buyers responsible for different
categories of products. The Company targets these individual buyers within an
organization and distributes publication titles corresponding to the product
categories for which such buyers are responsible. The Company is able to
accomplish this directed marketing strategy as a consequence of the depth of
customer information contained in its information systems databases. The
Company's customers select desired products from the Company's various
publications and place their orders by telephone, facsimile or direct computer
link.
The Company has invested significant resources in developing an extensive
customer and prospect database. This database, which includes more than 675,000
buyers' names, is a key component of the Company's growth strategy. The customer
and prospect database includes detailed information, including company size,
number of employees, industry of operation, various demographic and geographic
characteristics and personal purchase histories (catalog preference, product
preference, order value). The Company supplements this database with third party
mailing lists which are screened to the Company's specifications. In fiscal
1996, such lists resulted in over 793,000 mailings to potential buyers who have
not previously purchased from MSC. The Company has recently hired a database
management professional to utilize more effectively the information contained in
the Company's database and purchase lists. The Company believes that this
variety and depth of information on its customers offers the Company a
significant competitive advantage in increasing sales to existing customers and
attracting new customers.
The Company relies on its approximately 275 in-bound telemarketing
representatives, who are responsible for a substantial majority of customer
contacts and order entries. These telemarketing representatives are highly
trained individuals who build relationships with customers, assist customers in
reducing costs, provide technical support, coordinate special orders and
shipments with vendors and update customer account profiles in the Company's
information systems databases. The Company's "one call does it all" philosophy
is predicated on the ability of the telemarketing representative, with the
assistance of the Company's information systems databases, to respond
effectively to the customer's needs. When a customer places a call to the
Company, the telemarketing representative taking the call has immediate access,
through the Company's proprietary information systems databases, to that
customer's company and specific buyer profile, as well as inventory levels by
distribution center on all of the over 300,000 SKUs offered by MSC. The
telemarketing representative is able to access historical and current billing
information, purchasing profiles, plant and industry information and is prompted
to update the information contained in the databases, including employee and
buyer personnel information. The Company believes that its information systems
databases are an important factor in achieving customer satisfaction and the
success of the Company's growth strategy.
MSC's telemarketing representatives undergo an intensive two week training
course, are required to attend regular on-site training seminars and workshops
and are monitored and evaluated at regular intervals. Additionally, the
telemarketing representatives are divided into teams that are evaluated monthly
and monitored on a daily basis by team supervisors. Telemarketing
representatives receive technical training regarding various products from
vendors and in-house training specialists. The Company also maintains a separate
technical support group dedicated to answering specific customer inquiries and
assisting customers with the operation of products and finding low cost
solutions to manufacturing problems.
25
<PAGE>
Additionally, the Company employs a direct sales force of approximately 85
sales representatives. These commission-based sales representatives are
responsible for presenting the Company's total cost reduction program to
existing customers and increasing sales per customer.
Branch Offices
The Company currently operates 32 branch offices located in 19 states.
These branch offices receive approximately 35% of all orders and are staffed
with highly trained telemarketing representatives that utilize the same
information systems as in the distribution centers. The Company has experienced
higher sales growth and market penetration in areas where it has established a
branch office and believes its branch offices are critical to the success of the
Company's business strategy. In addition to opening new branch offices in
support of its distribution centers, the Company has acquired local distributors
and converted them to branch offices in new geographic locations to obtain an
immediate established local market presence through use of the acquired customer
base and integration of its operations with MSC. The Company believes that
branch office acquisitions will result in more rapid expansion at a lower cost.
See "--Acquisitions."
Publications
The Company's primary reference tool is its 3,560 page master catalog,
which is supported by specialty and promotional catalog, brochure and newspaper
titles, approximately 70 of which will be published in fiscal 1996. Specialty
and promotional publications permit multiple targeted mailings to customers
within various specialty process areas, such as welding, electrical supply and
hose and tubing. The Company intends to distribute specialty and promotional
catalogs, brochures and newspapers through utilization of the Company's
databases and purchased mailing lists to customers whose purchasing history or
profile suggests that they are most likely to purchase according to specific
product categories or product promotions. Consequently, specialty catalogs offer
a more focused selection of products at a lower catalog production cost due to
increased response rates and more efficient use of advertising space.
MSC's in-house staff designs and produces all of MSC's catalogs, brochures
and newspapers. Each publication is printed with photographs, contains detailed
product descriptions and includes a toll-free telephone number to be used by
customers to place a product order. In-house production helps reduce overall
expense and shortens production time, allowing the Company the flexibility to
alter its product offerings and pricing and refine its catalog, brochure and
newspaper formats more quickly.
The success of the Company's targeted marketing program in enhancing
revenues has justified an increase in the Company's direct mail budget
(excluding cooperative advertising revenues) from approximately $3.8 million in
fiscal 1992 to approximately $10 million in fiscal 1996. The budget for fiscal
1997 is approximately $12 million. As reflected in the following table, the
number of publication titles has increased from 13 in fiscal 1993 to 38 in
fiscal 1995 and is expected to exceed 70 in fiscal 1996. The number of pieces
mailed has increased from 2.7 million in fiscal 1993 to over 6.3 million in
fiscal 1996 and is expected to reach approximately 9.0 million in fiscal 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
August 29, August 28, August 27, September 2, August 31,
1992 1993 1994 1995 1996
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of publication titles 12 13 20 38 71
Number of publications mailed 2,447,000 2,688,000 4,794,000 6,604,000 6,300,000
</TABLE>
Customer Service
One of the Company's goals is to make purchasing its products as convenient
as possible. Since a majority of customer orders are placed by telephone, the
efficient handling of calls is an extremely important aspect of the Company's
business. Order entry and fulfillment occurs at each of the Company's 32
branches and main call centers located at the Company's three operating
distribution centers . Calls are received by highly trained in-bound
telemarketing representatives who utilize on-line terminals to enter customer
orders into computerized order processing systems. The Company's branch offices
field approximately 35% of all telephone orders. The Company's telephone
ordering system is flexible and, in the event of local or regional breakdown,
can be rerouted to alternative locations. When an order is entered into the
system, a credit check is performed, and, if the
26
<PAGE>
credit is approved, the order is electronically transmitted to the warehouse
closest to the customer and a packing slip is printed for order fulfillment.
Most of the orders placed with the Company are shipped by United Parcel Service
("UPS"), and, to a limited extent, by various other freight lines and local
carriers. Air freight is also used when appropriate. The Company has no written
agreement with UPS but has been able to negotiate favorable shipping rates due
to the volume of shipments from the Company. The Company is not dependent on any
one carrier and believes that alternative shipping arrangements can be made with
minimal disruption to operations in the event of the loss of UPS as the
Company's primary carrier. The Company believes that its relationships with all
its carriers are excellent. The Company guarantees same-day shipping if the
order is received prior to 4:30 p.m. eastern time and most customers receive
their orders (other than custom items and large industrial items shipped
directly by the manufacturer) within one or two business days of the order date.
Customers are invoiced for merchandise, shipping and handling promptly after
shipment. Back order levels are immaterial.
Information Systems
The Company's sophisticated, proprietary information systems allow
centralized management of key functions, including communication links between
distribution centers, inventory and accounts receivable management, purchasing,
pricing, sales and distribution, and the preparation of daily operating control
reports that provide concise and timely information regarding key aspects of its
business. These proprietary information systems enable the Company to ship to
customers on a same-day basis, respond quickly to order changes and provide a
high level of customer service. These applications enable the Company to achieve
cost savings, deliver superior customer service and manage its operations
centrally. Certain of the Company's information systems operate over a wide area
network and are real-time information systems that allow each distribution
center and branch office to share information and monitor daily progress
relating to sales activity, credit approval, inventory levels, stock balancing,
vendor returns, order fulfillment and other measures of performance. The Company
also maintains a sophisticated buying and inventory management system that
monitors substantially all of its SKUs and automatically purchases inventory
from vendors for replenishment based on projected customer ordering models. The
Company has completed the testing of an EDI purchasing program with its vendors
and customers for the purpose of reducing inventory levels and increasing
inventory turnover and expects to offer such program to many of the Company's
vendors during fiscal 1997.
In addition to the proprietary computer software programs for use in the
telemarketing and distribution operations, the Company has also developed a
proprietary MRO management system, the Customer Direct Access Plus System
("CDA"), which is designed to automate, simplify and control the administration
and management of MRO purchasing by giving the customer direct access to the
Company's computers for automatic product selection, customization of purchasing
parameters, a variety of report generation and product tracking capabilities and
cross-referencing capability to a customer's own product stock numbers. In
addition, the Company is developing a Windows(R)-based CDA and a CD-ROM package
and has recently commenced providing information on the Internet.
The Company runs its systems on an AS400 platform and utilizes disaster
recovery techniques and procedures which the Company believes are adequate to
fulfill its needs and are consistent with this type of equipment. The Company
believes that planned enhancements and upgrades to the next generation of its
existing operating platforms will be sufficient to sustain its present
operations and its anticipated growth for the foreseeable future.
Acquisitions
The Company has completed only a limited number of acquisitions to date,
including three in fiscal 1996. The Company, however, may actively consider
acquisitions as part of its future growth strategy if opportunities arise. The
Company believes that the ongoing consolidation within the industrial supply
industry is spurring smaller competitors to seek partners to increase their
productivity and reduce costs. The Company believes that it is well positioned
to play a significant role in this industry consolidation.
The Company believes that the most beneficial acquisitions are those which
can be integrated into its existing operations. Accordingly, the Company expects
to focus on branch office acquisition prospects that can be integrated into its
distribution facilities. The Company will also consider new market acquisitions
if they are of sufficient size that the Company can establish a meaningful
presence in such markets in accordance with its geographic growth plans.
27
<PAGE>
Upon completing an acquisition within an existing market, the Company
intends to move rapidly to integrate the acquired entity into its existing
operations. The Company believes that such integration offers a number of
opportunities to improve productivity and customer service. These benefits
include: (i) elimination of redundant facilities and services, (ii) reduction of
administrative overhead, (iii) consolidation of purchasing power, (iv) expanded
customer services, and (v) increased merchandise selection. From time to time,
the Company has engaged in and continues to engage in preliminary discussions
with respect to potential acquisitions. The Company is not currently a party to
any oral or written acquisition agreement or engaged in any negotiations with
respect to any material acquisition candidate. See "Risk Factors--Integration of
Prospective Acquisitions."
Competition
The MRO supply industry is a large, fragmented industry that is highly
competitive. The Company faces competition from (i) traditional channels of
distribution such as retail outlets, small dealerships, regional or national
distributors utilizing direct sales forces, and manufacturers of MRO supplies,
and (ii) large warehouse stores and larger direct mail distributors. The Company
believes that sales of MRO supplies will become more concentrated over the next
few years, which may make the industry more competitive. Certain of the
Company's competitors offer a greater variety of products and have substantially
greater financial and other resources than the Company. In the industrial
products market, customer purchasing decisions are primarily based on one or
more of the following criteria: price, product selection, product availability,
level of service and convenience.
Employees
As of June 1, 1996, the Company employed approximately 1,262 employees,
including approximately 1,197 full-time and approximately 65 part-time
employees. None of the Company's employees is represented by a labor union. The
Company considers its relationships with employees to be good and has
experienced no work stoppages.
Properties
The Company's distribution centers are as follows:
Approx.
Location Sq. Ft.
- ---------------- ------------------------
Atlanta, Georgia(1) 340,000
Long Island, New York(2) 243,000
Elkhart, Indiana(3) 275,000
Harrisburg, Pennsylvania 270,000
(expected to be fully
operational
in February 1997)(3)
- ----------
(1) The lease for this facility expires on July 31, 2010.
(2) The Long Island distribution center consists of 3 separate facilities--an
83,000 square foot headquarters and small parts shipping facility located
in Plainview, New York, a 100,000 square foot item shipping and receiving
facility located in Central Islip, New York and a 60,000 square foot small
parts receiving facility located in Plainview, New York. The leases for
these facilities expire on December 13, 1997, December 31, 1997, and August
1, 2000, respectively.
(3) This facility is owned by the Company.
The Company maintains 32 branch offices located in 19 states, ranging in
size from 3,000 to 16,000 square feet. The leases for these branch offices will
expire at various periods between August 1996 and October 2000. The aggregate
annual lease payments on these properties was approximately $970,000.
The Company believes that its facilities are adequate for its current needs
and that suitable additional space will be available as needed. See "--Growth
Strategy."
Regulatory and Legal Matters
The direct response business conducted by the Company is subject to the
Mail or Telephone Order Merchandise Rule and related regulations promulgated by
the Federal Trade Commission. While the Company believes it is in compliance
with such regulations, no assurance can be given that new laws or regulations
will not be enacted or adopted that might adversely affect the Company's
operations. There are no material legal proceedings pending against the Company.
28
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the directors
and executive officers of the Company. The directors and executive officers of
the Company were elected to the positions listed in October 1995, with the
exception of Messrs. Kelly and Redman, who were elected in April 1996.
Accordingly, all descriptions of positions held with MSC or the Company prior to
October 1995 refer to the Operating Subsidiary.
Name Age Position
- ---- --- --------
Sidney Jacobson ............. 78 Chairman of the Board of Directors
Mitchell Jacobson ........... 45 President, Chief Executive Officer and
Director
James Schroeder ............. 56 Vice President, Chief Operating
Officer and Director
Shelley Boxer ............... 49 Vice President, Chief Financial
Officer and Director
Thomas Eccleston ............ 48 Vice President - Plant and Equipment
and Secretary
Barbara Schwartz ............ 63 Vice President - Human Resources
Denis Kelly ................. 47 Director
Melvin Redman ............... 45 Director
Sidney Jacobson is a co-founder of MSC and has been its Chairman since June
1982. Prior to 1982, Mr. Jacobson served as President and Chief Executive
Officer of MSC since 1941.
Mitchell Jacobson was appointed President and Chief Executive Officer of
MSC in June 1982. Prior to that time, Mr. Jacobson had been an Executive Vice
President since joining the Company in 1976. Mitchell Jacobson is the son of
Sidney Jacobson.
James Schroeder was appointed Vice President and Chief Operating Officer of
MSC in 1986. Mr. Schroeder has served as Group Vice President of National
Service Industries, a manufacturing company, from 1984 to 1986, as President of
Avanti Motor Corp., an automobile dealership company, from 1983 to 1984, and as
President of the MSC Division of Wheelabrator-Frye, Inc., a manufacturing
company, from 1980 to 1983.
Shelley Boxer was appointed Vice President and Chief Financial Officer of
MSC in 1993. Mr. Boxer was formerly the Vice President and Chief Financial
Officer at Joyce International, Inc., a distribution and manufacturing company,
from 1992 to 1993. From 1987 to 1992, he was the Executive Vice President and
Chief Financial Officer at Kinney Systems, Inc., an automobile parking and real
estate company. From 1982 to 1987, Mr. Boxer was Vice President and Treasurer of
Meyers Parking System, Inc., an automobile parking and real estate company.
Tom Eccleston joined MSC in 1985 and was appointed Vice President of Plant
and Equipment of MSC in 1986. Prior to joining MSC, Mr. Eccleston was the
Director of Marine Operations at Prudential Lines, Inc., a shipping company,
from 1979 to 1983 and Operations Manager at Norton, Lilly & Co., an
international steamship agency, from 1973 to 1979.
Barbara Schwartz joined MSC in 1974 and was appointed Vice President of
Human Resources in 1986. From 1983 to 1985, Ms. Schwartz held the position of
Director of Operations and from 1976 to 1983 was the Controller at MSC.
Denis Kelly has been a director of the Company since April 1996. Mr. Kelly
is a Managing Director of Prudential Securities Incorporated, a position he has
held since July 1993. Before July 1993, Mr. Kelly was President of Denbrook
Capital Corporation. Mr. Kelly is also a director of Kenneth Cole Productions,
Inc.
Melvin Redman has been a director of the Company since April 1996. Mr.
Redman is a principal of Redman & Associates, a management consulting firm in
Arkansas. From 1992 to June 30, 1995, Mr. Redman was Senior
29
<PAGE>
Vice President of Operations for Walmart Stores, Inc. Prior to 1992, Mr. Redman
was Senior Vice President of Store Planning for Walmart.
Committees of the Board
The Board of Directors established an Audit Committee of the Board,
comprised of Messrs. Kelly and Redman. The Audit Committee is charged with
reviewing the Company's annual audit and meeting with the Company's independent
accountants to review the Company's internal controls and financial management
practices.
The Board of Directors also established a Compensation Committee of the
Board, comprised of Messrs. Kelly and Redman. The Compensation Committee is
responsible for establishing salaries, bonuses and other compensation for the
Company's executive officers and for administering the Company's 1995 Stock
Option Plan, including granting options and setting the terms thereof pursuant
to such plan, and the 1995 Restricted Stock Plan.
Directors' Compensation
The Company's policy is not to pay compensation to directors who are also
employees of the Company. The Company will grant options to purchase 2,500
shares of Class A Common Stock to non-employee directors upon their election and
reelection to the Board of Directors. Directors elected other than at an annual
meeting of shareholders will receive a pro rata number of options. The Company
also pays cash compensation to non-employee directors in the amount of $1,500
per board meeting.
Executive Compensation
The following table sets forth the compensation earned by the Company's
Chairman, its Chief Executive Officer and the four other most highly compensated
executive officers for the fiscal year ended September 2, 1995.
SUMMARY COMPENSATION TABLE
Annual Compensation
------------------------------------
Other All
Annual Other
Name and Principal Compensa- Compensa-
Position Salary Bonus tion(1) tion(2)
- -------------------------- --------- ------------ ---------- -----------
Sidney Jacobson
Chairman ............... $675,000 $500,000(3) $ 0 $ 6,405
Mitchell Jacobson
President and Chief
Executive Officer ........ 405,654 230,000(4) 2,802 154,245(5)
James Schroeder
Vice President and Chief
Operating Officer ...... 253,243 145,000 2,586 6,362
Shelley Boxer
Vice President and Chief
Financial Officer ...... 172,227 60,000 2,551 6,949
Barbara Schwartz
Vice President, Human
Resources .............. 95,096 40,000 1,426 7,210
Tom Eccleston
Vice President, Plant
and Equipment .......... 92,400 32,000 944 2,719
- ----------
(1) Company matching contribution to 401(k) Plan.
(2) Includes group term life insurance and other benefits.
(3) Includes $300,000 deferred bonus accrued in fiscal 1994 and paid in fiscal
1995.
(Footnotes continued on next page)
30
<PAGE>
(Footnotes continued from previous page)
(4) Includes $30,000 deferred bonus accrued in fiscal 1994 and paid in fiscal
1995.
(5) Includes split dollar life insurance premiums paid by the Company in the
aggregate amount of $145,691, which will be reimbursed upon payment of
proceeds under the terms of such policies. The Company capitalizes the cash
surrender value of such policies, which are included in "Other assets" on
the Company's balance sheets. See "Certain Relationships and Related
Transactions."
Prior to the Reorganization, Mitchell Jacobson, James Schroeder and Shelley
Boxer were directly involved in setting compensation for the Company's employees
and Mitchell Jacobson was responsible for setting compensation for the Company's
executives. Following the establishment of the Compensation Committee, such
Committee has been responsible for determining compensation for the Company's
executives.
Employment Agreements
Sidney Jacobson is employed as Chairman of the Board of Directors of the
Company pursuant to an employment agreement, with a term expiring in January,
2004. Under this agreement, Mr. Jacobson receives an annual base salary of
$300,000, which has been reduced effective November 30, 1995 from $650,000, and
is entitled to participate in the bonus pool. Mr. Jacobson has agreed that upon
termination of his employment, he will not compete with the Company for a period
of three years. The agreement also provides for a benefit of $200,000 per year
until January 2, 2004 payable to Mr. Jacobson's wife in the event of his death.
The agreement also provides that in the event of his disability, Mr. Jacobson
will receive his salary for a six month period following such disability and
$200,000 per year for the balance of his employment term. Mr. Jacobson is
required to devote his full working time to the affairs of the Company. The
agreement provides that Mr. Jacobson may, at his option, elect to become a
consultant and advisor to the Company at an annual fee of $300,000, in which
event Mr. Jacobson will be required to be available to the Company for up to 10
hours per week, not to exceed 40 hours in any given month. Mr. Jacobson does not
have any current intention to make such election, and any such election would
not be expected to have a material impact on the Company.
Mitchell Jacobson is employed as President and Chief Executive Officer of
the Company pursuant to an employment agreement with a term expiring on the
earlier of August 1, 2004 or 90 days after Mr. Jacobson's written election to
terminate employment. Under this agreement, Mr. Jacobson receives a current
annual base salary of $407,000 and is entitled to participate in the bonus pool
and other benefits available to Company employees. The agreement also provides
that in the event of disability, Mr. Jacobson will receive payment of salary for
a six month period following such disability and $200,000 per year for the
balance of his employment term. The agreement provides that in the event of Mr.
Jacobson's death, his wife will receive $400,000 per year for three years. Mr.
Jacobson is required to devote his full working time to the affairs of the
Company.
1995 Stock Option Plan
In 1995 the Board of Directors of MSC authorized, and the shareholders of
MSC approved, the MSC Industrial Direct Co., Inc. 1995 Stock Option Plan (the
"Option Plan"). Under such Plan, the Stock Option Committee of the Board of
Directors is authorized to grant options for up to 2,000,000 shares of Class A
Common Stock. The Board of Directors granted approximately 662,000 options under
such Plan prior to the Initial Public Offering exercisable at $19.00 per share,
the initial public offering price of the Class A Common Stock. The Plan was
developed to provide incentives to employees and consultants of the Company, to
attract new employees and non-employee directors, and to encourage employees and
non-employee directors to secure or increase their stock ownership in the
Company.
Nature and Purpose of the Option Plan
The purpose of the Option Plan is to induce certain individuals to remain
in the employ or service of the Company, to attract new employees and directors
and to encourage such individuals to secure or increase on reasonable terms
their stock ownership in the Company. The Board believes that the Option Plan
will promote continuity of management and increased incentive and personal
interest in the welfare of the Company by those who are or may become primarily
responsible for shaping and carrying out the long range plans of the Company
31
<PAGE>
and securing its continued growth and financial success. The approximate number
of persons eligible to participate in the Option Plan is 1,200.
Duration and Modifications
The Option Plan will terminate not later than November 17, 2005. The Board
may at any time terminate the Option Plan or make such modifications of the
Option Plan as it may deem advisable. However, except in certain limited
circumstances, the Board may not, without further approval by the stockholders,
increase the number of shares of Class A Common Stock as to which options may be
granted under the Option Plan, or change the manner of determining the option
prices, or extend the period during which an option may be granted or exercised
or withdraw the authority to administer the Option Plan from the committee
designated by the Board of Directors to administer the Option Plan.
Administration of the Plan
The Option Plan will be administered by the Compensation Committee. The
Compensation Committee will consist of at least two members of the Board of
Directors who are "disinterested persons" within the contemplation of Rule
16b-3(c)(i) promulgated under the Securities Exchange Act of 1934, as amended.
The members of the Compensation Committee will be appointed annually by, and
serve at the pleasure of, the Board of Directors. The Compensation Committee
will have discretion to determine the participants under the Option Plan, the
time and price at which options will be granted, the period during which options
will be exercisable, the number of shares subject to each option and whether an
option shall be an incentive stock option, a non-incentive stock option or a
combination thereof. The members of the Compensation Committee will not receive
additional compensation for service in connection with the administration of the
Option Plan.
Description of Options
Under the Option Plan, the per share exercise price of any option which is
an incentive stock option shall not be less than the fair market value of a
share of Class A Common Stock on the business day preceding the date of grant,
and the per share exercise price of any option that is a non-incentive stock
option may not be less than 85% of such fair market value (except for
non-incentive stock options granted to any person who is or may reasonably be
expected to become a "covered employee" under Section 162(m)(3) of the Code, in
which case the per share exercise price of such options shall not be less than
100% of such fair market value on the date of grant). The aggregate fair market
value of the shares of Class A Common Stock for which a participant may be
granted incentive stock options which are exercisable for the first time in any
calendar year may not exceed $100,000. No participant may be granted options to
purchase more than 1,000,000 shares of the Class A Common Stock.
Generally, Options granted to employees under the Option Plan are
exercisable 33 1/3% after the second anniversary of the date of grant, 66 2/3%
after the third anniversary of the date of grant, and in full after the fourth
anniversary of the date of grant. Options granted to non-employee directors will
be exercisable 50% after the first anniversary of the date of grant and in full
after the second anniversary of the date of grant. The Board may permit any
option to be exercised in whole or in part prior to the time that it would
otherwise be exercisable. Upon the exercise of an option, the option price must
be paid in cash or, if the Compensation Committee so determined at the time of
the grant of the option, in shares of Class A Common Stock. An option may not be
granted for a period in excess of ten years from the date of grant.
In the event of the death or retirement of an optionee, all options
theretofore granted shall become immediately exercisable and, if not exercised,
shall terminate, generally within three months of such optionee's death or
retirement. In the event an optionee leaves the employ of the Company or one of
its subsidiaries or ceases to serve as a director of the Company prior to his or
her 65th birthday, any options previously granted to but not exercised by such
optionee shall terminate, generally within 30 days of such optionee's
termination of employment or service as a director. Options are not transferable
except upon death.
If the fair market value of the Class A Common Stock declines below the
option price of any option, the Compensation Committee (with the prior approval
of the Board) may adjust, reduce, or cancel and regrant such option or take any
similar action it deems to be for the benefit of the participant in light of
such declining value.
The number of shares reserved for issuance under the Option Plan and the
number of shares covered by each option granted under the Option Plan will be
adjusted in the event of a stock dividend, reorganization,
32
<PAGE>
recapitalization, stock split-up, combination of shares, sale of assets, merger
or consolidation in which the Company is the surviving corporation. In the event
of the dissolution or liquidation of the Company, or a merger, reorganization or
consolidation in which the Company is not the surviving corporation, each option
will terminate.
Securities Subject to the Plan
There are 2,000,000 authorized but unissued shares of the Class A Common
Stock reserved for issuance upon the exercise of options granted under the
Option Plan. The number of authorized but unissued shares so reserved under the
Option Plan will be reduced from time to time to the extent that a corresponding
amount of issued and outstanding shares are purchased by the Company and set
aside for issuance upon the exercise of options granted under the Option Plan.
If any such options were to expire or terminate for any reason without having
been exercised in full, the unpurchased shares subject thereto would again
become available for the purposes of the Option Plan.
Federal Income Tax Consequences of Issuance and Exercise of Options
The following discussion of the federal income tax consequences of the
granting and exercise of options under the Option Plan, and the sale of Class A
Common Stock acquired as a result thereof, is based on an analysis of the Code,
as currently in effect, existing laws, judicial decisions and administrative
rulings and regulations, all of which are subject to change. In addition to
being subject to the federal income tax consequences described below, an
optionee may also be subject to state and/or local income tax consequences in
the jurisdiction in which he or she works and/or resides.
Non-Incentive Stock Options
Generally, no income will be recognized by an optionee at the time a
non-incentive stock option is granted. Ordinary income generally will be
recognized by an optionee at the time a non-incentive stock option is exercised
to the extent of the excess of the fair market value on the exercise date of the
shares issued to the optionee over the option price.
Generally, the Company will be entitled to a deduction for Federal income
tax purposes at such time and in the same amount as the amount included in
ordinary income by the optionee upon exercise of his or her non-incentive stock
option, subject to the usual rules as to reasonableness of compensation and
provided that suitable arrangements are made to collect and pay over applicable
withholding tax from the optionee.
If an optionee makes payment of the option price by delivering shares of
Class A Common Stock, the optionee generally will not recognize any gain as a
result of such delivery, but the amount of gain, if any, that is not so
recognized will be excluded from his or her basis in the new shares received.
Capital gain or loss on a subsequent sale or other disposition of the
shares acquired upon the exercise of a non-incentive stock option will be
measured by the difference between the amount realized on the disposition and
the tax basis of such shares. Generally, the tax basis of the shares acquired
upon the exercise of any non-incentive stock option will be equal to the sum of
the exercise price of such non-incentive stock option and the amount included in
income with respect to such option.
Incentive Stock Options
In general, neither the grant nor the exercise of an incentive stock option
will result in taxable income to an optionee or a deduction to the Company.
The sale of Class A Common Stock received pursuant to the exercise of an
incentive stock option which satisfies the holding period rules will result in
capital gain to an optionee and will not result in a tax deduction to the
Company. To receive incentive stock option treatment as to the shares acquired
upon exercise of an incentive stock option, an optionee must neither dispose of
such shares within two years after such incentive stock option is granted nor
within one year after the exercise of such incentive stock option. In addition,
an optionee generally must be an employee of the Company (or of a subsidiary of
the Company) at all times between the date of grant and the date three months
before exercise of such incentive stock option.
33
<PAGE>
If the holding period rules are not satisfied, the portion of any gain
recognized on the disposition of the shares acquired upon the exercise of an
incentive stock option that is equal to the lesser of (a) the fair market value
of the shares on the date of exercise minus the option price or (b) the amount
realized on the disposition minus the option price, will be treated as ordinary
(compensation) income, with any remaining gain being treated as capital gain.
The Company generally will be entitled to a deduction equal to the amount of
such ordinary income.
If an optionee makes payment of the option price by delivering shares of
Class A Common Stock, the optionee generally will not recognize any gain as a
result of such delivery, but the amount of gain, if any, that is not so
recognized will be excluded from his or her basis in the new shares received.
However, the use by an optionee of shares previously acquired pursuant to the
exercise of an incentive stock option to exercise an incentive stock option
generally will be treated as a taxable disposition if the transferred shares are
not held by the optionee for the requisite holding period.
An incentive stock option is treated as a non-incentive stock option for
purposes of the alternative minimum tax. This means, among other things, that
the spread between exercise price and fair market value on the exercise of an
incentive stock option will be considered as part of the optionee's income for
the purposes of the alternative minimum tax.
1995 Restricted Stock Plan
At the time of the Initial Public Offering, the Company issued 156,920
shares of Class A Common Stock to certain employees (the "Restricted Shares").
These shares were purchased at a price of $.01 per share, and will be held in
escrow pending vesting thereof. A purchaser of Restricted Shares can exercise
the voting rights associated with such shares immediately; however, the
Restricted Shares will vest 20% per year over the next five years commencing on
the first anniversary of the date of grant. Notwithstanding the foregoing, the
Restricted Shares will vest immediately upon the death or permanent disability
of the purchaser or his or her termination of employment by MSC without cause.
If a purchaser of Restricted Shares leaves the employ of the Company for any
reason other than death or permanent disability or termination of employment
without cause, all Restricted Shares purchased by such individual shall be
returned to the Company, whereupon such shares will be cancelled.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides certain information regarding the beneficial
ownership of the Company's capital stock and as adjusted to give effect to this
Offering by (i) each shareholder known by the Company to beneficially own more
than 5% of any class of the Company's outstanding voting securities, (ii) each
director of the Company, (iii) the Chief Executive Officer and each other
executive officer listed in the Summary Compensation Table and (iv) all
directors and executive officers as a group. Except as otherwise noted below,
each of the persons identified in the table has sole voting and investment power
over the shares beneficially owned by such person.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock(1)
-------------------- --------------------
Beneficial Ownership Beneficial Ownership
Beneficial Ownership Prior to Offering After Offering(4)
-------------------- ----------------- -----------------
Number of
Shares Percent Percent
Beneficial Owner(3) Number Percent(2) Offered Number Before Number After
- ---------------- ------ ------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mitchell Jacobson(5) 40,526 * 830,000 11,300,664 35.6% 10,470,664 31.0%
Marjorie Gershwind(6) 33,158 * 1,500,000 7,640,336 24.0% 6,140,336 18.2%
Sidney Jacobson(7) 100 * 2,608,000 8.2% 2,608,000 7.7%
Erik Gershwind(8) -- -- 1,424,000 4.5% 1,424,000 4.2%
Stacey Gershwind(9) -- -- 1,424,000 4.5% 1,424,000 4.2%
Joshua Jacobson Trust(10) -- -- 1,256,000 4.0% 1,256,000 3.7%
Jay Lubell(11) -- -- 1,016,000 3.2% 1,016,000 3.0%
Joseph Getraer(12) 678,000 8.2% 670,000 240,000 * 240,000 *
Denis Kelly 10,000 * -- -- -- --
34
<PAGE>
<CAPTION>
Class A Common Stock Class B Common Stock(1)
-------------------- --------------------
Beneficial Ownership Beneficial Ownership
Beneficial Ownership Prior to Offering After Offering(4)
-------------------- ----------------- -----------------
Number of
Shares Percent Percent
Beneficial Owner(3) Number Percent(2) Offered Number Before Number After
- ---------------- ------ ------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Melvin Redman -- -- -- -- -- --
James Schroeder -- -- -- -- -- --
Shelley Boxer 2,000 * -- -- -- --
Thomas Eccleston(13) 1,052 * -- -- -- --
Barbara Schwartz(13) -- -- -- -- -- --
T. Rowe Price Associates, Inc.(14) 422,500 5.1% -- -- -- --
100 E. Pratt Street
Baltimore, Maryland 21202
All directors and executive officers 53,678 * 13,908,664 43.8% 13,132,342(15) 38.7%
as a group (8 persons)
</TABLE>
- ----------------------
* Less than 1%.
(1) The Class B Common Stock has ten votes per share and is convertible into
Class A Common Stock on a one-to-one basis at the option of the holder or
automatically upon transfer to persons who are not members of the Jacobson
or Gershwind families. See "Description of Capital Stock."
(2) Excludes 2,000,000 shares of Class A Common Stock reserved for issuance
under the Company's 1995 Stock Option Plan.
(3) The address of each person is c/o the Company, 151 Sunnyside Boulevard,
Plainview, New York 11803-1592 unless otherwise indicated.
(4) Includes 20,475,000 shares of Class B Common Stock and 13,311,394 shares of
Class A Common Stock to be outstanding after this Offering.
(5) See "Certain Relationships and Related Transactions." Includes an aggregate
of 240,000 shares of Class B Common Stock that are beneficially held by
Mitchell Jacobson as Trustee for the issue of Marjorie Gershwind pursuant
to the Marjorie Diane Gershwind 1995 Qualified 3 Year Annuity Trust
Agreement, dated October 31, 1995. If the Underwriters' over-allotment
option is exercised in full, 375,000 shares of Class B Common Stock (50% of
such over-allotment shares) held by Mitchell Jacobson will be converted and
sold to the Underwriters. See "Underwriting." In such event, the total
shares beneficially owned by Mitchell Jacobson after the Offering will be
29.3%.
(6) See "Certain Relationships and Related Transactions." Marjorie Gershwind is
the sister of Mitchell Jacobson. If the Underwriters' over-allotment option
is exercised in full, 375,000 shares of Class B Common Stock (50% of such
over-allotment shares) held by Marjorie Gershwind will be converted and
sold to the Underwriters. See "Underwriting." In such event, the total
shares beneficially owned by Marjorie Gershwind after the Offering will be
16.8%.
(7) Includes an aggregate of 1,648,000 shares of Class B Common Stock which are
beneficially owned by Sidney Jacobson as Co-Trustee for both Stacey
Gershwind and Erik Gershwind pursuant to the Stacey Gershwind 1995 Trust
Agreement dated November 28, 1995 and the Erik Gershwind 1995 Trust
Agreement dated November 28, 1995, and an aggregate of 960,000 shares of
Class B Common Stock which are beneficially owned by Sidney Jacobson as
Trustee for both Stacey Gershwind and Erik Gershwind pursuant to two
separate Marjorie Gershwind 1994 15 year and 7 year Annuity Trust
Agreements, dated September 26, 1994. Sidney Jacobson is the father of
Mitchell Jacobson and Marjorie Gershwind.
(Footnotes continued on next page)
35
<PAGE>
(Footnotes continued from previous page)
(8) Includes 1,424,000 shares of Class B Common Stock held in trust pursuant to
various trust agreements. Erik Gershwind is the son of Marjorie Gershwind.
(9) Includes 1,424,000 shares of Class B Common Stock held in trust pursuant to
various trust agreements. Stacey Gershwind is the daughter of Marjorie
Gershwind.
(10) Joshua Jacobson is the son of Mitchell Jacobson.
(11) Includes 1,016,000 shares of Class B Common Stock beneficially held by Jay
Lubell as Trustee for Joshua Jacobson pursuant to The Joshua Jacobson 1994
Trust Agreement, dated January 31, 1994.
(12) Includes 240,000 shares of Class B Common Stock beneficially held by Joseph
Getraer, as Trustee for the Joshua Jacobson 1994 Trust pursuant to the
Mitchell Jacobson 1995 Qualified 3 year Annuity Trust Agreement dated
October 31, 1995 and 670,000 shares of Class A Common Stock that are
beneficially held by Joseph Getraer, as Trustee for the Mitchell Jacobson
1996 Charitable Remainder Unitrust dated August 8, 1996. All of the shares
held by the Mitchell Jacobson 1996 Charitable Remainder Unitrust dated
August 8, 1996 are being sold in this Offering.
(13) Reflects shares of Class A Common Stock issued under the 1995 Restricted
Stock Plan.
(14) Based on Schedule 13G dated February 14, 1996.
(15) Includes an aggregate of 13,078,664 shares of Class B Common Stock and
53,678 shares of Class A Common Stock.
36
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was formed in October 1995 as a holding company to hold all of
the outstanding capital stock of the Operating Subsidiary. In connection with
the Reorganization, 24,000,000 shares of Class B Common Stock were issued to the
former shareholders of the Operating Subsidiary in exchange for all of the
capital stock of the Operating Subsidiary. See "Reorganization of the Company."
In October 1995, the Company entered into an agreement to acquire all of
the capital stock of Primeline International, Inc. ("Primeline"), for a purchase
price of approximately $2 million payable in shares of Class A Common Stock, or
an aggregate of 105,263 shares of Class A Common Stock. The purchase price was
determined through negotiations at arms-length with the unaffiliated shareholder
of Primeline. There was no specific valuation methodology or other factors
relied upon in determining the purchase price. The acquisition was consummated
prior to the Initial Public Offering. Mitchell Jacobson, a director of MSC, and
his sister owned an aggregate of 70% of the outstanding capital stock of
Primeline. Primeline is engaged in the distribution of industrial supplies
primarily to the wholesale market and had net sales in calendar 1994 of
approximately $5 million. MSC sells merchandise to and purchases merchandise
from Primeline. For the three fiscal years ended August 28, 1993, August 27,
1994 and September 2, 1995, sales to Primeline were approximately $1,301,000,
$1,732,000 and $1,744,000, respectively, and purchases from Primeline were
approximately $955,000, $1,416,000 and $967,000, respectively.
Also in October 1995, the Company entered into an agreement to acquire all
of the outstanding capital stock of Kaja Productions, Inc. ("Kaja"), a company
that was wholly owned by the sister of Mitchell Jacobson, for an aggregate cash
purchase price of $1,000. The acquisition was consummated prior to the Initial
Public Offering. The purchase price was based on the nominal value of Kaja. Kaja
is responsible for most of the Company's publications, titles, design and
production, including the MSC master catalog. The Company is Kaja's only
customer.
Certain entities owned or controlled by Mitchell Jacobson and his sister
lease a number of locations to the Company. Two such affiliates lease two
distribution centers, located in Atlanta, Georgia and in Long Island, New York,
to MSC. As of September 2, 1995, the aggregate square footage of the two
distribution centers was 420,000 square feet with an aggregate annual rent of
approximately $2,024,000. Additionally, six other entities owned or controlled
by Mitchell Jacobson and his sister lease certain branch offices to MSC. As of
September 2, 1995, the aggregate square footage of such branch offices was
93,366 square feet and the aggregate annual rent for these offices was
approximately $447,000.
As of September 2, 1995, the Company was a guarantor of loans of certain
real estate related companies owned by shareholders of the Company. Such loans
aggregate approximately $1,867,000.
The Company believes that the terms of the foregoing arrangements are at
least as favorable to the Company as could have been obtained from unaffiliated
third parties.
During fiscal 1995, the Company paid split dollar life insurance premiums
in the aggregate amount of $145,691 for the benefit of Mitchell Jacobson. Such
premiums will be reimbursed upon payment of proceeds under the terms of the
various policies and the Company capitalizes the cash surrender value of such
policies on the Company's balance sheets under "Other assets." Also, during
fiscal 1995, the Company paid split dollar life insurance premiums in the
aggregate amount of $149,656 for the benefit of the sister of Mitchell Jacobson,
which amounts were reimbursed during fiscal 1995.
Prudential Securities Incorporated is acting as a representative for the
Underwriters. Denis Kelly, a director of the Company, is a Managing Director of
Prudential Securities Incorporated.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation (the "Certificate") and
the By-Laws is a summary and is qualified in its entirety by reference to the
provisions of the Certificate and the By-Laws, copies of which have been filed
with the Securities and Exchange Commission (the "Commission") as exhibits to
the Company's Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of (i) 100,000,000
shares of Class A Common Stock, $.001 par value, (ii) 50,000,000 shares of Class
B Common Stock, $.001 par value and (iii) 5,000,000 shares of preferred stock,
$.001 par value ("Preferred Stock").
Class A and B Common Stock
At June 1, 1996, there were approximately 506 holders of record of Class A
Common Stock and 8,311,394 shares of Class A Common Stock were issued and
outstanding. At June 1, 1996, there were 9 holders of record of Class B Common
Stock and 23,475,000 shares of Class B Common Stock issued and outstanding.
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Class A Common Stock and Class B Common Stock on the
applicable record date is entitled to receive such dividends as may be declared
by the Board of Directors out of funds legally available therefor, and, in the
event of liquidation, to share pro rata in any distribution of the Company's
assets after payment or providing for the payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Each holder of Class
A Common Stock is entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of shareholders,
including the election of directors. The holders of Class B Common Stock are
entitled to ten votes per share on the applicable record date and are entitled
to vote, together with the holders of the Class A Common Stock, on all matters
which are subject to shareholder approval. Holders of Class A Common Stock and
Class B Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or redemption or sinking fund provisions with respect to such
stock. The holders of the Class B Common Stock have the right to convert their
shares of Class B Common Stock into shares of Class A Common Stock at their
election and on a one-to-one basis, and all shares of Class B Common Stock will
automatically convert into shares of Class A Common Stock on a one-to-one basis
upon the sale or transfer of such shares of Class B Common Stock to any person
who is not a member of the Jacobson or Gershwind families.
The shares of Class A Common Stock offered hereby, when issued, will be
fully paid and nonassessable.
The Class A Common Stock is listed on the NYSE under the symbol "MSM."
The transfer agent for the Class A Common Stock is American Stock Transfer
& Trust Company.
Preferred Stock
The Company's Certificate authorizes 5,000,000 shares of Preferred Stock.
The Company's Board of Directors has the authority to issue shares of Preferred
Stock in one or more series and to fix, by resolution, the voting powers, full
or limited or no voting powers, and such designations, preferences and relative,
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof, if any, including the number of shares in
such series (which the Board may increase or decrease as permitted by New York
law), liquidation preferences, dividend rates, conversion rights and redemption
provisions of the shares constituting any series, without any further vote or
action by the shareholders. Any shares of Preferred Stock so issued would have
priority over the Class A Common Stock and Class B Common Stock with respect to
dividend or liquidation rights or both. There are currently no shares of
Preferred Stock outstanding and the Company has no current intention to issue
any shares of Preferred Stock.
38
<PAGE>
Certain Provisions of By-laws Affecting Shareholders
Special meetings of the shareholders may be called by resolution of the
Board of Directors or by the president and shall be called by the president or
secretary upon the written request (stating the purpose or purposes of the
meeting) of a majority of the Board of Directors or of the holders of a majority
of the outstanding shares entitled to vote. Only business related to the
purposes set forth in the notice of the meeting may be transacted at a special
meeting.
Business Combination Statute
The Company, as a New York resident domestic corporation, is subject to the
provisions of Section 912 of the New York Business Corporation Law. Section 912
provides, with certain exceptions, that a New York resident domestic corporation
may not engage in a "business combination" (e.g., merger, consolidation,
recapitalization or disposition of stock) with any "interested shareholder" for
a period of five years from the date that such person became an interested
shareholder unless: (a) the transaction resulting in a person becoming an
interested shareholder, or the business combination was approved by the board of
directors of the corporation prior to that person becoming an interested
shareholder; (b) the business combination is approved by the holders of a
majority of the outstanding voting stock not beneficially owned by such
interested shareholder; or (c) a business combination that meets certain
valuation requirements for the stock of the New York resident domestic
corporation. An "interested shareholder" is defined as any person that (a) is
the beneficial owner of 20% or more of the outstanding voting stock of the New
York resident domestic corporation or (b) is an affiliate or associate of the
corporation that at any time during the five years prior was the beneficial
owner, directly or indirectly, of 20% or more of the then outstanding voting
stock. These provisions are likely to impose greater restrictions on an
unaffiliated shareholder than on the existing shareholders who will continue to
own all of the Class B Common Stock after this Offering.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters") for whom Donaldson, Lufkin & Jenrette Securities Corporation and
Prudential Securities Incorporated are acting as representatives (the
"Representatives") have severally agreed to purchase from the Company and the
Selling Shareholders the number of shares of Class A Common Stock that each
Underwriter has agreed to purchase as set forth opposite its name below:
Underwriters Number of Shares
----------------
Donaldson, Lufkin & Jenrette Securities Corporation.....
Prudential Securities Incorporated......................
---------------------
Total.............................................. 5,000,000
=====================
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by counsel
and to certain other conditions. If any shares of Class A Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares (other than shares covered by the over-allotment option described below)
must be purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Class A Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to exceed
$____ per share. The Underwriters may allow, and such dealers may re-allow,
discounts not in excess of $____ per share to any other Underwriter and certain
other dealers.
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.
40
<PAGE>
Certain of the Selling Shareholders have granted to the Underwriters an
option to purchase up to an aggregate of 750,000 additional shares of Class A
Common Stock, at the offering price net of underwriting discounts and
commissions, solely to cover over-allotments. Such option may be exercised at
any time within 30 days after the date of this Prospectus. To the extent that
the Underwriters exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
The Company, the Selling Shareholders and certain members of the Gershwind
and Jacobson families have agreed not to sell any Class A Common Stock (or Class
A Common Stock issuable upon conversion of Class B Common Stock, except pursuant
to this Offering) prior to the expiration of 180 days from the date of this
Prospectus without the prior written consent of the Underwriters. The officers
and directors of the Company have agreed not to sell any Class A Common Stock
prior to the expiration of 90 days from the date of this Prospectus without the
prior written consent of the Underwriters.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby and
certain other legal matters in connection with this Offering will be passed upon
for the Company by Rosenman & Colin LLP, New York, New York. Certain legal
matters in connection with the shares of Class A Common Stock offered hereby
will be passed upon for the Underwriters by Latham & Watkins, New York, New
York.
Certain members and associates of the firm of Rosenman & Colin LLP own an
aggregate of approximately 15,000 shares of Class A Common Stock. An additional
240,000 shares of Class B Common Stock are beneficially held by Joseph Getraer,
a partner of Rosenman & Colin LLP, as Trustee for the Joshua Jacobson 1994 Trust
pursuant to the Mitchell Jacobson 1995 Qualified 3 year Annuity Trust Agreement
dated October 31, 1995 and 670,000 shares of Class A Common Stock are
beneficially held by Joseph Getraer as Trustee for the Mitchell Jacobson 1996
Charitable Remainder Unitrust dated August 8, 1996. All the shares held by the
Mitchell Jacobson 1996 Charitable Remainder Unitrust dated August 8, 1996 are
being sold in this Offering.
EXPERTS
The financial statements of MSC Industrial Direct Co., Inc. and of Sid Tool
Co., Inc. (the "Operating Subsidiary") included in this Prospectus and elsewhere
in the Registration Statement, of which this Prospectus is a part, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Class A Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Class A Common Stock, reference
is hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document summarize the terms of any such contract or other
document that are material to such discussion but are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. Copies of the Registration
Statement, including all exhibits thereto, may be obtained from the Commission's
principal office at 450 5th St., N.W., Washington, D.C. 20549, upon payment of
the fees prescribed by the Commission, or may be examined without charge at the
offices of the Commission.
The Company furnishes to its shareholders annual reports containing
financial statements of the Company audited by its independent auditors and
quarterly reports containing unaudited condensed financial statements for each
of the first three quarters of each fiscal year.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF SID TOOL CO., INC.
Report of Independent Public Accountants................................... F-2
Balance Sheets as of August 27, 1994 and September 2, 1995................. F-3
Statements of Income for the three fiscal years ended September 2, 1995.... F-4
Statements of Shareholders' Equity for the three fiscal years
ended September 2, 1995.................................................. F-5
Statements of Cash Flows for the three fiscal years ended September 2, 1995 F-6
Notes to Financial Statements.............................................. F-7
FINANCIAL STATEMENT OF MSC INDUSTRIAL DIRECT CO., INC.
Audited:
Report of Independent Public Accountants.................................. F-16
Balance Sheet as of November 14, 1995..................................... F-17
Notes to Balance Sheet.................................................... F-18
Unaudited:
Consolidated Balance Sheet as of June 1, 1996............................. F-19
Consolidated Statements of Income for the Nine Month Periods Ended
June 1, 1996 and May 27, 1995........................................... F-20
Consolidated Statement of Shareholders' Equity for the Nine Month
Period Ended June 1, 1996............................................... F-21
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
June 1, 1996 and May 27, 1995........................................... F-22
Notes to Consolidated Financial Statements................................ F-23
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sid Tool Co., Inc.:
We have audited the accompanying balance sheets of Sid Tool Co., Inc. as of
August 27, 1994 and September 2, 1995, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended September 2, 1995. 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 Sid Tool Co., Inc. as of August
27, 1994 and September 2, 1995, and the results of its operations and its cash
flows for each of the three years in the period then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
October 27, 1995 (except
with respect to the matters
discussed in Note 14, as to
which the date is
December 14, 1995)
F-2
<PAGE>
SID TOOL CO., INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
August 27, September 2, September 2,
1994 1995 1995
---------- ------------ -------------
Actual Actual Pro Forma
------ ------ ---------
(Note 14)
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents ................................................. $ 3,496 $ 681 $ 681
Accounts receivable, net of allowance for doubtful accounts of
$652 and $877, respectively ........................................... 23,193 31,078 31,078
Inventories ............................................................... 52,887 83,448 83,448
Due from affiliated companies ............................................. 253 791 791
Prepaid expenses and other current assets ................................. 1,096 1,070 1,070
-------- -------- --------
Total current assets ........................................................... 80,925 117,068 117,068
-------- -------- --------
Property, plant and equipment, net ............................................. 5,537 14,648 14,648
-------- -------- --------
Other assets:
Prepaid Federal income tax payments ....................................... 2,079 3,115 3,115
Other ..................................................................... 2,766 4,201 4,201
-------- -------- --------
4,845 7,316 7,316
-------- -------- --------
$ 91,307 $139,032 $139,032
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 8,934 $ 7,821 $ 7,821
Accrued expenses .......................................................... 10,059 18,811 18,811
Current portion of long-term notes payable ................................ 51 51 51
Current portion of revolving credit agreement ............................. 6,400 -- --
Current portion of obligations under capital leases with affiliates ....... 478 -- --
Current portion of subordinated debt to shareholders ...................... 6,277 9,157 9,157
Distribution payable to shareholders--pro forma (Note 14) ................. -- -- 52,255
-------- -------- --------
Total current liabilities ...................................................... 32,199 35,840 88,095
Long-term notes payable ........................................................ 599 28,348 28,348
Subordinated debt to shareholders .............................................. 2,621 2,621 2,621
Other long-term liabilities .................................................... 138 135 135
-------- -------- --------
Total liabilities .............................................................. 35,557 66,944 119,199
-------- -------- --------
Commitments and contingencies (Note 12)
Shareholders' equity (Note 14):
Common stock; $1 par value; 30,000 shares authorized, issued and
outstanding ........................................................... 30 30 30
Additional paid-in capital ................................................ 8,028 8,028 8,028
Retained earnings ......................................................... 47,692 64,030 11,775
-------- -------- --------
Total shareholders' equity ..................................................... 55,750 72,088 19,833
-------- -------- --------
$ 91,307 $139,032 $139,032
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
SID TOOL CO., INC.
STATEMENTS OF INCOME
(in thousands, except share data)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
---------------------------------------
August 28, August 27, September 2,
1993 1994 1995
---------- --------- ------------
<S> <C> <C> <C>
Net sales ....................................... $ 142,287 $ 174,682 $ 248,483
Cost of goods sold .............................. 80,491 99,830 145,195
--------- --------- ---------
Gross profit ............................... 61,796 74,852 103,288
Operating expenses .............................. 44,376 50,234 69,049
--------- --------- ---------
Income from operations ..................... 17,420 24,618 34,239
--------- --------- ---------
Other (expense) income:
Income on rental property .................. 217 113 118
Interest expense ........................... (1,263) (870) (1,870)
Interest income from affiliates ............ 250 164 29
Other (expense) income, net ................ (524) (639) (53)
--------- --------- ---------
(1,320) (1,232) (1,776)
--------- --------- ---------
Income before provision for income taxes 16,100 23,386 32,463
Provision for income taxes ...................... 418 813 765
--------- --------- ---------
Net income ............................. $ 15,682 $ 22,573 $ 31,698
========= ========= =========
Pro forma information--unaudited (note 14):
Income before provision for income taxes ... $ 32,463
Adjustment for officer compensation ........ 677
Pro forma stock compensation charge ........ (3,000)
--------
Pro forma income before pro forma
provision for income taxes 30,140
Pro forma provision for income taxes ....... 11,905
--------
Pro forma net income ................... $ 18,235
========
Pro forma net income per share .................. $ 0.68
========
Pro forma weighted average common shares
outstanding ................................ 26,908
========
Supplementary pro forma net income per share .... $ 0.67
========
Supplementary pro forma weighted average common shares
outstanding ................................ 29,023
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SID TOOL CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Fiscal Years Ended September 2, 1995
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-In Retained
Shares Amount Caital Earnings Total
-------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, August 29, 1992 ......... 30 $ 30 $ 8,028 $ 32,128 $ 40,186
Net income .................. -- -- -- 15,682 15,682
Distributions to shareholders -- -- -- (6,160) (6,160)
-------- -------- -------- -------- --------
Balance, August 28, 1993 ......... 30 30 8,028 41,650 49,708
Net income .................. -- -- -- 22,573 22,573
Distributions to shareholders -- -- -- (16,531) (16,531)
-------- -------- -------- -------- --------
Balance, August 27, 1994 ......... 30 30 8,028 47,692 55,750
Net income .................. -- -- -- 31,698 31,698
Distributions to shareholders -- -- -- (15,360) (15,360)
-------- -------- -------- -------- --------
Balance, September 2, 1995 ....... 30 $ 30 $ 8,028 $ 64,030 $ 72,088
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SID TOOL CO., INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
--------------------------------------
August 28, August 27, September 2,
1993 1994 1995
--------- ---------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 15,682 $ 22,573 $ 31,698
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization ..................................... 1,235 1,501 1,932
Loss (gain) on disposal of property, plant and equipment .......... 73 96 (2)
Provision for doubtful accounts ................................... 353 489 694
Changes in operating assets and liabilities:
Accounts receivable ............................................... (2,510) (5,626) (8,578)
Inventories ....................................................... (2,039) (4,089) (30,561)
Prepaid expenses and other current assets ......................... (224) 1,845 26
Prepaid federal income tax payments ............................... (195) (695) (1,036)
Other assets ...................................................... 144 (2,366) (1,435)
Accounts payable .................................................. (669) 4,955 (1,112)
Accrued expenses .................................................. 1,756 2,267 7,193
Other long-term liabilities ....................................... (38) 10 (3)
--------- --------- ---------
Total adjustments .......................................................... (2,114) (1,613) (32,882)
--------- --------- ---------
Net cash provided by (used in) operating activities ........................ 13,568 20,960 (1,184)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment ............................ (1,524) (2,163) (9,495)
Proceeds from sale of property, plant and equipment ................... 28 40 11
Cash paid for acquisition (Note 13) ................................... -- (629) --
--------- --------- ---------
Net cash used in investing activities ...................................... (1,496) (2,752) (9,484)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from borrowings under revolving credit agreement ............. 72,500 61,000 108,650
Repayment of borrowings under revolving credit agreement .............. (78,001) (71,900) (87,301)
Payments under capital leases ......................................... (243) (84) (478)
Proceeds from subordinated debt to shareholders ....................... 4,118 17,232 20,144
Repayment of subordinated debt to shareholders ........................ (3,838) (9,423) (17,263)
Repayments from (advances to) affiliates .............................. (720) 4,715 (539)
Distributions to shareholders ......................................... (6,160) (16,531) (15,360)
--------- --------- ---------
Net cash provided by (used in) financing activities ........................ (12,344) (14,991) 7,853
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ....................... (272) 3,217 (2,815)
Cash and cash equivalents, beginning of year ............................... 551 279 3,496
--------- --------- ---------
Cash and cash equivalents, end of year ..................................... $ 279 $ 3,496 $ 681
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
========= ========= =========
Interest .......................................................... $ 1,363 $ 866 $ 1,883
========= ========= =========
Income taxes ...................................................... $ 447 $ 624 $ 561
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share, location, estimated lives and customer amounts)
1. Business and Organization
Sid Tool Co., Inc. (the "Company") is a distributor of industrial equipment
and supplies with headquarters in Plainview, New York. The Company serves both
domestic and international markets through its distribution network, which
includes twenty-one local branches in sixteen states, concentrated in the
Eastern and Southern United States, and regional distribution centers in
Plainview/Central Islip, New York and Atlanta, Georgia. For a discussion of
risks associated with the Company and its business, see "Risk Factors" in the
accompanying registration statement (Note 14) of which these financial
statements and notes to financial statements are a part.
2. Summary of Significant Accounting Policies
Company's Year End
The Company's fiscal year ends on the Saturday closest to August 31. The
financial statements for 1993, 1994 and 1995 contain fifty-two weeks, fifty-two
weeks and fifty-three weeks, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, as well as certain
highly liquid investments with original maturities of three months or less.
Concentration of Credit Risk
The Company's mix of receivables is diverse, with approximately 120,000
active customer accounts. The Company sells its products directly to end users
and, in some cases, to other wholesalers and distributors in its market areas.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the
lower of average cost or market.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment are computed
for financial reporting purposes on both the straight-line and accelerated
methods based on the estimated useful lives of the assets.
Expenditures for maintenance and repairs are charged to expense as
incurred; costs of major renewals and improvements are capitalized. At the time
property and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and accumulated
depreciation accounts and the profit or loss on such disposition is reflected in
income.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 34, "Capitalization of Interest Cost," interest
attributable to construction in progress is capitalized as part of the cost of
related buildings during the period prior to which such facilities are available
and ready for use.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal catalogs
are deferred and included in other assets in the Company's balance sheet ($2,221
and $3,546 at August 27, 1994 and September 2, 1995, respectively). These costs
are charged to expense over the period that the catalogs remain the most current
source of sales, which period is less than one year.
Sales Returns
The Company reports its sales levels on a net sales basis, with net sales
being computed by deducting from gross sales the amount of actual sales returns
and the amount of reserve established for anticipated sales returns.
F-7
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
2. Summary of Significant Accounting Policies-(continued)
Income Taxes
The Company, with the consent of its shareholders, elected to have its
Federal income and certain states' income taxed as a subchapter "S" corporation.
In lieu of Federal and these certain states' corporate income taxes, the
shareholders are taxed on their proportionate share of income, or receive the
benefit of any losses. Corporate state income taxes for "S" corporations are
provided, if required, at statutory rates which are lower than for other
corporate entities. Prior to the election of the "S" corporation status
effective September 1, 1987, the Company had retained earnings of $19,862.
Affiliates
The Company is affiliated with Primeline International, Inc. (Note 14); MSC
International Korea, Inc.; Kaja Productions, Inc. (Note 14) and various real
estate entities (together, the "affiliates"). The affiliates are owned primarily
by the Company's shareholders. See Notes 3, 8, 11 and 12 for discussion of
certain related party transactions.
Capital Leases
Long-term lease transactions related to the financing of property, plant
and equipment are accounted for as installment purchases of equipment under
capital leases. This equipment is included in property, plant and equipment and
depreciated over the lease term (Note 4), and the related obligation is included
in obligations under capital leases (Note 8).
Reclassifications
Certain prior year financial statement amounts have been reclassified to
conform with the current year's presentation.
3. Due from Affiliated Companies
The amounts due from affiliated companies bear interest at the prime rate
(8.75% at September 2, 1995).
4. Property, Plant and Equipment
The following is a summary of property, plant and equipment and the
estimated useful lives used in the computation of depreciation and amortization:
Number of August 27, September 2,
Years 1994 1995
--------- ---------- ------------
Land ......................................... -- $ 637 $ 637
Building ..................................... 40 107 5,799
Building and leasehold improvements .......... 10-31.5 2,276 2,532
Furniture, fixtures and equipment ............ 5-10 10,817 16,526
Equipment under capital leases ............... lease term 874 --
Automobiles .................................. 3-10 368 364
------- -------
15,079 25,858
Less: Accumulated depreciation and
amortization (including $781
attributable to equipment under
capital leases at August 27, 1994) 9,542 11,210
------- -------
$ 5,537 $14,648
======= =======
F-8
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
5. Prepaid Federal Income Tax Payments
The Company is required to make certain Federal income tax depository
payments in order to maintain its fiscal year end as a subchapter "S"
corporation. If the Company should change its fiscal year to a calendar year end
or no longer qualifies as a subchapter "S" corporation, such deposits would be
refunded to the Company. As of August 27, 1994 and September 2, 1995, these
Federal tax deposits amounted to $2,079 and $3,115, respectively.
6. Accrued Expenses
Accrued expenses consist of the following:
August 27, September 2,
1994 1995
---------- ------------
Accrued purchases .................................. $ 3,208 $ 6,755
Accrued payroll and bonus .......................... 2,674 3,618
Accrued other ...................................... 4,177 8,438
------- -------
Total accrued expenses ........... $10,059 $18,811
======= =======
7. Long-term Notes Payable
Long-term notes payable consist of the following as of September 2, 1995:
Revolving credit agreement(a) $27,800
Term note payable(b) ........ 599
-------
28,399
Less: Current portion ...... 51
-------
$28,348
=======
Maturities of long-term notes payable are as follows:
1996 ..................... $ 51
1997 ..................... 548
1998 ..................... --
1999 ..................... 27,800
-------
$28,399
=======
(a) As of September 2, 1995, the Company had an unsecured revolving credit
agreement with borrowings of $27,800. The credit agreement provides
for maximum borrowings of $80 million expiring on April 30, 1999.
During the term of the agreement, the Company can borrow at the bank's
base rate (8.75% at September 2, 1995), Bankers Acceptance ("BA") rate
or LIBOR rate plus margins, which vary from .45% to .75% per annum
based on the ratio of total liabilities to effective net worth, or bid
note rate. A facility fee of one-eighth of one percent (.125%) per
annum is payable on the unused portion of the credit. The agreement
contains certain covenants including, but not limited to, restrictions
related to indebtedness, net worth, capital expenditures and the
payment of dividends. As of September 2, 1995, the Company was in
compliance with these covenants.
(b) The term note payable represents the Company's share of a loan payable
under a five year credit agreement with a bank, as agent for a group
of banks. The Company is obligated for 50% of the total debt, as these
borrowings are secured by real property which is owned 50% by the
Company and 50% by a real estate affiliate. This note bears interest
at the bank's prime rate (8.75% at September 2, 1995) plus a margin of
.75% per annum, and is payable in monthly principal installments of
$4, plus interest through April 1997, at which time the balance of the
unpaid principal and any accrued interest is due.
F-9
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
8. Obligations Under Capital Leases with Affiliates
Obligations under capital leases with affiliates consist of the following:
August 27,
1994
----------
Capitalized lease payable in monthly installments of $3,
plus interest at approximately 9.5% per annum, with
a final payment of approximately $412 due June 1995.
The original cost of the underlying equipment
approximates $695 .............................................. $ 443
Capitalized leases payable in varying monthly installments
from $1 to $2, including interest at approximately 12%
per annum, with final payments due March-July 1995.
The original cost of the underlying equipment
aggregates approximately $196 .................................. 35
-------
478
Less: Current portion .............................................. 478
-------
$ --
=======
9. Subordinated Debt to Shareholders
During fiscal 1992, the Company entered into subordinated debt agreements
with its shareholders. The agreements provide for interest to be paid at 1%
below prime rate (7.75% and 8.75% at August 27, 1994 and September 2, 1995,
respectively). Borrowings under these agreements are subordinated to the
long-term notes payable and obligations under capital leases described in Notes
7 and 8, respectively, and can be increased or repaid pursuant to limitations
included in the long-term notes payable agreement. Subordinated debt to
shareholders is comprised of the following:
August 27, September 2,
1994 1995
---------- ------------
Subordinated debt to shareholders $ 8,898 $11,778
Less: Current portion .......... 6,277 9,157
------- -------
$ 2,621 $ 2,621
======= =======
10. Employee Benefit Plan
The Company maintains a defined contribution plan with both a profit
sharing feature and a 401(k) feature, which covers all employees who have
completed at least one month of service with the Company. For the fiscal years
ended August 28, 1993, August 27, 1994 and September 2, 1995, the Company
contributed $400, $623 and $1,350, respectively, to the plan.
11. Related Party Transactions
The Company sells merchandise to and purchases merchandise from certain of
its affiliates. For the fiscal years ended August 28, 1993, August 27, 1994 and
September 2, 1995, respectively, sales to and purchases from affiliates were
made as follows:
For the Fiscal Years Ended
-----------------------------------------
August 28, August 27, September 2,
1993 1994 1995
---------- ---------- ------------
Sales to affiliates........... $ 1,301 $ 1,732 $ 1,744
Purchases from affiliates..... 955 1,416 967
F-10
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
12. Commitments and Contingencies
Leases
The operations of the Company are conducted on leased premises, primarily
leased from affiliates. The leases (most of which provide for the payment of
real estate taxes, insurance and other operating costs) are for varying periods,
the longest extending to the year 2011. At September 2, 1995, approximate
minimum annual rentals on such leases are as follows:
Total (including
Related Party Related Party
Commitments) Commitments
---------------- -------------
1996................................ $ 3,116 $ 2,613
1997................................ 2,347 1,816
1998................................ 1,670 1,364
1999................................ 1,376 1,162
2000................................ 1,121 1,064
2001 and thereafter................. 9,532 9,532
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for the fiscal years ended August 28,
1993, August 27, 1994 and September 2, 1995 was approximately $3,600, $3,100 and
$2,964, respectively, including approximately $3,200, $2,800 and $2,511,
respectively, paid to affiliates. In the opinion of the Company's management,
these leases with affiliates are on terms which approximate fair market value.
The Company is obligated under certain equipment operating
leases, which expire on varying dates through fiscal 2000. At September 2, 1995,
approximate minimum annual rentals on such leases are as follows:
1996..................... $ 1,168
1997..................... 676
1998..................... 295
1999..................... 97
2000..................... 11
Guarantees
As of September 2, 1995, the Company was a guarantor on loans made to
affiliated real estate companies aggregating approximately $1,867.
Self Insurance
The Company has a self-insured group health insurance plan. The Company is
responsible for all covered claims to a maximum liability of $100 per
participant during a June 30 plan year. Benefits paid in excess of $100 are
reimbursed to the plan under the Company's excess loss policy. In addition, the
Company also has an aggregate stop loss policy whereby the Company's liability
for total claims submitted cannot exceed a pre-determined dollar factor based
upon, among other things, past years' claims experience, actual claims paid, and
monthly accumulated aggregate deductibles. Group health insurance expense for
the fiscal years ended August 28, 1993, August 27, 1994 and September 2, 1995
was approximately $2,650, $2,357 and $3,234, respectively.
F-11
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
Letters of Credit
As of September 2, 1995, the Company had outstanding letters of credit
aggregating approximately $681.
Employment Agreements
The Chairman of the Board of Directors of the Company is employed pursuant
to an employment agreement with a term expiring in January, 2004 (see Note
14-Adjustment to Officer Compensation). Under this agreement, the Chairman
receives an annual base salary of $650 and is entitled to participate in the
bonus pool. The Chairman has agreed that upon termination of his employment, he
will not compete with the Company for a period of three years. The agreement
also provides for certain payments in the event of his disability or death.
Finally, the agreement provides that the Chairman may, at his option, elect to
become a consultant and advisor to the Company at an annual fee of $300.
The President and Chief Executive Officer of the Company is employed
pursuant to an employment agreement with a term expiring either on August 1,
2004 or 90 days after the President's written election to terminate employment.
Under this agreement, the President receives an annual base salary of $400,
subject to increases in the cost of living, and is entitled to participate in
the bonus pool and other benefits available to Company employees. The agreement
also provides for certain payments in the event of his disability or death.
13. Acquisition of Assets and Liabilities
On August 15, 1994, the Company acquired various assets and assumed various
liabilities, principally the accounts receivable, inventory and accounts
payable, of Cast Industrial Products Co. for a net cash purchase price of $629.
There was no goodwill as a result of this transaction. The pro forma effects of
this transaction have not been presented, as the results are immaterial to the
Company's financial statements taken as a whole.
14. Subsequent Events
Incorporation of MSC Industrial Direct Co., Inc.
In connection with the pending initial public offering described below, the
Company will become a wholly-owned subsidiary of MSC Industrial Direct Co.,
Inc., which is a holding company formed on October 24, 1995, and which bears the
name under which the Company conducts its business.
Reorganization
Immediately prior to the effective date of the pending initial public
offering described below, the shareholders of Sid Tool Co., Inc. will exchange
their currently outstanding common stock for 24,000 shares of Class B common
stock of MSC Industrial Direct Co., Inc. When these transactions are effected,
all information contained in the accompanying financial statements and footnotes
will be retroactively restated to give effect to this transaction. Pro forma
weighted average common shares outstanding has been presented on a basis which
gives pro forma effect to these transactions and to the issuance of restricted
stock described below as well as the effect of the issuance of 2,750 shares of
Class A common stock, which is the number of incremental shares that would need
to be issued at the proposed initial public offering price to provide proceeds
sufficient to make the distribution of "S" Corporation earnings described below.
Historical per share data has not been presented, as this data would be
misleading in light of the pending initial public offering.
F-12
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
Initial Public Offering
MSC Industrial Direct Co., Inc. is pursuing an initial public offering of
its securities. The offering contemplates the sale of 7,000 shares of Class A
common stock at an offering price of $19.00 per share before underwriting
commissions and offering expenses. MSC Industrial Direct Co., Inc. plans to use
a portion of the proceeds of this offering to repay certain of the Company's
debt obligations under its revolving credit agreement and term note payable
(Note 7) and subordinated debt to shareholders (Note 9), pursuant to which the
Company had aggregate outstanding borrowings of $40,177 at September 2, 1995,
and to make a distribution to current shareholders of approximately $52,255 of
the Company's undistributed tax basis "S" Corporation retained earnings at
September 2, 1995. A pro forma September 2, 1995 balance sheet, adjusted to
reflect the Company's financial position had this distribution been formally
declared and had the amount of the distribution due to shareholders been accrued
as of that date, has been presented along with the historical September 2, 1995
balance sheet in the accompanying financial statements.
Supplemental pro forma net income for the fiscal year ended September 2,
1995 reflects the tax-effected impact of the reduction of interest expense of
$1,870 attributable to debt to be repaid as though this debt was repaid at the
beginning of the year. Supplemental weighted average common shares outstanding
includes the pro forma weighted average shares outstanding, as well as the
effect of the issuance of 2,115 shares of Class A common stock, which is the
number of incremental shares that would need to be issued at the proposed
initial public offering price to provide proceeds sufficient to pay the
outstanding amounts of such debt at September 2, 1995. These incremental shares
are not and will not be issued and outstanding for any other purpose and are
included in this calculation solely to illustrate their effect on a supplemental
basis.
Change in Tax Status
Concurrent with this public offering, the Company will no longer qualify as
a subchapter "S" Corporation. The pro forma effect of a subchapter "C"
Corporation income tax provision has been included in the calculation of pro
forma net income in the accompanying statement of income for the fiscal year
ended September 2, 1995.
Adjustment to Officer Compensation
A pro forma adjustment has been made in determining pro forma net income
per share for the year ended September 2, 1995 to give effect to the reduction
of compensation for the Company's Chairman from $927 to $250 per year, which
represents the amount of compensation to be received by the Company's Chairman
subsequent to the proposed offering.
Acquisition of Affiliated Entities
In connection with the proposed offering described above, MSC Industrial
Direct Co., Inc. will acquire Primeline International, Inc. for approximately
$2,000 in Class A common stock and will acquire Kaja Productions, Inc. for
approximately $1 in cash. The pro forma effects of these pending transactions
have not been presented, as the results are immaterial to the Company's
financial statements taken as a whole.
Option and Restricted Stock Plans
In connection with the proposed offering described above, MSC Industrial
Direct Co., Inc. will adopt the MSC Industrial Direct Co., Inc. 1995 Stock
Option Plan, pursuant to which options to purchase 2,000 shares of
F-13
<PAGE>
SID TOOL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share, location, estimated lives and customer amounts)
Class A common stock may be granted. Options will be granted to employees,
officers and directors to purchase up to approximately 662 shares at the initial
public offering price.
MSC Industrial Direct Co., Inc. will also adopt the Restricted Stock Plan,
whereby MSC Industrial Direct Co., Inc. will award 158 shares of Class A common
stock to various employees. Employees vest in their ownership of these shares at
the end of five years, prior to which such shares would be forfeited upon the
departure of the employees. Pro forma net income for the year ended September 2,
1995 includes the pro forma effect of a compensation charge of $3,000 related to
these stock awards. This amount will be included as a separate component of
shareholders' equity, and the compensation charge will be recorded ratably over
the five year vesting period. Pro forma weighted average common shares
outstanding for the year ended September 2, 1995 includes the pro forma effect
of 158 shares of Class A common stock issued in connection with this plan.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MSC Industrial Direct Co., Inc.:
We have audited the accompanying balance sheet of MSC Industrial Direct Co.,
Inc. (a New York corporation) as of November 14, 1995. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement 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 balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. 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 balance sheet referred to above presents fairly, in all
material respects, the financial position of MSC Industrial Direct Co., Inc. as
of November 14, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 15, 1995
F-15
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
BALANCE SHEET
As of November 14, 1995
ASSETS
Cash ..................................................................... $ 17
-----
Total Assets ............................................................. $ 17
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities......................................................... $ --
-----
Shareholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
no shares outstanding................................................ $ --
Class A common stock, $.001 par value; 100,000,000 shares
authorized; 1 share outstanding...................................... --
Class B common stock, $.001 par value; 50,000,000 shares
authorized; no shares outstanding.................................... --
Additional paid-in capital.............................................. 17
-----
Total shareholders' equity................................................ 17
-----
Total liabilities and shareholders' equity................................ $ 17
=====
The accompanying notes are an integral part of this balance sheet.
F-16
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
NOTES TO BALANCE SHEET
November 14, 1995
1. Organization and Business
MSC Industrial Direct Co., Inc. ("MSC"), was incorporated on October 24,
1995, as a holding company for the purpose of (i) issuing shares of Class A
Common Stock in an initial public offering and (ii) issuing 24,000,000 shares of
Class B Common Stock to the shareholders of Sid Tool Co., Inc. (the "Operating
Subsidiary") in exchange for their currently outstanding 30,000 shares of common
stock of the Operating Subsidiary immediately prior to the effective date of
MSC's initial public offering.
2. Stock Issuance
On November 14, 1995, MSC issued 1 share of Class A Common Stock to a
shareholder of the Operating Subsidiary in exchange for cash in the amount of
$17, which was the midpoint of the range of offering prices per share
contemplated in the proposed initial public offering at that date.
F-17
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Balance Sheets
(Note 1)
(in thousands, except share data)
<TABLE>
<CAPTION>
June 1, September 2,
1996 1995
Assets (unaudited) (audited)
-------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .......................................... $ 1,791 $ 681
Accounts receivable, net of allowance for doubtful accounts of $951
and $877, respectively ............................................. 40,031 31,078
Inventories ........................................................ 130,935 83,448
Due from affiliated companies ...................................... -- 791
Prepaid expenses and other current assets .......................... 1,783 1,070
Deferred income taxes .............................................. 8,513 --
--------- ---------
Total current assets ............................................ 183,053 117,068
--------- ---------
Property, Plant and Equipment, net .................................. 28,061 14,648
--------- ---------
Other Assets:
Prepaid Federal income taxes ....................................... 4,512 3,115
Other .............................................................. 3,939 4,201
--------- ---------
8,451 7,316
--------- ---------
$ 219,565 $ 139,032
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ................................................... $ 10,256 $ 7,821
Accrued liabilities ................................................ 27,596 18,811
Income taxes payable ............................................... 1,415 --
Current portion of long-term debt .................................. 51 51
Current portion of subordinated debt to shareholders ............... -- 9,157
--------- ---------
Total current liabilities ....................................... 39,318 35,840
Long-Term Notes Payable ............................................. 14,057 28,348
Subordinated Debt to Shareholders ................................... -- 2,621
Deferred Income Taxes ............................................... 971 --
Other Long-Term Liabilities ......................................... 114 135
--------- ---------
Total liabilities ............................................... 54,460 66,944
--------- ---------
Shareholders' Equity
Class A common stock; $0.001 par value; 100,000,000 shares
authorized in 1996; 8,311,394 shares issued and outstanding ...... 8 --
Class B common stock; $0.001 par value; 50,000,000 shares
authorized; 23,475,000 shares and 24,000,000 shares, respectively,
issued and outstanding ........................................... 24 24
Additional paid-in capital ......................................... 144,471 8,034
Retained earnings .................................................. 23,313 64,030
--------- ---------
167,816 72,088
Deferred stock compensation ........................................ (2,711) --
--------- ---------
Total shareholders' equity ...................................... 165,105 72,088
--------- ---------
$ 219,565 $ 139,032
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-18
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Income
(Note 1)
(unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
(in thousands, except per share data) June 1, May 27,
1996 1995
-------- ----------
<S> <C> <C>
Net Sales $ 224,527 $ 182,025
Cost of Goods Sold 131,264 106,491
--------- ---------
Gross Profit 93,263 75,534
Operating Expenses 61,214 50,170
Distribution Center Restructuring Charge (Note 4) 8,600 --
--------- ---------
Income from Operations 23,449 25,364
--------- ---------
Other Income (Expense):
Interest income 748 18
Interest expense (1,293) (1,279)
Other income (expense), net 289 (59)
--------- ---------
(256) (1,320)
--------- ---------
Income before Provision for Income Taxes 23,193 24,044
Provision for Income Taxes 1,947 612
--------- ---------
Net Income $ 21,246 $ 23,432
========= =========
Net Income per Common Share (Note 5)
Weighted Average Number of Common Shares Outstanding
Pro Forma Information (Note 5):
Income before provision for income taxes $ 23,193
Pro forma provision for income taxes 9,160
---------
Pro forma net income $ 14,033
=========
Pro forma net income per common share (Note 5) $ 0.46
=========
Pro forma weighted average number of common shares outstanding 30,205
=========
Supplemental Information (Note 5);
Supplemental net income $ 14,483
=========
Supplemental net income per common share $ 0.47
=========
Supplemental weighted average number of common shares
outstanding .................................................. 30,612
=========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-19
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statement of Shareholders' Equity
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Class A Common Stock Class B Common Stock Additional Deferred
-------------------- -------------------- Paid-In Retained Stock
Shares Amount Shares Amount Capital Earnings Compensation Total
------ ------ ------ ------ ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thirty-nine weeks ended June 1, 1996:
Balance, September 2, 1995
(Note 1) -- $ -- 24,000 $ 24 $ 8,034 $ 64,030 $ -- $ 72,088
Initial public offering of
common stock, net of costs
of offering of $11,509 7,525 8 -- -- 131,466 -- -- 131,474
Exchange of Class B
common stock for Class A
common stock 525 -- (525) -- -- -- -- --
Issuance of restricted
common stock 157 -- -- -- 2,971 -- (2,971) --
Issuance of common stock
for acquisition of
subsidiaries 105 -- -- -- 2,000 -- -- 2,000
Net income -- -- -- -- -- 21,246 -- 21,246
Amortization of deferred
stock compensation -- -- -- -- -- -- 260 260
Distributions to
shareholders (Note 3) -- -- -- -- -- (61,963) (61,963)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, June 1, 1996 8,312 $ 8 23,475 $ 24 $144,471 $ 23,313 $ (2,711) $165,105
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-20
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC.
Consolidated Statements of Cash Flows
(Note 1)
(unaudited)
<TABLE>
<CAPTION>
(in thousands) Thirty-Nine Weeks Ended
June 1, May 27,
1996 1995
--------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 21,246 $ 23,432
--------- ---------
Adjustments to reconcile net income to net cash used in operating
activities:
Deferred income taxes (7,542) --
Depreciation and amortization 2,282 1,380
Provision for doubtful accounts 618 509
Loss (gain) on disposal of property and equipment (33) 1
Changes in operating assets and liabilities:
Accounts receivable (9,043) (9,326)
Inventories (45,637) (19,390)
Prepaid expenses and other current assets (700) 1,494
Other assets (1,056) (544)
Accounts payable and other current liabilities 12,611 (1,369)
Other long-term liabilities (21) 6
--------- ---------
(48,521) (27,239)
--------- ---------
Net Cash used in operating activities (27,275) (3,807)
--------- ---------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (15,359) (7,690)
--------- ---------
Cash Flows from Financing Activities:
Net proceeds from initial public offering of common stock 131,466 --
Long-term borrowings 67,614 13,754
Repayments of long-term debt (82,386) --
Repayments of subordinated debt to shareholders (11,778) 4,891
Repayments from affiliates 791 (348)
Distributions to shareholders (61,963) (10,192)
--------- ---------
Net cash provided by financing activities 43,744 8,105
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 1,110 (3,392)
Cash and Cash Equivalents - beginning of period 681 3,496
--------- ---------
Cash and Cash Equivalents - end of period $ 1,791 $ 104
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-21
<PAGE>
Notes to Consolidated Financial Statements
(in thousands except share data)
(unaudited)
1. MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was incorporated
on October 24, 1995, as a holding company for the purpose of (i) issuing
8,050,000 shares of Class A Common Stock in an initial public offering and
(ii) issuing 24,000,000 shares of Class B Common Stock to the shareholders
of Sid Tool Co., Inc. (the "Operating Subsidiary") in exchange for their
then outstanding 30,000 shares of common stock of the Operating Subsidiary
immediately prior to the effective date of MSC's initial public offering.
On November 14, 1995, MSC issued one share of Class A Common Stock to a
shareholder of the Operating Subsidiary in exchange for cash in the amount
of $17. MSC did not have any significant operating activity from its
inception until December 20, 1995, the closing date of the initial public
offering.
The 1995 financial statements included herein are those of the Operating
Subsidiary. The 1996 consolidated financial statements are those of the
Company and its subsidiaries which, prior to December 20, 1995, reflect
only the activity of the Operating Subsidiary. All references to a year are
to the Company's fiscal year, which ends on the Saturday nearest August 31
of such year.
2. Reference is made to the Notes to Financial Statements contained within the
Operating Subsidiary's audited financial statements included elsewhere in
this Prospectus. In the opinion of management, the interim unaudited
financial statements included herein reflect all adjustments necessary,
consisting of normal recurring adjustments, for a fair presentation of such
data on a basis consistent with that of the audited data presented therein.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
3. On December 20, 1995, the Company consummated its initial public offering
of 8,050,000 shares of Class A Common Stock, 7,525,000 of which shares were
offered by the Company and 525,000 of which shares were offered by a
principal shareholder of the Company, at a price of $19.00 per share. These
525,000 shares were converted to Class A Common Stock from previously
issued Class B Common Stock. Net proceeds received by the Company were
approximately $131,500. As a result of the public offering, the Operating
Subsidiary no longer qualified as a Subchapter "S" corporation, and became
subject to "C" corporation taxation. Prior to the Initial Public Offering,
the Operating Subsidiary declared an "S" corporation dividend to the then
existing shareholders in the aggregate amount of approximately $62,000,
which amount was equal to substantially all previously taxed, undistributed
"S" corporation earnings. The Operating Subsidiary paid the "S" corporation
dividend by delivery to the then existing shareholders of promissory notes
in the principal amount of such dividends, which notes have been repaid
with a portion of the net proceeds from the offering. The provision for
income taxes for the thirty-nine week period ended June 1, 1996 reflects
"S" corporation taxation through the date of the public offering, and "C"
corporation taxation thereafter. (See Note 6.)
4. On May 9, 1996, the Company announced that it would be relocating its
multi-location Long Island, New York warehouse and distribution center
operation to a new, single-location, 104 acre Company-owned facility near
Harrisburg, Pennsylvania. The Company anticipates that it will realize
substantial savings in construction and operating costs over those which
would have been incurred had it remained and expanded its operations on
Long Island. The estimated cost of relocation of the Company's existing
Long Island facilities is approximately $8,600, and has been reflected as a
charge to income from operations for the thirty-nine week period ended June
1, 1996.
5. Pro forma net income per common share was computed by dividing the
Company's pro forma net income by the pro forma weighted average number of
common shares, which consist of the 24,000,000 shares of Class B Common
Stock outstanding during the thirty-nine week period ended June 1, 1996 (of
which 525,000 shares were exchanged during the period for Class A Common
Stock), as well as the weighted average effect of the issuance of
approximately 6,205,000 shares of Class A Common Stock as of the beginning
of such period reflecting the number of shares to be issued in the initial
public offering necessary to (i) repay the notes as discussed in Note 3,
(ii) acquire a related entity for approximately $2,000 in stock, and (iii)
deliver certain restricted shares, valued at approximately $3,000, to
employees of the Company. Pro forma net income reflects the pro forma
effect of the "C: corporation taxation.
Supplemental net income per common share was computed by dividing the
Company's supplemental net income by the supplemental weighted average
number of common shares outstanding during the thirty-nine week period
ended June 1, 1996. The supplemental weighted average number of common
shares represents
F-22
<PAGE>
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share data)
(unaudited)
the pro forma weighted average number of shares of common stock outstanding
during the period as well as the supplemental weighted effect of the
issuance of approximately 407,000 shares of Class A Common Stock as of the
beginning of such period, reflecting the number of shares to be issued in
this offering necessary to repay certain indebtedness as of June 1, 1996.
Supplemental net income also reflects the taxeffected impact of the
reduction of interest expense of $744 attributable to debt to be repaid
with proceeds from this offering, as though this debt was repaid at the
beginning of the period.
Had the initial public offering occurred on the first day of fiscal 1995,
the weighted average number of common shares used in the computation of pro
forma earnings per share would have resulted in pro forma net income and
pro forma earnings per share as follows:
Thirty-Nine Weeks Ended
---------------------------
June 1, May 27,
Including Restructuring (Note 4) 1996 1995
- ----------------------- ---------- ----------
Pro forma net income $ 14,033 $ 14,547
Pro forma earnings per share $ 0.45 $ 0.45
Excluding Restructuring (Note 4)
- -----------------------
Pro forma net income $ 19,233 $ 14,547
Pro forma earnings per share $ 0.61 $ 0.45
6. The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." Under the asset and liability method specified by SFAS No. 109, the
deferred tax amounts included in the balance sheet are determined based on
the differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that will be in effect
when these differences reverse. Differences between assets and liabilities
for financial statement and tax return purposes are principally related to
inventories and certain accrued liabilities related to the restructuring
charge described in Note 4. Deferred tax assets and liabilities, which were
established in the second quarter due to the Company's taxation as a "C"
Corporation since the closing date of its initial public offering in
December 1995, resulted in a credit to the provision for income taxes of
$3,966 for the thirty-nine week period ended June 1, 1996.
7. During March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of," was issued by the Financial
Accounting Standards Board ("FASB"). This statement establishes financial
accounting and reporting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995.
During October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation." This statement establishes financial accounting and
reporting standards for stockbased employee compensation plans. The
provisions of SFAS No. 123 encourage entities to adopt a fair value based
method of accounting for stock compensation plans; however, these
provisions also permit the Company to continue to measure compensation
costs under pre-existing accounting pronouncements. If the fair value based
method of accounting is not adopted, SFAS No. 123 requires pro forma
disclosures of net income and net income per share in the notes to the
financial statements. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after
December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost.
The Company will be required to comply with the accounting and disclosure
provisions of SFAS No. 121, and SFAS No. 123 if adopted, no later than
fiscal 1997. The effect, if any, on the financial statements, of
implementation of these pronouncements has not been determined.
F-23
<PAGE>
[MAP OF COMPANY LOCATIONS TO BE INSERTED]
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering made hereby, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company,
the Underwriters or any other person. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such offer or solicitation.
--------------------
TABLE OF CONTENTS
--------------------
Prospectus Summary..............................................................
Risk Factors....................................................................
Use of Proceeds.................................................................
Dividend Policy.................................................................
Price Range ....................................................................
Capitalization..................................................................
Selected Financial and Operating Data...........................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.....................................................................
Business........................................................................
Management......................................................................
Principal and Selling Shareholders..............................................
Certain Relationships and Related
Transactions...................................................................
Description of Capital Stock....................................................
Underwriting....................................................................
Legal Matters...................................................................
Experts.........................................................................
Additional Information..........................................................
Index to Financial Statements................................................F-1
================================================================================
================================================================================
5,000,000 Shares
[LOGO]
Class A Common Stock
----------
PROSPECTUS
----------
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant's expenses in connection with the issuance of the securities
being registered, other than underwriting discounts and commissions, are
estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $65,431
*NASD Filing Fee...............................................
*Printing and Engraving........................................
*Counsel Fees and Expenses.....................................
*Accountants' Fees and Expenses................................
*Blue Sky Qualification Fees and Expenses......................
*Transfer Agent and Registrar Fees and Expenses................
*New York Stock Exchange Listing Fee...........................
*Miscellaneous.................................................
-------
*Total......................................................... $
</TABLE>
- ------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Registrant provides that any person
may be indemnified against all expenses and liabilities to the fullest extent
permitted by the Business Corporation Law of the State of New York.
Section 722 of the New York Business Corporation Law, as amended, the law
of the state in which the Registrant is incorporated, empowers a corporation,
within certain limitations, to indemnify any person who served in any capacity
at the request of the corporation, by reason of the fact that he, his testator
or intestate, was a director or officer of the corporation, or served such other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, against judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees actually and necessarily
incurred as a result of such action or proceeding, or any appeal therein, if
such director or officer acted, in good faith, for a purpose which he reasonably
believed to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation and, in criminal actions
or proceedings, in addition, had no reasonable cause to believe that his conduct
was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant was formed in October 1995 as a holding Company to hold all
of the outstanding capital stock of Sid Tool Co., Inc. Pursuant to the Exchange
Agreement dated October 30, 1995, the shareholders of Sid Tool Co., Inc.
contributed all of their shares of stock of Sid Tool Co., Inc. in exchange for
24,000,000 shares of Class B Common Stock of the Registrant.
In October 1995, the Registrant entered into an agreement to acquire all of
the capital stock of Primeline International, Inc. ('Primeline') for a purchase
price of $2 million payable in shares of Class A Common Stock of the Registrant
upon consummation of the Initial Public Offering. The Registrant's President and
his sister owned 70% of the outstanding stock of Primeline.
The foregoing transactions were accomplished pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended (the
'Act'), pursuant to Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Registration Statement:
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.01 Form of Underwriting Agreement.
*1.02 Master Agreement Among Underwriters dated March 1, 1993.
*1.03 Master Dealer Agreement dated December 1, 1987.
*3.01 Certificate of Incorporation of Registrant.
*3.02 By-laws of Registrant.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
*4.01 Specimen Class A Common Stock Certificate.
5.01 Opinion of Rosenman & Colin LLP.
*10.01 Registrant's 1995 Stock Option Plan.
*10.02 Employment Agreement, dated as of January 2, 1994, between Registrant and Sidney Jacobson, as amended
on October 31, 1995.
*10.03 Employment Agreement, dated as of August 1, 1994, between Registrant and Mitchell Jacobson.
*10.04 Exchange Agreement dated October 30, 1995 between the Registrant and the Shareholders named therein.
*10.05 Amended and Restated Credit Agreement, dated as of April 27, 1995, between the Registrant and the
banks named therein, as amended as of August 25, 1995.
+11.01 Calculation of supplementary pro forma net income per share.
21.01 List of Subsidiaries.
+23.01 Consent of Arthur Andersen LLP.
23.02 Consent of Rosenman & Colin LLP (included in Exhibit 5.01).
+24.01 Power of Attorney (included on signature page at page II-4).
</TABLE>
- ------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-98832.
+ Previously filed on August 26, 1996.
b. Financial Statement Schedules
For the three fiscal years ended September 2, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on Schedule............... S-1
Schedule-Valuation and Qualifying Accounts......................... S-2
</TABLE>
All other schedules have been omitted because the information is not
applicable or is presented in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
Registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Additionally, the undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, 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 Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Act, 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.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Pre-effective Amendment No. 1 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, County of New
York, State of New York on September 16, 1996.
MSC INDUSTRIAL DIRECT CO., INC.
By: /s/ MITCHELL JACOBSON
---------------------------------
Mitchell Jacobson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-effective Amendment No. 1 to the Registration Statement on Form S-1 has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*/s/ SIDNEY JACOBSON Chairman of the Board of Directors September 16, 1996
- ------------------------------------------
Sidney Jacobson
*/s/ MITCHELL JACOBSON President, Chief Executive Officer and September 16, 1996
- ------------------------------------------ Director
Mitchell Jacobson
*/s/ JAMES SCHROEDER Vice President, Chief Operating Officer, September 16, 1996
- ------------------------------------------ and Director
James Schroeder
*/s/ SHELLEY M. BOXER Vice President, Chief Financial Officer, September 16, 1996
- ------------------------------------------ Principal Accounting Officer and Director
Shelley M. Boxer
*/s/ DENIS KELLY Director September 16, 1996
- ------------------------------------------
Denis Kelly
*/s/ MELVIN REDMAN Director September 16, 1996
- ------------------------------------------
Melvin Redman
</TABLE>
* Signed by Mitchell Jacobson pursuant to a Power of Attorney dated August 23,
1996 included on Signature Page to the Registration Statement (File No.
333-10833) filed August 26, 1996.
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
1.01 Form of Underwriting Agreement. ............................................................
*1.02 Master Agreement Among Underwriters dated March 1, 1993. ...................................
*1.03 Master Dealer Agreement dated December 1, 1987. ............................................
*3.01 Certificate of Incorporation of Registrant. ................................................
*3.02 By-laws of Registrant......................................................................
*4.01 Specimen Class A Common Stock Certificate. .................................................
5.01 Opinion of Rosenman & Colin LLP. ...........................................................
*10.01 Registrant's 1995 Stock Option Plan. .......................................................
*10.02 Employment Agreement, dated as of January 2, 1994, between Registrant and Sidney Jacobson,
as amended on October 31,1995. .............................................................
*10.03 Employment Agreement, dated as of August 1, 1994, between Registrant and Mitchell
Jacobson. ..................................................................................
*10.04 Exchange Agreement dated October 30, 1995 between the Registrant and the Shareholders named
therein. ...................................................................................
*10.05 Amended and Restated Credit Agreement, dated as of April 27, 1995, between the Registrant
and the banks named therein, as amended as of August 25, 1995. .............................
+11.01 Calculation of supplementary pro forma net income per share. ...............................
21.01 List of Subsidiaries. ......................................................................
+23.01 Consent of Arthur Andersen LLP. ............................................................
23.02 Consent of Rosenman & Colin LLP (included in Exhibit 5.01). ................................
+24.01 Power of Attorney (included on signature page at page II-4). ...............................
</TABLE>
- ------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-98832.
+ Previously filed on August 26, 1996.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Sid Tool Co., Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Sid Tool Co., Inc. included in this registration
statement and have issued our report thereon dated October 27, 1995. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. This schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Melville, New York
October 27, 1995
S-1
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Accounts Deductions Year
---------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended August 28, 1993
Allowance for doubtful accounts ......... $ 602 $ 353 $ -- $ 354 $ 601
========== ========== ========== =========== =========
For the fiscal year ended August 27, 1994
Allowance for doubtful accounts ......... $ 601 $ 489 $ -- $ 438 $ 652
========== ========== ========== =========== =========
For the fiscal year ended September 2, 1995
Allowance for doubtful accounts ......... $ 652 $ 694 $ -- $ 469 $ 877
========== ========== ========== =========== =========
</TABLE>
S-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MSC INDUSTRIAL DIRECT CO., INC.
---------------------------------------------------------
5,000,000 Shares
of
Class A Common Stock
---------------------------------------------------------
---------------------------------------------------
UNDERWRITING AGREEMENT
DATED AS OF SEPTEMBER 19, 1996
---------------------------------------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
5,000,000 Shares
MSC INDUSTRIAL DIRECT CO., INC.
Class A Common Stock
UNDERWRITING AGREEMENT
September 19, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
MSC Industrial Direct Co., Inc., a New York corporation (the
"Company"), and the shareholders of the Company named in Part A of Schedule II
hereto (collectively, the "Selling Shareholders") severally propose to issue
and/or sell to the several underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 5,000,000 shares of Class A Common Stock, par
value $.001 per share (the "Common Stock"), of the Company (the "Firm Shares").
The Firm Shares consist of 2,000,000 shares to be issued and sold by the
Company and 3,000,000 outstanding shares to be sold by the Selling
Shareholders.
Certain Selling Shareholders set forth on Part B of Schedule II
hereto (the "Option Selling Shareholders") also propose to sell to the several
Underwriters not more than an additional 750,000 shares of Common Stock (the
"Additional Shares"), if requested by the Underwriters as provided in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter collectively
called the "Shares." The Company and the Selling Shareholders are hereinafter
collectively called the "Sellers."
Terms not otherwise defined herein shall have the meaning given them
in the Prospectus (as defined below).
<PAGE>
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder
(collectively, the "Act"), a registration statement on Form S-1 (No. 333-10833)
including a prospectus relating to the Shares, which may be amended. As used in
this agreement (the "Agreement"), (i) the term "Registration Statement" shall
mean the registration statement prepared and filed by the Company with the
Commission on Form S-1 (No. 333-10833), as amended, at the time it becomes
effective, including the information, if any, contained in any registration
statement filed under Rule 462(b) under the Act or any prospectus filed with
the Commission after such registration statement becomes effective pursuant
to Rule 424(b) under the Act and deemed to be part of such registration
statement at the time it became effective pursuant to Rule 430A under the Act,
and (ii) the term "Prospectus" shall mean the prospectus in the form first used
by the Underwriters to confirm sales of the Shares, whether or not filed with
the Com mission pursuant to Rule 424(b) under the Act.
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, (i) the Company hereby agrees to issue and sell 2,000,000
Firm Shares to the several Underwriters named in Schedule I hereto, (ii) each
Selling Shareholder agrees, severally and not jointly, to sell the number of
Firm Shares set forth opposite such Selling Shareholder's name in Schedule II
hereto to the several Underwriters named in Schedule I hereto and (iii) each of
the Underwriters agrees, severally and not jointly, to purchase from the
Sellers at a price per share of $___________ (the "Purchase Price") the
respective number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement and subject to its terms and conditions, each Option Selling
Shareholder severally agrees to sell to the several Underwriters named in
Schedule I hereto the Additional Shares and the Underwriters shall have the
right to purchase, severally and not jointly, up to 375,000 Additional Shares
from each of the Option Selling Shareholders set forth on Schedule II hereof
(aggregating up to 750,000 Additional Shares from all Option Selling
Shareholders) at the Purchase Price. Additional Shares may be purchased solely
for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The Underwriters may exercise their right to
purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to each Option Selling Shareholder within 30 days after
the date of this Agreement. The Representatives shall give any such notice on
behalf of the Underwriters and such notice shall specify the aggregate number
of Additional Shares to be purchased pursuant to such exercise and the date for
payment and delivery thereof. The date specified in any such notice shall be a
business day (i) no earlier than the Closing Date (as hereinafter defined),
(ii) no later than ten business days after such notice has been given and
(iii) no earlier than two business days after such notice has been given. If
any Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from each Option Selling Shareholder at the
Purchase Price the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) which bears
the same proportion to the
2
<PAGE>
total number of Additional Shares to be purchased from such Option Selling
Shareholder as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
The Sellers hereby agree, severally and not jointly, and the Company
shall, concurrently with the execution of this Agreement, deliver an agreement
(collectively, the "Lock-up Agreements") executed by (i) the Company, (ii) each
of the directors and officers of the Company and (iii) each shareholder listed
on Annex I hereto, pursuant to which each such person agrees not to offer,
sell, contract to sell, grant any option to purchase, or otherwise dispose of
any shares of common stock of the Company or any securities convertible into or
exercisable or exchangeable for such common stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such common stock (each, a "Prohibited Transfer") except to
the Underwriters pursuant to this Agreement, in the case of each officer and
director of the Company, for a period of 90 days after the date of the
Prospectus, and in the case of the Company and each shareholder listed in Annex
I hereto, for a period of 180 days after the date of the Prospectus, without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), provided, the Lock-up Agreement executed by Marjorie Diane
Gershwind shall permit the transfer of shares of common stock of the Company to
a trust to be created to hold such common stock of the Company for the benefit
of Marjorie Diane Gershwind, provided that such trust has executed a Lock-up
Agreement that, not withstanding the applicability of Rule 144(k) under the
Act, may allow such trust to sell common stock of the Company in coordination
with DLJ. The Company also agrees to take such other actions as the
Representatives may reasonably request to prevent parties listed on Annex I
hereto from consummating a Prohibited Transfer. Notwithstanding the foregoing,
during such period (i) the Company may issue shares pursuant to the Company's
1995 Restricted Stock Plan and may grant stock options pursuant to the Company's
1995 Stock Option Plan and (ii) the Company may issue shares of its common stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof.
3. TERMS OF PUBLIC OFFERING. The Sellers are advised by the
Representatives that the Underwriters propose (i) to make a public offering of
their respective portions of the Shares as soon after the effective date of the
Registration Statement as in their judgment is advisable, and (ii) initially
to offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY AND PAYMENT. Delivery to the Underwriters of, and
payment by the Underwriters for, the Firm Shares shall be made at 10:00 A.M.,
New York City time, on the third business day (such time and date being
referred to as the "Closing Date") following the date of the initial public
offering of the Firm Shares, at the offices of Latham & Watkins, 885 Third
Avenue, Suite 1000, New York, New York, 10022. The Closing Date and the
location of delivery of the Firm Shares may be varied by agreement between the
Representatives and the Company.
3
<PAGE>
Delivery to the Underwriters of, and payment for, any Additional
Shares to be purchased by the Underwriters shall be made at such place as the
Representatives shall designate at 10:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by the Representatives
pursuant to Section 2 (an "Option Closing Date"). Any such Option Closing Date
and the location of delivery of such Additional Shares may be varied by
agreement between the Representatives and the Option Selling Shareholders.
Certificates for the Shares shall be registered in such names and
issued in such denominations as the Representatives shall request in writing
not later than two full business days prior to the Closing Date or an Option
Closing Date, as the case may be. Such certificates shall be made available for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date or an Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to the
Representatives on the Closing Date or an Option Closing Date, as the case may
be, with any transfer taxes thereon duly paid by the Company, for the
respective accounts of the several Underwriters, against payment of the
Purchase Price by [certified or official bank checks payable in New York
Clearing House funds to the order of the applicable Seller].
5. AGREEMENTS OF THE COMPANY. The Company agrees with the
Representatives:
(a) To use its best efforts to cause the Registration Statement
to become effective at the earliest possible time.
(b) To advise the Representatives promptly and, if requested by
the Representatives, to confirm such advice in writing, (i) when the
Registration Statement has become effective, if and when the Prospectus
is sent for filing pursuant to Rule 424 under the Act and when any
post-effective amendment thereto becomes effective, (ii) of the receipt
by the Company of any comments from the Commission or any state
securities commission or other regulatory authority that relate to the
Registration Statement or the Prospectus or requests by the Commission or
any state securities commission or other regulatory authority for
amendments to the Registration Statement or amendments or supplements to
the Prospectus or for additional information, (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purposes by the Commission or any state securities
commission or other regulatory authority, and (iv) of the happening of
any event during the period referred to in Section 5(e) that makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or that requires the making of any additions to or
changes in the Registration Statement or the Prospectus in order to make
the statements therein not misleading. The Company shall use its best
efforts during the period referred to in Section 5(e) to prevent the
issuance of any stop order or order suspending the qualification or
exemption of the Shares under any state securities or Blue Sky laws, and,
if at any time during the period referred to in Section 5(e) the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities
4
<PAGE>
commission or other regulatory authority shall issue an order suspending
the qualification or exemption of the Shares under any state securities
or Blue Sky laws, the Company shall use its best efforts to obtain the
withdrawal or lifting of such order at the earliest possible time.
(c) To furnish to the Underwriters, without charge, four (4)
copies (one (1) manually executed copy and three (3) conformed copies) of
Registration Statement as and when first filed with the Commission and of
each amendment to it as and when filed, including all exhibits filed
therewith, and to furnish to each Underwriter such reasonable number of
conformed copies of the Registration Statement as first filed and of each
amendment to it, without exhibits, as and when requested by such
Underwriter.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
to make any amendment or supplement to the Prospectus of which the
Underwriters shall not previously have been advised and provided a copy
at least two business days prior to the filing thereof or such lesser
reasonable amount of time as is necessitated by the exigency of such
amendment or supplement, or to which the Underwriters shall object,
provided, that the consent of the Underwriters to the filing of any
amendment or supplement to the Registration Statement shall not be
unreasonably withheld or delayed; and to prepare and file with the
Commission, promptly upon the Representatives' request, any amendment to
the Registration Statement or supplement to the Prospectus which may be
legally required or reasonably advisable in connection with the
distribution of the Shares by the Underwriters, and to use its best
efforts to cause the same to become promptly effective.
(e) Within the time period during which the Prospectus relating
to the Shares is required to be delivered under the Act, if in the
opinion of counsel for the Underwriters a prospectus is required by law
to be delivered in connection with the sales by an Underwriter or a
dealer, to furnish to each Underwriter or dealer as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as such
Underwriter or dealer may reasonably request.
(f) If during the period specified in Section 5(e) any event
shall occur as a result of which, in the opinion of counsel for the
Underwriters it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein not misleading when the
Prospectus is delivered to a purchaser, or if it is necessary to amend or
supplement the Prospectus to comply with any law, forthwith to prepare
and file with the Commission an appropriate amendment or supplement to
the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not be misleading when it is so delivered, or so that
the Prospectus will comply with law, and to furnish to each Underwriter
and to such dealers as the Representatives shall specify, such number of
copies thereof as such Underwriter or dealers may reasonably request.
(g) Prior to any public offering of the Shares, to (i)
cooperate with the Underwriters and counsel for the Underwriters in
connection with the registration or
5
<PAGE>
qualification of the Shares for offer and sale by the several
Underwriters and by dealers under the state securities or Blue Sky laws
of such jurisdictions as the Underwriters may reasonably request, (ii)
continue such qualification in effect so long as required for
distribution of the Shares, and (iii) file such consents to service of
process or other documents as may be necessary to effect such
registration or qualification; provided, however, that the Company shall
not be required in connection therewith to register or qualify as a
foreign corporation where it is not now so qualified.
(h) During a period of five years following the date of this
Agreement, to deliver to the Representatives promptly upon their becoming
available (i) copies of all current, regular and periodic reports filed
by the Company with any securities exchange or with the Commission or any
governmental authority succeeding to any of the Commission's functions
and (ii) such other information as the Representatives may reasonably
request regarding the Company or its Subsidiaries (as defined).
(i) During a period of five years following the date of this
Agreement, to mail to the Representatives, without charge, as soon as
available a copy of each report or other publicly available information
of the Company furnished to the holders of Common Stock or filed with the
Commission and such other publicly available information concerning the
Company as the Representatives may request.
(j) To use the proceeds from the sale of the Shares by the
Company substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(k) To use its best efforts to maintain the inclusion of the
Common Stock on the New York Stock Exchange or a comparable national
securities exchange for a period of five years after the effective date
of the Registration Statement; provided, however, that the Company shall
not be required to comply with this clause (k) in the event the Company
is no longer subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(l) To pay all costs, expenses, fees and taxes (other than the
incremental costs, expenses, fees and taxes pertaining to the Shares sold
by the Selling Shareholders which shall be paid by the Selling
Shareholders in accordance with Sections 8(a) and 8(b) hereof) in
connection with or incident to:
(1) the preparation, printing, processing, filing,
distribution and delivery under the Act of the Registration
Statement (including financial statements and exhibits), each
preliminary prospectus, the Prospectus and all amendments and
supplements thereto;
(2) the preparation, printing, processing, execution,
distribution and delivery of the preliminary and supplemental
Blue Sky memoranda (including, in each case, any disbursements
of counsel to the Underwriters relating to such printing and
delivery);
6
<PAGE>
(3) the registration with the Commission, and the
issuance and delivery to the several Underwriters, of the
Shares (including, without limitation, the fees of the
Company's transfer agent and registrar, the costs of printing
and engraving the certificates evidencing the Shares and any
transfer or other taxes payable thereon);
(4) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the
several states (including, without limitation, in each case the
reasonable fees and disbursements of counsel to the
Underwriters relating to such registration or qualification and
any filing fees in connection therewith);
(5) filing fees payable to the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the
offering;
(6) the listing of the Shares on the New York Stock
Exchange; and
(7) furnishing such copies of the Registration Statement,
the preliminary prospectus, the Prospectus and all amendments
and supplements thereto as may be requested by the Underwriters
or by dealers to whom the Shares may be sold.
(m) Not to take, directly or indirectly, any action designed
to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares. Except as permitted by
the Act, the Company will not distribute any Registration Statement,
preliminary prospectus or Prospectus or other offering material in
connection with the offering and sale of the Shares.
(n) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by
the Company prior to the Closing Date or any Option Closing Date, as the
case may be, and to satisfy all conditions precedent to the delivery of
the Shares.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to and covenants with each Underwriter that:
(a) When the Registration Statement becomes effective,
including at the date of any post-effective amendment, at the date of the
Prospectus and at the Closing Date,
(1) the Registration Statement will comply in all
material respects with the provisions of the Act, and will not
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and
7
<PAGE>
(2) the Prospectus and any supplements thereto will not
contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the Act; and did not contain 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.
The representations and warranties contained in clauses (1) and
(2) of Section 6(a) and Section 6(b) shall not apply to statements or
omissions in any preliminary prospectus, the Registration Statement or
the Prospectus (or any supplement or amendment to them) made in reliance
upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by or on behalf of such Underwriter
expressly for use therein.
The Company acknowledges for all purposes under this Agreement
that the statements set forth in any preliminary prospectus and the
Prospectus (or any amendment or supplement) (i) in the last paragraph on
the cover page and (ii) in the table, and the second paragraph below the
table under the caption "Underwriting" constitute the only written
information furnished to the Company by any Underwriter as of the date
hereof expressly for use in the preliminary prospectus, the Registration
Statement or the Prospectus (or any amendment or supplement to them as of
the date hereof).
(c) The Company and each of its subsidiaries (each, a
"Subsidiary" and, collectively, the "Subsidiaries") is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, has full corporate power and
authority to carry on its respective business and to own, lease and
operate its respective properties, and is duly qualified and is in good
standing as a foreign corporation registered to do business in each
jurisdiction in which the nature of its business, or its ownership,
leasing or operation of property requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the condition (financial or other), business, property,
prospects or results of operations of the Company and its Subsidiaries
taken as a whole (a "Material Adverse Effect"). All of the outstanding
shares of capital stock of, or other equity interests in, each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable, are not subject to preemptive or similar rights and,
except as described in the Prospectus or contained in contracts filed as
exhibits to the Registration Statement, contractual rights. Except as
described in the Prospectus or contained in contracts filed as exhibits
to the Registration Statement, (i) all of the shares of capital stock or
other equity interests in the Subsidiaries are owned directly or
indirectly by the Company, free and clear of any security interest,
mortgage, pledge, claim, lien or encumbrance (each, a "Lien"), and (ii)
there are no
8
<PAGE>
outstanding subscriptions, rights, warrants, calls or options to acquire,
or instruments or securities convertible into or exchangeable for, any
shares of capital stock or other equity interest in any such Subsidiary
or the Company.
(d) All the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable and not subject to any preemptive or similar rights; and
the Shares to be issued and sold by the Company hereunder have been duly
authorized and, when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights. The Company has all
necessary corporate power and authority to enter into and perform its
obligations under this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be sold by it to the Underwriters pursuant
hereto.
(e) The authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus.
(f) Except as could not be expected to have a Material Adverse
Effect, neither the Company nor any of its Subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of
any obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture, mortgage, deed of trust or other contract, lease or other
instrument to which the Company or any of its Subsidiaries is a party or
by which it or any of its Subsidiaries or their respective property is
bound, or to which any of the property or assets of the Company or any of
its Subsidiaries is subject which has not been waived.
(g) The execution, delivery and performance of this Agreement
by the Company, the issuance and sale of the Shares to be sold by the
Company, the compliance by the Company with the provisions of this
Agreement, and the consummation of the transactions contemplated by this
Agreement will not, except as may be disclosed in the Registration
Statement or the Prospectus, (i) require any consent, approval,
authorization or other order of, or filing or registration with, any
court, regulatory body, administrative agency or other governmental body
(except as may be required under the Act or other securities or Blue Sky
laws of various states or by the NASD); (ii) conflict with or constitute
a breach of any of the terms or provisions of, or default under, the
charter or by-laws of the Company or any of the Subsidiaries; (iii)
require any consent or approval (which has not been obtained) of parties
to, or conflict with or constitute a breach of any of the terms or
provisions of, or default under, any material agreement or other
instrument to which the Company or any of the Subsidiaries or their
respective properties are bound which has not been waived; or (iv) result
in the creation or imposition of any lien on any material asset of the
Company or any of the Subsidiaries.
(h) This Agreement has been duly authorized and validly
executed by the Company and (assuming the due execution and delivery
thereof by the Underwriters) is the legally valid and binding obligation
of the Company, enforceable against the Company in
9
<PAGE>
accordance with its terms, except as such enforceability may be: (i)
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights
and remedies generally, (ii) limited by general principles of equity
(whether considered in a proceeding at law or in equity) and (iii)
limited by securities laws prohibiting or limiting the availability of,
and public policy against, indemnification or contribution.
(i) As of the Closing Date, the Registration Statement has
become effective under the Act and any required filing of the Prospectus,
or any supplement thereto, pursuant to Rule 424(b) under the Act has been
made in the manner and within the time period required thereunder, and no
stop order suspending the effectiveness of the Registration Statement has
been issued and, to the knowledge of the Company, no proceedings for that
purpose are pending before or contemplated by the Commission. There is no
contract or document concerning the Company or any of its Subsidiaries of
a character required to be described in the Registration Statement or in
the Prospectus or to be filed as an exhibit to the Registration Statement
that is not so described or filed as required.
(j) There is (i) no action, suit or proceeding before or by any
court, arbitrator or governmental agency, body or official, domestic or
foreign, now pending or, to the knowledge of the Company, threatened or
contemplated to which the Company or any of its Subsidiaries is a party
or to which the business or property of the Company or any of its
Subsidiaries is subject, (ii) to the knowledge of the Company, no
statute, rule, regulation or order that has been enacted, adopted or
issued by any governmental agency or that has been proposed by any
governmental body (other than Blue Sky laws, regulations or orders), or
(iii) no injunction, restraining order or order of any nature by a
federal or state court of competent jurisdiction to which the Company or
any of its Subsidiaries is subject, that, in each case above, (1) might
have a Material Adverse Effect (except as disclosed in the Registration
Statement or the Prospectus), (2) would interfere with or adversely
affect the issuance of the Shares to be Sold by the Company, or (3) might
in any manner invalidate or question the validity of any provisions of
this Agreement (other than provisions relating to indemnification and
contribution) or the Shares.
(k) No holder of any security of the Company has or will have
any right to require registration of any security of the Company by
virtue of any transaction contemplated by this Agreement.
(l) Except as set forth in the Prospectus or that, singly or in
the aggregate, could not be expected to have a Material Adverse Effect,
neither the Company nor any of its Subsidiaries has violated any
applicable existing federal, state, local or foreign laws or regulations
("Laws"), including, but not limited to, (i) Laws relating to the
protection of human health and safety or the environment, (ii) Laws
relating to discrimination in the hiring, promotion or pay of employees,
(iii) wage or hour Laws, and (iv) provisions of the Employee Retirement
Income Security Act of 1974.
10
<PAGE>
(m) Except as disclosed in the Prospectus or that could not be
expected to have a Material Adverse Effect, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.
(n) All tax returns required to be filed by the Company and
each of its Subsidiaries in any jurisdiction have been filed, and all
material taxes (including, but not limited to, withholding taxes,
penalties and interest, assessments, fees and other charges due or
claimed to be due from any taxing authority) have been paid other than,
in either case, those (i) being contested in good faith and for which
adequate reserves have been provided, (ii) currently payable without
penalty or interest or (iii) which would not have a Material Adverse
Effect.
(o) Except as set forth in the Prospectus or that, singly or in
the aggregate, could not be expected to have a Material Adverse Effect,
(i) the Company and each of its Subsidiaries has (1) such permits,
licenses, franchises, certificates, consents, exemptions, orders, and
authorizations of governmental or regulatory authorities ("Permits") as
are necessary to own, lease, license and use its respective properties
and to conduct its business, and (2) fulfilled and performed all of its
material obligations with respect to the Permits, (ii) all such Permits
are valid and in full force and effect and (iii) no event has occurred
that could be expected to allow, or after notice or lapse of time could
be expected to allow, revocation or termination of any Permit or that
could be expected to result in any other material impairment of the
rights granted to the Company or any of its Subsidiaries under any
Permit.
(p) Except as set forth in the Prospectus or that, singly or in
the aggregate, could not be expected to have a Material Adverse Effect,
(i) the Company and each of its Subsidiaries have good and marketable
title, free and clear of all liens (except liens for taxes not yet due
and payable) to all property and assets described in the Registration
Statement as being owned by it, (ii) each lease to which the Company and
each of its Subsidiaries is a party is valid and binding and no default
has occurred or is continuing thereunder, and (iii) the Company and each
of its Subsidiaries enjoy peaceful and undisturbed possession under all
such leases to which it is a party as lessee.
(q) The Company and each of its Subsidiaries maintain adequate
insurance covering their properties, operations, personnel and
businesses. Such insurance insures against such losses and risks as are
adequate in accordance with customary industry practice to protect the
Company and each of its Subsidiaries and their respective businesses.
(r) The consolidated historical financial statements and pro
forma financial information of the Company (and its predecessor entity)
set forth in the Registration Statement, together with related schedules
and notes (and any amendment or supplement thereto), comply as to form in
all material respects with the applicable requirements of the Act. Such
consolidated historical financial statements present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company (and its predecessor entity) on the
basis stated in the Registration Statement at the respective
11
<PAGE>
dates or for the respective periods to which they apply and are in
accordance with generally accepted accounting principles ("GAAP"), and
such financial statements and related schedules and notes have been
prepared in accordance with GAAP consistently applied throughout the
periods involved, except as disclosed therein. Such pro forma financial
information has been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified, and give
effect to assumptions made on a reasonable basis and present fairly the
historical and proposed transactions contemplated by the Prospectus and
this Agreement. The other historical financial information and data
relating to the Company (and its predecessor entity) set forth in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto) is, in all material respects, accurately presented
and prepared on a basis consistent with the financial statements and the
books and records of the Company (and its predecessor entity).
(s) The Company and each of its Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that: (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability for assets; (3)
access to assets is permitted only in accordance with management's
general or specific authorization; and (4) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(t) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(u) Subsequent to the dates for which information is given in
the Registration Statement and Prospectus and up through the Closing
Date, unless set forth in or contemplated by the Prospectus, the Company
has, or will, notify the Underwriters that: (1) neither the Company nor
any of its Subsidiaries has incurred any liabilities or obligations,
direct or contingent, which are material, individually or in the
aggregate, to the Company and its Subsidiaries taken as a whole, nor
entered into any material transactions not in the ordinary course of
business; and (2) there has not been any decrease in the Company's
capital stock or any material increase in long-term indebtedness or
short-term indebtedness of the Company and its Subsidiaries, taken as a
whole, or any payment of or declaration to pay any dividends or any other
distribution with respect to the Company's capital stock.
(v) Arthur Andersen LLP are independent public accountants with
respect to the Company (including its predecessor entities) and its
Subsidiaries as required by the Act.
(w) To the Company's knowledge, the Company (directly or
through its Subsidiaries) possesses or is licensed to use the patents,
patent rights, licenses, inventions,
12
<PAGE>
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names (collectively,
"Intellectual Property") material to the business of the Company and its
Subsidiaries and neither the Company nor any of its Subsidiaries has
received any notice of infringement of or conflict with asserted rights
of others with respect of the foregoing. The use of such material
Intellectual Property in connection with the business and operations of
the Company and the Subsidiaries does not, to the Company's knowledge,
infringe on the rights of any person.
(x) Neither the Company nor any of its Subsidiaries is (a) an
"investment company" within the meaning of the Investment Company Act of
1940, as amended or (b) a "holding company" or a "subsidiary company" of
a holding company or an "affiliate" thereof within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(y) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or
affiliate located in Cuba.
(z) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
7. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Excluding paragraph (h) below, which pertains only to Mitchell Jacobson, each
Selling Shareholder severally represents and warrants to each Underwriter that:
(a) Such Selling Shareholder is the lawful owner of the Shares
to be sold by such Selling Shareholder pursuant to this Agreement and
has, and on the Closing Date (and any Option Closing Date, if applicable)
will have, good and clear title to such Shares, free of all restrictions
on transfer, liens, encumbrances, security interests and claims
whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to
this Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(c) Such Selling Shareholder has, and on the Closing Date will
have, full legal right, power and authority to enter into this Agreement
and to sell, assign, transfer and deliver such Shares in the manner
provided herein, and this Agreement has been duly authorized, executed
and delivered by such Selling Shareholder and this Agreement is a valid
and binding agreement of such Selling Shareholder enforceable in
accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by applicable law.
13
<PAGE>
(d) Such Selling Shareholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably
be expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Shares pursuant to the distribution contemplated by this Agreement,
and other than as permitted by the Act, such Selling Shareholder has not
distributed and will not distribute any prospectus or other offering
material in connection with the offering and sale of the Shares.
(e) The execution, delivery and performance of this Agreement
by such Selling Shareholder, compliance by such Selling Shareholder with
all the provisions hereof and the consummation of the transactions
contemplated hereby will not require any consent, approval, authorization
or other order of any court, regulatory body, administrative agency or
other governmental body (except such as may be required under the Act,
state securities laws or Blue Sky laws) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, organizational documents of such Selling Shareholder, if not an
individual, or any agreement, indenture or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder or
property of such Selling Shareholder is bound, or violate or conflict
with any laws, administrative regulation or ruling or court decree
applicable to such Selling Shareholder or property of such Selling
Shareholder.
(f) Such parts of the Registration Statement under the caption
"Principal and Selling Shareholders" which specifically relate to such
Selling Shareholder do not, and will not on the Closing Date (and any
Option Closing Date, if applicable), contain any untrue statement of a
material fact or omit to state any 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.
(g) At any time during the period described in paragraph 5(e)
hereof, if there is any change in the information referred to in
paragraph 7(f) above, the Selling Shareholders will immediately notify
you of such change.
(h) Mitchell Jacobson represents and warrants to each
Underwriter that he has no actual knowledge that any preliminary
prospectus, the Registration Statement or the Prospectus (or any
amendment or supplement thereto) contains any untrue statement of a
material fact or omits to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations and
warranties contained in this Section 7(h) shall not apply to statements
or omissions in any preliminary prospectus, the Registration Statement or
the Prospectus (or any amendment or supplement thereto) based upon
information relating to any Underwriter furnished to the Company in
writing by or on behalf of any Underwriter through the Underwriters
expressly for use therein.
14
<PAGE>
8. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each Selling Shareholder
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with
respect to the Shares to be sold by such Selling Shareholder; and
(b) To pay all other incremental costs, expenses, fees and
taxes with respect to the Shares to be sold by each Selling Shareholder,
including the incremental costs, expenses, fees and taxes in connection
with or incident to:
(1) the registration with the Commission of the Shares;
and
(2) filing fees payable to the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the
offering; and
(c) To take all reasonable actions in cooperation with the
Company and the Underwriters to cause the Registration Statement to
become effective at the earliest possible time, to do and perform all
things to be done and performed by such Selling Shareholder under this
Agreement prior to the Closing Date.
9. INDEMNIFICATION.
(a) Each of the Company and the Selling Shareholders agrees to
indemnify and hold harmless (i) each Underwriter and (ii) each person, if
any, who controls (within the meaning of Section 15 of the Act or Section
20 of the Exchange Act) any Underwriter (any of the persons referred to
in this clause (ii) being hereinafter referred to as a "controlling
person"), and (iii) the respective officers, directors, partners,
employees, representatives and agents of each Underwriter or any
controlling person (any person referred to in clause (i), (ii) or (iii)
in such capacity may hereinafter be referred to as an "Indemnified
Person") to the fullest extent lawful, from and against any and all
losses, claims, damages, liabilities, judgments, actions and expenses
(including, without limitation and as incurred, reimbursement of all
reasonable costs of investigating, preparing, pursuing or defending any
claim or action, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, including the fees and expenses
of counsel to any Indemnified Person) directly or indirectly caused by,
related to, based upon, arising out of or in connection with any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the
information deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) promulgated under the Act, if applicable, or the Prospectus
(including any amendment or supplement thereto) or any preliminary
prospectus, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except insofar
as such losses, claims, damages, liabilities or expenses are caused by an
untrue statement or omission or alleged untrue statement or omission that
is (i) made
15
<PAGE>
in reliance upon and in conformity with information relating to any
Underwriter furnished in writing to the Company by or on behalf of such
Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto) or the Prospectus (or
any amendment or supplement thereto) or any preliminary prospectus or
(ii) made in any preliminary prospectus if a copy of the Prospectus (as
amended or supplemented, if the Company shall furnish such amendment or
supplement thereto) was not sent or given by or on behalf of such
Underwriter to the person asserting any such loss, claim, damage,
liability or expense, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Shares as required
by the Act and the Prospectus (as so amended or supplemented) would have
corrected in all material respects such untrue statement or omission. The
Company shall notify the Underwriters promptly of the institution, threat
or assertion of any claim, proceeding (including any governmental
investigation) or litigation in connection with the matters addressed by
this Agreement which involves the Company, any of the Subsidiaries, any
Selling Shareholder or an Indemnified Person.
(b) Each Selling Shareholder also agrees to indemnify and hold
harmless each Indemnified Person to the fullest extent lawful, from and
against any and all losses, claims, damages, liabilities, judgments,
actions and expenses (including, without limitation and as incurred,
reimbursement of all reasonable costs of investigating, preparing,
pursuing or defending any claim or action, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
including the fees and expenses of counsel to any Indemnified Person)
directly or indirectly caused by, related to, based upon, arising out of
or in connection with any breach of the representations, warranties and
agreements made by such Selling Shareholder in Sections 7 and 8.
(c) In case any action or proceeding (including any
governmental investigation) shall be brought or asserted against any of
the Indemnified Persons with respect to which indemnity may be sought
against the Company or the Selling Shareholders, such Indemnified Person
shall promptly notify the Company or the Selling Shareholders, as the
case may be, in writing (provided, that the failure to give such notice
shall not relieve the Company or the Selling Shareholders, as the case
may be, of their obligations pursuant to this Agreement) and the Company
or the Selling Shareholders, as the case may be, shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to
such Indemnified Person and payment of all fees and expenses (regardless
of whether it is ultimately determined that an Indemnified Person is not
entitled to indemnification hereunder). Such Indemnified Person shall
have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Person unless (i) the
employment of such counsel shall have been specifically authorized in
writing by the Company or the Selling Shareholders, as the case may be,
(ii) the Company or the Selling Shareholders, as the case may be, shall
have failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both
such Indemnified Person and the Company (or any of its Subsidiaries) or
the Selling Shareholders, as the case may be, and such Indemnified Person
shall have been advised by such counsel that there
16
<PAGE>
may be one or more legal defenses available to it which are different
from or additional to those available to such indemnifying party (in
which case such indemnifying party shall not have the right to assume the
defense of such action on behalf of such Indemnified Person, it being
understood, however, that such indemnifying party shall not, in
connection with any one such action or separate but substantially similar
or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses
of more than one separate firm of attorneys (in addition to any local
counsel) for all such Indemnified Persons, which firm shall be designated
in writing by DLJ, provided, that such firm be reasonably satisfactory to
the Indemnified Parties, and that all such fees and expenses shall be
reimbursed as they are incurred). The Company or the Selling
Shareholders, as the case may be, shall not be liable for any settlement
of any such action or proceeding effected without the prior written
consent of such indemnifying party, but if settled with the written
consent of such indemnifying party, which consent will not be
unreasonably withheld, such indemnifying party agrees to indemnify and
hold harmless any Indemnified Person from and against any loss, claim,
damage, liability or expense by reason of any such settlement.
Notwithstanding the foregoing sentence, if at any time an Indemnified
Person shall have requested the Company or the Selling Shareholders to
reimburse the Indemnified Person for fees and expenses of counsel as
contemplated by the second sentence of this paragraph, such indemnifying
party agrees to be liable for any settlement of any proceeding effected
without the written consent of such indemnifying party if (i) such
settlement is entered into more than 20 business days after receipt by
the Company of the aforesaid request, and (ii) such indemnifying party
shall not have reimbursed the Indemnified Person in accordance with such
request prior to the date of such settlement. The Company or the Selling
Shareholders shall not, without the prior written consent of each
Indemnified Person, settle or compro mise or consent to the entry of
judgment in or otherwise seek to terminate any pending or threatened
action, claim, litigation or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
any Indemnified Person is a party thereto), unless such settlement,
compromise, consent or termination includes an unconditional release of
each Indemnified Person from all liability arising out of such action,
claim, litigation or proceeding.
(d) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, any person controlling (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) the
Company, each Selling Shareholder, and the officers, directors, partners,
employees, representatives and agents of each such person to the same
extent as the foregoing indemnity from the Company and the Selling
Shareholders to each of the Indemnified Persons, but only with respect to
claims and actions based on information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter expressly for
use in the Prospectus. The Company and each of the Selling Shareholders
acknowledge that the only written information furnished to the Company by
any Underwriter expressly for use in the Prospectus is as set forth in
Section 6(a) of this Agreement.
17
<PAGE>
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and expenses (i) in
such proportion as is appropriate to reflect the relative benefits
received by the indemnifying party on the one hand and the indemnified
party on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative
fault of the indemnifying parties and the indemnified party, as well as
any other relevant equitable considerations. The relative benefits
received by the Company or the Selling Shareholders, as the case may be,
on the one hand, and the Underwriters, on the other hand, shall be deemed
to be in the same proportion as the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Company or the Selling Shareholders, as the case may be,
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault of the Company or the Selling
Shareholders, as the case may be, and the Underwriters shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact related to information supplied by the
Company or the Selling Shareholders, as the case may be, or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The indemnity and contribution obligations of the Company and
the Selling Shareholders set forth herein shall be in addition to any
liability or obligation the Company and the Selling Shareholders may
otherwise have to any Indemnified Person.
The Company, each of the Selling Shareholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to
this Section 9(e) were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 9, the Underwriters (and the Underwriters' related
Indemnified Persons) shall not be required to contribute, in the
aggregate, any amount in excess of the amount by which the total
underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
18
<PAGE>
(f) The indemnity and contribution agreements contained in this
Section 9 are in addition to any liability which the Company and each of
the Selling Shareholders may otherwise have to the Indemnified Persons.
(g) Notwithstanding any other provision of this Section 9, the
aggregate liability of each Selling Shareholder for any and all losses,
claims, damages, liabilities, judgments, actions and expenses (including,
without limitation, all reasonable costs of investigating, preparing,
pursuing or defending any claim or action, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
including the fees and expenses of counsel to any Indemnified Person)
pursuant to this Section 9 is limited to an amount equal to the gross
proceeds from the sale of the Shares by such Selling Shareholder.
(h) Each Seller hereby designates the Company as its authorized
agent upon which process may be served in any action, suit or proceeding
which may be instituted in any state or federal court in the State of New
York by any Underwriter or person controlling an Underwriter asserting a
claim for indemnification or contribution under or pursuant to this
Section 9, and each Seller will accept the jurisdiction of such court in
such action, and waives, to the fullest extent permitted by applicable
law, any defense based upon lack of personal jurisdiction or venue. A
copy of any such process shall be sent or given to such Seller at the
address for notices specified in Section 12 hereof.
10. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All of the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on the date hereof and on the Closing Date with the same force
and effect as if made on and as of the date hereof and the Closing Date.
The Company shall have performed or complied in all material respects
with all of the obligations and agreements and satisfied all conditions
to be performed, complied with or satisfied by it on or prior to the
Closing Date.
(b) (1) The Registration Statement shall have become effective
(or if a post-effective amendment is required to be filed pursuant to
Rule 430A promulgated under the Act, such post-effective amendment shall
have become effective) not later than 5:00 P.M., New York City time, on
the date of this Agreement or at such later date and time as the
Underwriters may approve in writing; (2) no injunction, restraining order
or order of any nature by a federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares; (3) at the Closing Date, no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
commenced or shall be pending before or shall have been threatened by the
Commission and every request for additional information on the part of
the Commission shall have been complied with in all material
19
<PAGE>
respects, and (4) at the Closing Date, no stop order suspending the sale
of the Shares in any jurisdiction contemplated by Section 5(g) hereof
shall have been issued and no proceeding for that purpose shall have been
commenced or be pending or threatened.
(c) (1) Except as disclosed in the Prospectus, since the date
hereof or since the dates as of which information is given in the
Registration Statement and Prospectus, there shall not have been any
event that had a Material Adverse Effect, or any development involving a
prospective change that could have a Material Adverse Effect, whether or
not arising in the ordinary course of business; (2) except as disclosed
in the Prospectus, since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, there has not been any
material change, or any development involving a prospective material
change, in the capital stock or in the long-term debt of the Company and
its Subsidiaries, taken as a whole, from that set forth in the
Registration Statement and Prospectus; (3) the Company and its
Subsidiaries shall have no material liability or obligation, direct or
contingent, that is required to be disclosed on a balance sheet in
accordance with GAAP and that is not disclosed on the latest balance
sheet included in (or otherwise disclosed in) the Registration Statement
and the Prospectus; and (4) the Company and its Subsidiaries shall have
no material liability or obligation, direct or contingent, other than
those reflected in the Prospectus.
(d) The Underwriters shall have received a certificate of the
Company (satisfactory to the Underwriters and counsel to the
Underwriters) dated the Closing Date, executed on behalf of the Company
by the Chief Executive Officer and the principal financial or accounting
officer of the Company, confirming, to the best of such Officers'
knowledge, as of the Closing Date, all matters set forth in Sections
10(a), 10(b) and 10(c).
(e) All of the representations and warranties of each of the
Selling Shareholders contained in this Agreement shall be true and
correct on the Closing Date with the same force and effect as if made on
and as of the date hereof and the Closing Date, and you shall have
received a certificate to such effect, dated the Closing Date, from each
Selling Shareholder.
(f) The Underwriters shall have received on the Closing Date an
opinion (satisfactory to the Underwriters and counsel to the
Underwriters) dated the Closing Date, of Rosenman & Colin LLP, counsel
for the Company and the Selling Shareholders ("R&C"), to the effect that:
(1) the Registration Statement, as of its effective date,
and the Prospectus, as of its date, complied as to form in all
material respects with the requirements of the Act and the
applicable rules and regulations of the Commission thereunder,
except that in each case such counsel expresses no opinion with
respect to the financial statements or other financial and
statistical data contained in the Registration Statement or the
Prospectus;
(2) the Registration Statement has become effective under
the Act;
20
<PAGE>
(3) the Company has been duly organized and the Company
and each of the Subsidiaries is validly existing as a corporation in
good standing under the laws of the State of New York, has the
corporate power to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(4) the Company has all necessary corporate power and
authority to authorize the offering of the Shares, to enter and
perform its obligations under this Agreement and to authorize,
issue, sell and deliver the Shares to the Underwriters;
(5) the execution, delivery and performance of this
Agreement by the Company and each Selling Shareholder and the
issuance and sale of the Shares as contemplated by this Agreement
and the Prospectus, will not, except as may be disclosed in the
Registration Statement or the Prospectus and except as would not
have a Material Adverse Effect, to the best knowledge of such
counsel (except with respect to clause (B) below), (A) require any
consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body
(except as may be required under the Act or other securities or Blue
Sky laws of various states or by the NASD); (B) conflict with or
constitute a breach of any of the terms or provisions of, or default
under, the charter or by-laws of the Company or any of its
Subsidiaries; (C) require any consent or approval (which has not
been obtained) of parties to, or constitute a breach of any of the
terms or provisions of, or default under, any of the agreements
filed as an exhibit to the Registration Statement (which has not
been waived); (D) violate any laws or rules or regulations, rulings
or court decrees as applicable to the Company or any of its
Subsidiaries or any Selling Shareholder or their respective
properties; or (E) result in the creation or imposition of any Lien
on any material asset of the Company or any of its Subsidiaries or
any Selling Shareholder under any of the agreements filed as an
exhibit to the Registration Statement;
(6) except as would not have a Material Adverse Effect,
to the best knowledge of such counsel, the Company and its
Subsidiaries are not in violation of any of their respective
charters or by-laws and neither the Company nor any of its
Subsidiaries are in default in the performance of any obligation,
agreement or condition contained in any of the agreements filed as
an exhibit to the Registration Statement to which the Company or its
Subsidiaries are a party or by which their properties are bound or
to which any of the property or assets of the Company or its
Subsidiaries are subject which have not been waived;
(7) this Agreement has been duly authorized and validly
executed by the Company and each of the Selling Shareholders;
(8) all the outstanding shares of Common Stock (including
the Shares to be sold by the Selling Shareholders) have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar statutory or,
21
<PAGE>
except as described in the Prospectus or contained in contracts
filed as exhibits to the Registration Statement, contractual rights;
(9) the Shares to be issued and sold by the Company
hereunder have been duly authorized and, when issued and delivered
to the Underwriters against payment therefor as provided by this
Agreement, will have been validly issued and will be fully paid and
non-assessable and the issuance of such Shares is not subject to any
preemptive or similar statutory or, except as described in the
Prospectus or contained in contracts filed as exhibits to the
Registration Statement, contractual rights;
(10) all the outstanding shares of common stock in each
of the Subsidiaries have been duly authorized and validly issued and
are fully paid, non-assessable and not subject to any preemptive or
similar statutory or, except as described in the Prospectus or
contained in contracts filed as exhibits to the Registration
Statement, contractual rights, and are held of record by the
Company;
(11) the authorized capital stock of the Company,
including the Common Stock, conforms as to legal matters to the
description thereof contained in the Prospectus;
(12) any required filing of the Prospectus pursuant to
Rule 424(b)(1) under the Act has been made in the manner and within
the time period required thereunder and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending before or have been
threatened by the Commission;
(13) to the best knowledge of such counsel, there is no
contract concerning the Company or any of the Subsidiaries of a
character required to be described in the Registration Statement or
in the Prospectus or to be filed as an exhibit to the Registration
Statement that is not so described or filed as required;
(14) to the best knowledge of such counsel, no holder of
any security of the Company has or will have any right to require
registration of any security of the Company by virtue of the
transactions contemplated by this Agreement;
(15) the statements under the caption "Management--1995
Stock Option Plan" in the Prospectus, and Items 14 and 15 of Part II
of the Registration Statement insofar as such statements constitute
a summary of legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to
such legal matters, documents and proceedings;
(16) the Company is not an "investment company" within
the meaning of the Investment Company Act of 1940, as amended; and
22
<PAGE>
(17) immediately prior to the Closing Date, each Selling
Shareholder was the sole registered owner of the Shares to be sold
by such Selling Shareholder; upon registration of the Shares in the
names of the Underwriters in the stock records of the Company, and
the issuance of new certificates registered in the names of the
Underwriters representing such Shares, assuming the Underwriters
purchased the Shares in good faith and without notice of any adverse
claim within the meaning of the Uniform Commercial Code, the
Underwriters will have acquired all rights of such Selling
Shareholder in the Shares free of any adverse claim, any lien in
favor of the Company and any restrictions on transfer imposed by the
Company, and the owner of the Shares, if other than such Selling
Shareholder, will be precluded from asserting against the
Underwriters the ineffectiveness of any unauthorized endorsement.
In addition, R&C shall state that such counsel has participated in
conferences with directors, officers and other representatives of the Company,
representatives of the independent public accountants of the Company, the
Underwriters' representatives and counsel for the Underwriters, in connection
with the preparation of the Registration Statement and Prospectus and has
considered the matters required to be stated therein and the statements
included therein, and, although such counsel has not independently verified the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and Prospectus (except as indicated above) and relying
on Company officers regarding materiality, such counsel advises the
Representatives that, on the basis of the foregoing, no facts have come to such
counsel's attention which led it to believe that the Registration Statement (as
amended or supplemented, if applicable), on the effective date thereof,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
contained therein not misleading or that the Prospectus (as amended or
supplemented, if applicable), on the date thereof or on the Closing Date,
contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements contained
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no view with
respect to the financial statements and related notes, the financial statement
schedules and other financial, statistical and accounting data included in or
omitted from the Registration Statement or Prospectus). It is also understood
that such counsel is opining only as to the laws of the United States and New
York and that such counsel may assume the capacity of all natural persons and
the genuineness of all signatures.
(g) The Underwriters shall have received on the Closing Date an
opinion, dated the Closing Date, of Latham & Watkins, counsel for the
Underwriters, in form and substance satisfactory to the Underwriters.
(h) The Underwriters shall have received letters from Arthur
Andersen LLP, independent public accountants, on the date hereof as well
as on the Closing Date (in the latter case constituting an affirmation of
the statements set forth in the former), in form and substance reasonably
satisfactory to the Underwriters, with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus.
23
<PAGE>
(i) The Shares shall have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance.
(j) Latham & Watkins, counsel to the Underwriters, shall have
been furnished with such documents and opinions, in addition to those set
forth above, as they may reasonably require for the purpose of enabling
them to review or pass upon the matters referred to in this Section 10
and in order to evidence the accuracy, completeness or satisfaction in
all material respects of any of the representations, warranties or
conditions herein contained.
(k) The Underwriters shall have received copies of each of the
Lock-up Agreements.
(l) Prior to the Closing Date, the Company shall have furnished
to the Underwriters such further information, certificates and documents
as the Underwriters may reasonably request.
The several obligations of the Underwriters to purchase any
Additional Shares hereunder are subject to the delivery to the Representatives
on the applicable Option Closing Date of such documents as the Representatives
may reasonably request with respect to the good standing of the Company and its
Subsidiaries, the due authorization and issuance of such Additional Shares, the
ownership, title and transferability of and absence of adverse claims with
respect to any Additional Shares and other matters related to the issuance of
such Additional Shares including, without limitation, a letter from Arthur
Andersen LLP, constituting an affirmation of the statements set forth in the
letters described in Section 10(h) above.
11. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon the later of the time that (i) the Company and the
Underwriters execute this Agreement, (ii) the Commission releases notification
of the effectiveness of the Registration Statement and (iii) if a
post-effective amendment is required to be filed pursuant to Rule 430A under
the Act, the effectiveness of such post-effective amendment.
(a) The Underwriters may terminate this Agreement at any time
on or prior to the Closing Date by notice to the Sellers if any of the
following has occurred:
(i) since the respective dates as of which information is
given in the Registration Statement and the Prospectus and
except as disclosed or contemplated therein, any adverse change
or development involving a prospective adverse change which
would cause a Material Adverse Effect, whether or not arising
in the ordinary course of business, which would, in the
Representatives' sole judgment make it impracticable or
inadvisable to market the Shares;
(ii) any outbreak or escalation of hostilities or other
national or international calamity or crisis or material
adverse change in the financial markets of the United
24
<PAGE>
States or elsewhere or any other substantial national or
international calamity or emergency, if the effect of such
outbreak, escalation, calamity, crisis, change or emergency
would, in the Representatives' sole judgment, make it
impracticable or inadvisable to market the Shares or to enforce
contracts for the sale of securities;
(iii) any suspension or limitation of trading in
securities generally on the New York Stock Exchange, the
American Stock Exchange or the NASDAQ National Market or
general limitation on prices for securities on either of the
exchanges or the NASDAQ Stock Market;
(iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule
or order of any court or other governmental authority which in
the Representatives' sole judgement causes or will cause a
Material Adverse Effect;
(v) the declaration of a general banking moratorium by
either federal or New York State authorities; or
(vi) the taking of any action by any federal, state or
local government or agency in respect of its monetary or fiscal
affairs which in the Representatives' sole judgement has a
material adverse effect on the financial markets in the United
States and makes it impracticable or inadvisable to sell the
Shares.
If on the Closing Date or on an Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase the Firm Shares or Additional Shares, as the case may be, which
it or they have agreed to purchase hereunder on such date and the
aggregate number of Firm Shares or Additional Shares, as the case may be,
which such defaulting Underwriter or Underwriters, as the case may be,
agreed but failed or refused to purchase is not more than one-tenth of
the total number of Shares to be purchased on such date by all
Underwriters, each non-defaulting Underwriter shall be obligated
severally, in the proportion which the number of Firm Shares set forth
opposite its name in Schedule I hereto bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as the Underwriters
may specify, to purchase the Firm Shares or Additional Shares, as the
case may be, which such defaulting Underwriter or Underwriters, as the
case may be, agreed but failed or refused to purchase on such date;
provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 11 by
an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of
such Underwriter. If on the Closing Date or on an Option Closing Date, as
the case may be, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares, or Additional Shares, as the case may be, and the
aggregate number of Firm Shares or Additional Shares, as the case may be,
with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares to be purchased on such date by all
Underwriters and arrangements
25
<PAGE>
satisfactory to the Representatives and the applicable Sellers for
purchase of such Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter and the applicable Sellers. In any such case
which does not result in termination of this Agreement, either the
Representatives or the applicable Sellers shall have the right to
postpone the Closing Date or the applicable Option Closing Date, as the
case may be, but in no event for longer than seven days, in order that
the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
(b) The indemnities and contribution provisions and the other
agreements, representations and warranties of the Company, its officers
and directors, the Selling Shareholders, and of the several Underwriters
set forth in or made pursuant to this Agreement shall remain operative
and in full force and effect, and will survive delivery of and payment
for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter or by or on
behalf of the Sellers, the officers or directors of the Company, any
controlling person of the Company or the Selling Shareholders, (ii)
acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
(c) If this Agreement shall be terminated by the Underwriters
pursuant to clause (i) of Section 11(a) or because of the failure or
refusal on the part of the Sellers to comply with the terms or to fulfill
any of the conditions of this Agreement, the Sellers agree to reimburse
the Underwriters for all out-of-pocket expenses (including the reasonable
fees and disbursements of counsel) incurred by the Underwriters.
Notwithstanding any termination of this Agreement, the Company shall be
liable for all expenses which it has agreed to pay pursuant to Section
5(l) hereof.
12. NOTICES. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to MSC
Industrial Direct Co., Inc., 151 Sunnyside Blvd., Plainview, New York
11803-1592, Attention: Chief Financial Officer, (ii) if to any of the Selling
Shareholders, to Mitchell Jacobson c/o MSC Industrial Direct Co., Inc., 151
Sunnyside Blvd., Plainview, New York 11803-1592 and (iii) if to the
Underwriters, to Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park
Avenue, New York, New York 10172, Attention: Syndicate Department, and, in each
case, with a copy to Rosenman & Colin LLP, 575 Madison Avenue, New York, New
York 10022, Attention: Joseph L. Getraer, Esq. and Latham & Watkins at 885
Third Avenue, Suite 1000, New York, New York 10022, Attention: Philip E.
Coviello, Esq., or in any case to such other address as the person to be
notified may have requested in writing.
13. SUCCESSORS. Except as otherwise provided, this Agreement has
been and is made solely for the benefit of and shall be binding upon the
Company, the Selling Shareholders, the
26
<PAGE>
Underwriters, any Indemnified Person referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED,
INTERPRETED AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO CONTRACTS MADE AND
PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CHOICE
OF LAW PROVISIONS.
15. JURISDICTION. Each party to this Agreement hereby irrevocably
consents to the personal jurisdiction of the courts of the State of New York
located in the borough of Manhattan and of the United States of America sitting
in the Southern District of New York, in any action to enforce, interpret or
construe any provision of this Agreement, and also hereby irrevocably waives
any defense of improper venue or forum non conveniens to any such action
brought in either of those courts. Each party further irrevocably agrees that
any action to enforce, interpret or construe any provision of this Agreement
will be brought only in either of those courts and not in any other court.
16. COUNTERPARTS. This Agreement may be signed in various
counterparts which together shall constitute one and the same instrument.
[SIGNATURES PAGES FOLLOW]
27
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, each of the Selling Shareholders and the several
Underwriters.
Very truly yours,
MSC INDUSTRIAL DIRECT CO., INC.
By:
--------------------------------------
Name:
Title:
SELLING SHAREHOLDERS:
--------------------------------------
Mitchell Jacobson
--------------------------------------
Marjorie Gershwind
--------------------------------------
Mitchell Jacobson 1996 Charitable
Remainder Unitrust
By: Joseph L. Getraer, as Trustee
<PAGE>
Accepted to and agreed by:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
Acting severally on behalf
of themselves and the several
Underwriters named in
Schedule I hereto
BY: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
--------------------------------
Name: Marc Cummins
Title: Managing Director
29
<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriters Firm Shares
- ------------ -----------
Donaldson, Lufkin & Jenrette Securities Corporation
Prudential Securities Incorporated
-----------
5,000,000
<PAGE>
SCHEDULE II
PART A
SELLING SHAREHOLDERS
Firm Shares
-----------
Mitchell Jacobson 1996 Charitable Remainder Unitrust...................670,000
Mitchell Jacobson......................................................830,000
Marjorie Gershwind...................................................1,500,000
---------
3,000,000
PART B
OPTION SELLING SHAREHOLDERS
Additional Shares
-----------------
Mitchell Jacobson......................................................375,000
Marjorie Gershwind.....................................................375,000
-------
750,000
<PAGE>
ANNEX I
LOCK-UP AGREEMENTS
Officers and Directors of the Company (90 Days)
- -----------------------------------------------
James Shroeder
Shelley Boxer
Thomas Eccleston
Barbara Schwartz
Denis Kelly
Melvin Redman
Shareholders (180 Days)
- -----------------------
Mitchell Jacobson
Marjorie Gershwind
Erik Gershwind
Stacey Gershwind
Joshua Jacobson 1994 Trust
Marjorie Diane Gershwind 1994 Qualified Seven Year Annuity Trust
Marjorie Diane Gershwind 1994 Qualified Fifteen Year Annuity Trust
Marjorie Diane Gershwind 1995 Qualified Three Year Annuity Trust
The Mitchell Jacobson 1995 Qualified Three Year Annuity Trust
The Stacey Gershwind 1995 Trust
The Erik Gershwind 1995 Trust
32
<PAGE>
[Rosenman & Colin LLP Letterhead]
EXHIBIT 5.01
September 16, 1996
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have been requested by MSC Industrial Direct Co., Inc. (the 'Company'),
a New York corporation, to furnish our opinion in connection with the
registration statement (the 'Registration Statement') on Form S-1 (Registration
Number 333-10833), with respect to the registration of 5,750,000 shares (the
'Shares') of the Company's Class A Common Stock, par value $.001 per share.
We have made such examination as we deemed necessary for the purpose of
this opinion. Based upon such examination, it is our opinion that, when the
Registration Statement has become effective under the Securities Act of 1933,
when the Shares have been qualified as required under the laws of those
jurisdictions in which they are to be issued and sold and when the Shares have
been issued, sold and paid for in the manner described in the Registration
Statement, the Shares will have been validly issued and will be fully paid and
non-assessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption 'Legal
Matters' in the prospectus included in the Registration Statement.
Very truly yours,
ROSENMAN & COLIN LLP
By /s/ Edward H. Cohen
---------------------------------
A Partner
<PAGE>
EXHIBIT 21.01
SUBSIDIARIES OF MSC INDUSTRIAL DIRECT CO., INC.
CORPORATION STATE OF INCORPORATION
- ----------- -----------------------
Sid Tool Co., Inc....................................... New York
Primeline International, Inc............................ New York
Kaja Productions, Inc................................... New York
Cut-Rite Tool Corp...................................... Florida
D.T.C. Tool Corp........................................ Florida
Swiss Precision Instruments, Inc........................ California
