<PAGE>
As filed with the Securities and Exchange Commission on July 30, 1997
Registration No. 333-31837
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
PRE-EFFECTIVE
AMENDMENT
NO. 1
TO
FORM S-3
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:
Joseph L. Getraer, 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, other than securities offered only in connection with dividend or interest
reinvestment plans, 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>
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 JULY 30, 1997
PROSPECTUS
_______, 1997
1,550,000 Shares
[LOGO]
Class A Common Stock
All of the 1,550,000 shares of Class A Common Stock offered hereby 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, the principal
shareholders of the Company will own approximately 51.7% of the outstanding
shares of capital stock of the Company and will control approximately 91.5% 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 July 21, 1997, the last reported sales price for the Class A
Common Stock on the New York Stock Exchange was $41.1875.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Price Underwriting Proceeds to
to the Discounts and the Selling
Public Commissions(1) Shareholders (2)
- -------------------------------------------------------------------------------
Per Share....... $ $ $
Total........... $ $ $
- -------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have 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 $500,000, of which approximately
$30,000 and $470,000 will be paid by the Company and the Selling
Shareholders, respectively.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to an aggregate of 232,500 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>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THOSE ACTIVITIES, SEE "UNDERWRITING."
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) unless otherwise indicated, 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. References to the "1996 Offering" are to the Company's second public
offering of Class A Common Stock in September 1996. References to the "Public
Offerings" are to both the Initial Public Offering and the 1996 Offering. The
Company was formed in October 1995 as a holding company to own 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 Company's
Initial Public Offering, a total of 24,000,000 shares of the Company's 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 Company's principal executive offices are located at
151 Sunnyside Boulevard, Plainview, New York 11803-1592.
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 ("SKUs")
through its 3,560 page master catalog and weekly, monthly and quarterly
specialty and promotional catalogs, newspapers and brochures, which are
supported by approximately 50 customer service locations. Most of the Company's
products are carried in stock, and orders for these products are typically
fulfilled 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 24.9% from $125.5 million
in fiscal 1992 to $305.3 million in fiscal 1996. During this same period, income
from operations increased at a compound annual rate of 28.6% from $12.6 million
to $34.5 million. These strong growth trends have continued during fiscal 1997.
For the nine months ended May 31, 1997, net sales increased by $96.3 million, or
42.9%, to $320.8 million from $224.5 million for the nine months ended June 1,
1996, 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 in fiscal 1996, increased by $11.8 million, or
36.6%, to $43.8 million from $32.0 million for the nine months ended June 1,
1996. The Company also expects to realize modest future growth from four
acquisitions effected during fiscal 1997.
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
3
<PAGE>
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's core business focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $150. MSC has in
excess of 141,000 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
approximately 50 branch offices. The Company's distribution centers are located
in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana. 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, which states account for 81% of the Company's sales. 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.
4
<PAGE>
THIS OFFERING
Class A Common Stock Offered..........................1,550,000 shares
Capital Stock to be Outstanding After this Offering
Class A Common Stock................................16,429,119 shares(1)
Class B Common Stock................................17,413,700 shares(2)
Total...........................................33,842,819 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."
Use of Proceeds.......................................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.
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 1,950,111 shares of Class A Common Stock reserved for issuance
under the Company's 1995 Stock Option Plan, of which options to purchase
1,138,007 shares of Class A Common Stock are outstanding.
(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 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 29, August 28, August 27, September 2, August 31,
1992 1993 1994 1995 1996 June 1, May 31,
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) 1996 1997
------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales....................... $125,454 $142,287 $174,682 $248,483 $305,294 $224,527 $320,794
Gross profit.................... 55,385 61,796 74,852 103,288 126,775 93,263 131,420
Operating expenses.............. 42,454 44,951 50,811 69,532 83,666 61,214 87,626
Restructuring charge............ -- -- -- -- 8,600 8,600 --
Income from operations.......... 12,630 16,845 24,041 33,756 34,509 23,449 43,794
Income taxes.................... 323 418 813 765 5,531 1,947 17,418
Net income...................... 10,458 15,682 22,573 31,698 28,503 21,246 26,702
Net income per share............ $0.79
=====
Weighted average number of
shares outstanding.......... 33,930
======
Pro forma net income(1)......... 6,523 9,740 14,149 19,640 20,591 14,033(3)
Pro forma net income
per share(2)................ $0.67 $0.45
===== =====
Pro forma weighted average
number of shares
outstanding(2).............. 30,696 30,205
====== ======
Selected Operating Data(4):
Active customers................ 75 78 98 120 127 125 141
Number of SKUs.................. 140 150 170 231 302 250 302
Orders entered.................. 967 1,103 1,348 1,833 2,155 1,560 1,906
Number of publication titles
(not in thousands).......... 12 13 20 38 70 61 39
Number of publications mailed... 2,447 2,688 4,794 6,604 6,300 5,167 6,723
Revenues per employee........... $ 189 $ 201 $ 214 $ 249 $ 266 $ 262 $ 280
</TABLE>
August 31, 1996 May 31, 1997
--------------- ------------
Balance Sheet Data:
Working capital............................ $163,785 $190,703
Total assets............................... 265,484 316,912
Short-term debt............................ 2,486 59
Long-term debt, net of current portion..... 42,191 2,590
Shareholders' equity....................... 172,571 264,971
- ------------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate
of 39.5%.
(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) the
weighted average shares of Class A and Class B Common Stock outstanding
during the year, (ii) the impact of approximately 262,000 shares issued for
the acquisition of an affiliated corporation and the Company's 1995
Restricted Stock Plan assumed to be outstanding for the entire year, (iii)
the impact of 3,318,000 shares issued in the Initial Public Offering, the
proceeds of which were used to pay the final "S" corporation distribution,
assumed to be outstanding for the entire year, and (iv) the common stock
equivalent impact of 756,000 outstanding options issued under the Company's
1995 Stock Option Plan, based upon the grant date of the options.
(3) Excluding the tax-effected impact of the restructuring charge of $8,600,000
in the nine month period ended June 1, 1996, pro forma net income for that
period would have been $19,233,000 or $0.61 per share.
(4) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--General."
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, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (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 $125.5 million in fiscal 1992 to $305.3 million
in fiscal 1996. This growth trend has continued during fiscal 1997. For the nine
months ended May 31, 1997, net sales increased by $96.3 million, or 42.9%, to
$320.8 million from $224.5 million for the nine months ended June 1, 1996. 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
Harrisburg, Pennsylvania distribution center. 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
7
<PAGE>
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
markets. In furtherance of this strategy, the Company made four acquisitions
during fiscal 1997. 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 91.5% 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" and
"Description of Capital Stock."
8
<PAGE>
Possible Volatility of Stock Price
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 16,429,119 shares of
Class A Common Stock outstanding immediately after completion of this Offering,
substantially all of which are 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. See "Principal and Selling Shareholders" and "Underwriting."
USE OF PROCEEDS
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.
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 27, 1994,
September 2, 1995 and August 31, 1996 and the selected balance sheet data as of
September 2, 1995 and August 31, 1996 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 June 1,
1996 and May 31, 1997 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 29, 1992, August 28, 1993 and August
27, 1994 the selected income statement data for the fiscal years ended August
29, 1992 and August 28, 1993 are derived from audited financial statements of
the Company not included herein.
9
<PAGE>
<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)
-----------------------------------------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales...................................... $125,454 $142,287 $174,682 $248,483 $305,294
Gross profit................................... 55,385 61,796 74,852 103,288 126,775
Operating expenses............................. 42,454 44,951 50,811 69,532 83,666
Restructuring charge........................... -- -- -- -- 8,600
Income from operations......................... 12,630 16,845 24,041 33,756 34,509
Income taxes................................... 323 418 813 765 5,531
Net income..................................... 10,458 15,682 22,573 31,698 28,503
Net income per share...........................
Weighted average number of shares outstanding..
Pro forma net income(1) ....................... 6,523 9,740 14,149 19,640 20,591
Pro forma net income per share(2).............. $0.67
====
Pro forma weighted average number of shares
outstanding(2)............................... 30,696
======
Selected Operating Data(4):
Active customers............................... 75 78 98 120 127
Number of SKUs................................. 140 150 170 231 302
Orders entered................................. 967 1,103 1,348 1,833 2,155
Number of publication titles (not in thousands) 12 13 20 38 70
Number of publications mailed.................. 2,447 2,688 4,794 6,604 6,300
Revenues per employee.......................... $ 189 $ 201 $ 214 $ 249 $ 266
<CAPTION>
Nine Months Ended
---------------------------------------------
June 1, May 31,
1996 1997
---------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C>
Income Statement Data:
Net sales...................................... $224,527 $320,794
Gross profit................................... 93,263 131,420
Operating expenses............................. 61,214 87,626
Restructuring charge........................... 8,600 --
Income from operations......................... 23,449 43,794
Income taxes................................... 1,947 17,418
Net income..................................... 21,246 26,702
Net income per share........................... $0.79
========
Weighted average number of shares
outstanding.................................. 33,930
========
Pro forma net income(1) ....................... 14,033(3)
Pro forma net income per share(2).............. $0.45
========
Pro forma weighted average number of shares
outstanding(2)............................... 30,205
========
Selected Operating Data(4):
Active customers............................... 125 141
Number of SKUs................................. 250 302
Orders entered................................. 1,560 1,906
Number of publication titles (not in thousands) 61 39
Number of publications mailed.................. 5,167 6,723
Revenues per employee.......................... $ 262 $ 280
</TABLE>
<TABLE>
<CAPTION>
August 29, August 28, August 27, September 2, August 31, May 31,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at period end):
Working capital........................ $54,158 $57,335 $48,726 $81,228 $163,785 $190,703
Total assets........................... 75,745 80,853 91,307 139,032 265,484 316,912
Short-term debt........................ 498 665 12,728 9,208 2,486 59
Long-term debt, net of current portion. 23,762 18,374 3,220 30,969 42,191 2,590
Shareholders' equity................... 40,187 49,708 55,750 72,088 172,571 264,971
</TABLE>
- --------------------------------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%.
(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) the
weighted average shares of Class A and Class B Common Stock outstanding
during the year, (ii) the impact of approximately 262,000 shares issued
for the acquisition of an affiliated corporation and the Company's 1995
Restricted Stock Plan assumed to be outstanding for the entire year,
(iii) the impact of 3,318,000 shares issued in the Initial Public
Offering, the proceeds of which were used to pay the final "S"
corporation distribution, assumed to be outstanding for the entire
year, and (iv) the common stock equivalent impact of 756,000
outstanding options issued under the Company's 1995 Stock Option Plan,
based upon the grant date of the options.
(3) Excluding the tax-effected impact of the restructuring charge of
$8,600,000 in the nine month period ended June 1, 1996, pro forma net
income for that period would have been $19,233,000 or $0.61 per share.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
10
<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 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 4.8 million pieces in fiscal 1994 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. In fiscal 1997, the number of targeted
marketing pieces mailed will increase to approximately 11.3 million as the
Company increases its direct marketing efforts to take advantage of additional
products offered and its expanded distribution capabilities. 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 took advantage of the additional products
offered and its expanded distribution capabilities by further increasing its
direct marketing efforts. These direct marketing expenditures are expected to
enhance 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.
Revenue per employee increased from approximately $214,000 in fiscal 1994
to an annualized rate of approximately $280,000 during the first nine months
of fiscal 1997. The Company believes that this increase in revenue per employee
is indicative of its efforts to achieve higher levels of efficiency and cost
savings at the employee level. However, commencement of shipping operations at
the Elkhart, Indiana and Harrisburg, Pennsylvania distribution centers has had
a negative impact on revenue per employee. The Company intends to 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 1.3 million in fiscal 1994 to approximately 2.2 million during
fiscal 1996. The number of orders entered and processed is approximately
1.9 million for the first nine months of fiscal 1997, an increase from
approximately 1.6 million for the comparable period in fiscal 1996. The average
order size of approximately $150 for the Company's core business 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
11
<PAGE>
order processing have been significant contributing factors to the Company's
increase in orders and, accordingly, sales, both from existing customers 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, the Company recorded 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 156,131
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 and its new distribution center in
Harrisburg, Pennsylvania during fiscal 1997 in order to improve the Company's
efficiency, geographic distribution and market penetration. The opening of these
new distribution centers required a substantial capital investment, including
expenditures for real estate and construction, and substantial investment for
inventory. The openings have 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 these new distribution centers, expenses as a percentage of
sales may be adversely impacted.
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 June 1, 1996 and May 31, 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
------------------------------------------------------ -------------------------------
August 27, 1994 September 2, 1995 August 31, 1996 June 1, 1996 May 31, 1997
--------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales (dollars in thousands)... $174,682 $248,483 $305,294 $224,527 $320,794
======== ======== ======== ======== ========
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................... 42.9 41.6 41.5 41.5 41.0
Operating expenses................. 29.1 28.0 27.4 27.3 27.3
Restructuring charge............... -- -- 2.8 3.8 --
Net income......................... 12.9 12.8 9.3 9.5 8.3
Pro forma net income............... 8.1 7.9 6.7 6.3 --
</TABLE>
Thirty-Nine Weeks Ended May 31, 1997 Compared to
Thirty-Nine Weeks Ended June 1, 1996
Net sales increased by $96.3 million, or 42.9%, to $320.8 million during
the first nine months of 1997 from $224.5 million in the first nine months of
1996. This increase was attributable to an increase in sales to the Company's
existing customers, an increase in the number of active customers and the
effect of the acquisitions made subsequent to June 1, 1996. The increase in
sales to existing customers was derived primarily from an increase in the number
of SKUs offered.
Gross profit increased by $38.2 million, or 40.9%, to $131.4 million in
the first nine months of 1997, from $93.3 million in the first nine months of
1996, primarily attributable to increased sales. As a percentage of sales,
gross profit decreased from 41.5% to 41.0%, resulting primarily from slightly
lower margins realized from customers and product lines gained through the
Company's acquisitions.
Operating expenses increased by $26.4 million, or 43.1%, to $87.6 million
in the first nine months of 1997, from $61.2 million in the first nine months
of 1996. As a percentage of sales, operating expenses remained constant at
27.3%. This results from both operating efficiencies and the distribution of
fixed expenses over a larger revenue base offset by the expenses related to the
investment in new branches, which will enhance future growth.
12
<PAGE>
Restructuring charge of $8.6 million, recorded during the third quarter
of 1996, is the estimated cost of the relocation of the Company's Long Island
distribution center and warehouses. This is the equivalent of $5.2 million
after taxes, or $0.16 per share. The restructuring charge includes the cost of
relocating or replacing the Company's Long Island workforce, the cost to
physically move the inventory from Long Island to Harrisburg, Pennsylvania, and
the cost of leases and assets associated with abandoned facilities.
Net income increased by $5.5 million, to $26.7 million in the first nine
months of 1997 from $21.2 million in the first nine months of 1996, but
increased by $12.7 million as compared with pro forma 1996 net income of $14.0
million, which gives pro forma effect to "C" corporation taxation for the
entire period. The increase in net income is primarily attributable to increased
sales and gross margins offset by the increase in operating expenses necessary
in order to service increased volume and invest in future growth.
Fiscal Year Ended August 31, 1996 Compared to
Fiscal Year Ended September 2, 1995
Net sales increased by $56.8 million, or 22.9%, to $305.3 million in
fiscal 1996 from $248.5 million in fiscal 1995, which included one extra week
(the Company's fiscal years contain either 52 or 53 weeks). 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 new
customers. The increase in sales to existing customers was derived primarily
from an increase of 31% in the number of SKUs offered as well as from more
focused marketing efforts. Average annual sales per customer increased 16%, and
the number of active customers increased 6% in fiscal 1996, as compared to
fiscal 1995.
Gross profit increased by $23.5 million, or 22.7%, to $126.8 million in
fiscal 1996 from $103.3 million in fiscal 1995. The increase in gross profit
was attributable to increased sales. As a percentage of sales, gross profit
remained constant at approximately 41.5% and 41.6% for the respective periods.
Operating expenses, exclusive of the restructuring charge, increased by
$14.1 million, or 20.3%, to $83.7 million in fiscal 1996 from $69.5 million in
fiscal 1995. This increase was attributable to increased sales volume which
required added staffing and support. As a percentage of sales, operating
expenses declined from 28.0% to 27.4%.
Restructuring charge of $8.6 million, recorded during the third quarter
of fiscal 1996, is the estimated cost of the relocation of the Company's Long
Island distribution center and warehouses. This is the equivalent of $5.2
million after taxes, or $0.17 per share. The restructuring charge includes the
cost of relocating or replacing the Company's Long Island workforce, the cost to
physically move the inventory from Long Island to Harrisburg, Pennsylvania, and
the cost of leases and assets associated with abandoned facilities. The
Harrisburg, Pennsylvania distribution center commenced shipping in September
1996, and is expected to be fully operational in the first half of fiscal 1997.
Income from operations increased by $0.8 million, or 2.2%, to $34.5
million in fiscal 1996 from $33.8 million in fiscal 1995. This increase was
attributable to increased sales and gross profit offset in part by the
aforementioned restructuring charge and increases in operating expenses. Before
taking into account the restructuring charge, income from operations would have
increased by $9.4 million, or 27.7%, to $43.1 million.
Net income decreased by $3.2 million, or 10.1%, to $28.5 million in
fiscal 1996, from $31.7 million in fiscal 1995. The decrease in net income is
primarily attributable to the restructuring charge and taxation at "C"
corporation rates for a portion of fiscal 1996, partially offset by increased
sales and gross profit. Before taking into account the restructuring charge, net
income would have increased by $2.0 million, or 6.3%, to $33.7 million.
Pro forma net income increased by $1.0 million, or 4.8%, to $20.6 million
in fiscal 1996 from $19.6 million in fiscal 1995. This change in pro forma net
income reflects primarily the cumulative effects of the changes in net income.
As a percentage of sales, pro forma net income in fiscal 1996 decreased to 6.7%
from 7.9% in fiscal 1995. This decline in pro forma net income as a percentage
of sales reflects primarily the restructuring charge
13
<PAGE>
in 1996, offset, in part, by the percentage decline in other operating
expenses and the decline in pro forma income taxes, both as a percentage of
sales.
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 35.8% 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 $18.7 million, or 36.8%, to $69.5 million
in fiscal 1995 from $50.8 million in fiscal 1994. As a percentage of sales,
operating expenses in fiscal 1995 declined to 28.0% from 29.1% 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 $9.7 million, or 40.4%, to $33.8
million in fiscal 1995 from $24.0 million in fiscal 1994. As a percentage of
sales, income from operations in fiscal 1995 decreased to 13.6% from 13.8% in
fiscal 1994. This decrease reflects the cumulative effects of a 1.3% decline in
gross profit margins offset by a 1.1% 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.
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
14
<PAGE>
interest expense as a percentage of sales, offset by a 1.1% improvement in
operating expenses as a percentage of sales.
Pro forma net income increased by $5.5 million, or 38.8%, to $19.6
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 7.9% from 8.1% in
fiscal 1994. This change in pro forma net income reflects the cumulative effects
of the 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 September 2, 1995
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales............................. $54,118 $61,187 $66,719 $66,459
Income from operations................ 6,520 8,353 10,128 8,755
Net income............................ 6,210 7,880 9,311 8,297
Pro forma net income(1)............... 3,845 4,900 5,782 5,113
<CAPTION>
Year Ended August 31, 1996
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales............................. $69,681 $74,631 $80,215 $80,767
Income from operations................ 8,766 10,305 4,378 11,060
Net income............................ 7,988 10,950 2,758(2) 6,807
Pro forma net income(1)............... 4,969 6,305 -- --
<CAPTION>
Year Ended August 30, 1997
---------------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Income Statement Data:
Net sales............................. $92,214 $104,685 $123,895
Income from operations................ 11,364 14,675 17,755
Net income............................ 6,950 8,831 10,921
Pro forma net income(1)............... -- -- --
</TABLE>
- -------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate
of 39.5%.
(2) Net of restructuring charge of $5,200,000 (after income tax effect of
$3,400,000).
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 (see Note 1 to the annual consolidated financial statements),
distributions to its then existing shareholders, primarily to satisfy their tax
liabilities resulting from the previous "S" corporation status of the Operating
Subsidiary. The Company's sources of financing have historically been from
operations, bank borrowings under its $80 million credit facility (the "Credit
Facility "), subordinated loans from shareholders, and a portion of the proceeds
from the Initial Public Offering and the 1996 Public Offering. The Company
completed the Initial Public Offering on December 20, 1995, and outstanding
subordinated debt to shareholders and credit facility debt as of that date were
repaid out of the net proceeds. Subsequent bank borrowings were repaid out of
the proceeds from the 1996 Public Offering. The Company anticipates that its
cash flows from operations and available lines of credit will be adequate to
support its operations and its growth 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 provides next day service to most of the midwestern
United States. As a result of the opening of this facility, the Company
significantly increased its inventories to provide for future orders from the
distribution center.
15
<PAGE>
Net cash provided by (used in) operating activities increased $60.8
million to $33.6 million from a net cash usage of $27.3 million for the
thirty-nine week periods ended May 31, 1997 and June 1, 1996, respectively. The
net usage of cash in 1996 was primarily due to purchases of inventory in
connection with the initial stocking of the Elkhart distribution center and
introduction of new products. In 1997, inventory excluding inventory of acquired
companies declined, reflecting improved inventory control policies and
procedures. Net cash provided by (used in) operating activities was $21.0
million, $(1.2) million and $(30.9) million in fiscal 1994, 1995 and 1996,
respectively. 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. The
decrease from fiscal 1995 to fiscal 1996 results principally from purchases
of inventory in connection with the stocking of the Elkhart distribution
center and the introduction of new products.
Net cash used in investing activities for the thirty-nine week periods
ended May 31, 1997 and June 1, 1996 was approximately $39.1 million and $15.4
million, respectively. The increase is primarily attributable to cash paid for
acquisitions during 1997. The balance reflects continued investment in existing
distribution centers and new branches. Net cash used in investing activities for
fiscal 1996 was approximately $37.4 million, substantially representing 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.
Net cash provided by financing activities during the thirty-nine week
periods ended May 31, 1997 and June 1, 1996 was approximately $13.1 million and
$43.7 million, respectively. The change of $30.7 million is primarily
attributable to the difference between the proceeds received from the completion
of the Company's Public Offerings, net of the repayment of existing long-term
debt and shareholder distributions from such proceeds. Net cash provided by
(used in) financing activities was $(15.0) million, $7.9 million and $69.3
million in fiscal 1994, 1995 and 1996, respectively, primarily reflecting
proceeds from the Company's Public Offerings, the Company's borrowings in
connection with the Credit Facility and additional bank borrowings in fiscal
1995 principally to fund the growth in inventory.
16
<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' 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 approximately 50 customer service locations. Most of the
Company's products are carried in stock, and orders for these products are
typically fulfilled 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
24.9% from $125.5 million in fiscal 1992 to $305.3 million in fiscal 1996.
During this same period, income from operations increased at a compound annual
rate of 28.6% from $12.6 million to $34.5 million. These growth trends have
continued during fiscal 1997. For the nine months ended May 31, 1997, net sales
increased by $96.3 million, or 42.9%, to $320.8 million from $224.5 million for
the nine months ended June 1, 1996, 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 in fiscal 1996, increased
by $11.8 million, or 36.6%, to $43.8 million from $32.0 million for the nine
months ended June 1, 1996. The Company also expects to realize modest future
growth from four acquisitions effected during fiscal 1997.
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's core business focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $150. MSC has in
excess of 141,000 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 approximately 50 branch offices. The Company's distribution centers
are located in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana.
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, which states account for 81% of the Company's sales.
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.
17
<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 16% 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. 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 which 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 have
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.
18
<PAGE>
Business Strategy
The Company's business strategy is to provide its customers with
a low cost means for obtaining and maintaining MRO supplies. The strategy
includes the following key elements: (i) a broad selection of in-stock products;
(ii) prompt response and same-day shipping; (iii) superior, value-added customer
services; (iv) 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 primarily 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 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 3,560 pages and over
300,000 items, which is currently distributed once
per year. The Company's catalog was supplemented by
approximately 50 specialty and promotional catalog,
brochure and newspaper titles in fiscal 1997,
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
19
<PAGE>
history or other criteria suggest receptiveness 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 increased from 2.4 million in
fiscal 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 number of targeted marketing pieces
mailed will increase to approximately 11.3 million
as the Company increases its direct marketing
efforts to take advantage of additional products
offered and its expanded distribution capabilities.
The Company's expenditures on direct mail increased
from $3.8 million in fiscal 1992 to approximately
$10 million in fiscal 1996, and is expected to grow
to approximately $12.5 million in fiscal 1997.
o Commitment to Technological Innovation. The
Company utilizes technological innovation 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 lies in the
incremental revenue 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.
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.
20
<PAGE>
In fiscal 1997, the Company shifted its growth
emphasis from increasing its offering of SKUs to
increasing the size and diversity of its customer
base. This shift took 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 product purchases. MSC has
increased the number of publication titles
distributed over the past several years from 12 in
fiscal 1992 to approximately 50 in fiscal 1997.
o Expansion into New Markets. The Company operates
primarily in the continental United States through
a network of three regional distribution centers
and approximately 50 branch offices. The strategic
locations of the Company's distribution centers
allow next day delivery via low cost ground
carriers in 28 states located primarily 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. Three of the Company's
acquisitions completed during fiscal 1997 operate
in markets where the Company already was present.
The Company believes that the integration of
acquired entities 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.
The Company will consider expansion into new markets through the
acquisition of industrial supply companies with existing distribution
facilities. One of the Company's acquisitions completed during fiscal 1997
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. No assurance can be given that any such
acquisitions, if made, will be successfully integrated into the Company's
existing operations, nor can there be any assurance that the Company will be
able to implement this phase of its growth strategy.
Products
The Company currently offers in excess of 300,000 SKUs, which
number represents a greater than 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.
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 not be cost-effective
to purchase the top-of-the-line name
21
<PAGE>
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.
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 1997. 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 Harrisburg, Pennsylvania, Atlanta, Georgia and
Elkhart, Indiana. The Company commenced shipping from the Elkhart, Indiana
distribution center during fiscal 1996, and the center is now fully operational.
During fiscal 1997, the Company commenced shipping from the Harrisburg,
Pennsylvania distribution center which became fully operational during the first
half of fiscal 1997. Over the next several years, the Company intends to open
additional
22
<PAGE>
distribution centers in the West and Southwest in order to achieve the Company's
goal of next day delivery throughout the continental United States.
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's core business focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $150. 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 of 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 141,000 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 685,000 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 1997, such lists will result in over 1,000,000
mailings to potential buyers who had 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 purchased
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 300 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 business 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
23
<PAGE>
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.
Additionally, the Company employs a direct sales force of
approximately 130 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 approximately 50 branch offices
located in 33 states. The Company estimates 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 50 of which were published in fiscal 1997.
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 revenue has justified an increase in the Company's direct mail budget
(excluding cooperative advertising revenue) from approximately $3 million in
fiscal 1993 to approximately $10 million in fiscal 1996. The Company anticipates
spending approximately $12.5 million in fiscal 1997. As reflected in the
following table, the number of publication titles has increased from 13 in
fiscal 1993 to approximately 50 in fiscal 1997. The number of pieces mailed has
increased from 2.7 million in fiscal 1993 to 6.3 million in fiscal 1996, and is
expected to reach approximately 11.3 million in fiscal 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------
August 28, August 27, September 2, August 31, August 30,
1993 1994 1995 1996 1997
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of publication titles....... 13 20 38 70 50
Number of publications mailed...... 2,688,000 4,794,000 6,604,000 6,300,000 11,300,000
</TABLE>
24
<PAGE>
Customer Service
One of the Company's goals is to make purchasing its products as
convenient as possible for its customers. 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 approximately 50 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 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 satisfactory. 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, and historically have been, immaterial.
Information Systems
The Company's 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. The proprietary information systems 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 has offered this 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 product 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.
25
<PAGE>
Acquisitions
The Company has completed a limited number of acquisitions to
date. 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.
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. No assurance can be given that
any such acquisitions, when and if made, will be successfully integrated into
the Company's existing operations, nor can there be any assurance that the
Company will be able to implement this phase of its growth strategy. See "Risks
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. The Company believes it competes effectively
on all such criteria.
Employees
As of July 18, 1997, the Company employed approximately 1,710
employees, including approximately 1,665 full-time and approximately 45
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. Operational
Location Sq. Ft. Date
-------- --------- ------------
Atlanta, Georgia(1) 340,000 October 1990
Elkhart, Indiana(2) 270,000 March 1996
Harrisburg, Pennsylvania(2) 270,000 January 1997
- -------------------
26
<PAGE>
(1) The lease for this facility expires on July 31, 2010.
(2) This facility is owned by the Company.
The Company maintains its headquarters at an 83,000 square foot
facility in Plainview, Long Island, and sublets to a third party approximately
60,000 square feet of another facility also located in Plainview, Long Island.
The Company maintains approximately 50 branch offices located in
33 states, ranging in size from 850 to 16,000 square feet. The leases for
these branch offices will expire at various periods between October 1997 and
June 2003. The aggregate annual lease payments on these properties in fiscal
1997 was approximately $1,645,000.
The Company believes that its facilities are adequate for its
current needs and that suitable additional space will be available as needed.
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.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information with respect to the
directors and executive officers of the Company. Other than Messrs. Kelly,
Redman and Langton, the directors and executive officers of the Company were
elected to the positions listed in October 1995. Accordingly, the descriptions
of their positions held with MSC or the Company prior to October 1995 refer to
the Operating Subsidiary.
Name Age Position
- ---- --- --------
Sidney Jacobson...... 79 Chairman of the Board of Directors
Mitchell Jacobson.... 46 President, Chief Executive Officer and Director
James Schroeder...... 57 Vice President, Chief Operating Officer and Director
Shelley Boxer........ 49 Vice President, Chief Financial Officer and Director
Thomas Eccleston..... 49 Vice President - Plant and Equipment and Secretary
Barbara Schwartz..... 64 Vice President - Human Resources
Denis Kelly.......... 48 Director
Melvin Redman........ 46 Director
Raymond Langton...... 52 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.
27
<PAGE>
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 Vice
President of Operations for Walmart Stores, Inc. Prior to 1992, Mr. Redman was
Senior Vice President of Store Planning for Walmart.
Raymond Langton has been a director of the Company since July
1997. Mr. Langton is currently an investor for his own account. Mr. Langton was
the President and Chief Executive Officer of Chicago Rawhide Worldwide from 1995
to February 1997. From 1991 to 1995, Mr. Langton was President and Chief
Executive Officer of SKF North America. Mr. Langton is also a director of SKF
USA, Inc.
Committees of the Board
The Board of Directors established an Audit Committee of the
Board, comprised of Messrs. Kelly, Redman and Langton. 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, Redman and Langton. 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
28
<PAGE>
shareholders will receive a pro rata number of options. The Company also pays
each non-employee director compensation of $10,000 per annum and $1,500 per
board meeting.
29
<PAGE>
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 * 750,000(16) 9,660,014 28.7% 8,910,014 26.3%
Marjorie Gershwind(6) 33,158 * 750,000(16) 5,389,686 16.0 4,639,686 13.7
Sidney Jacobson(7) 100 * -- 2,608,000 7.7 2,608,000 7.7
Erik Gershwind(8) -- -- -- 1,424,000 4.2 1,424,000 4.2
Stacey Gershwind(9) -- -- -- 1,424,000 4.2 1,424,000 4.2
Joshua Jacobson Trust(10) -- -- -- 1,256,000 3.7 1,256,000 3.7
Jacobson Family Foundation(11) 57,500 * 50,000 -- -- -- --
Joseph Getraer(12) 2,500 * -- 1,256,000 3.7 1,256,000 3.7
Denis Kelly 15,000 * -- -- -- -- --
Melvin Redman 625 * -- -- -- -- --
James Schroeder -- -- -- -- -- -- --
Shelley Boxer 2,000 * -- -- -- -- --
Thomas Eccleston 5,263 * -- -- -- -- --
Barbara Schwartz 3,157 * -- -- -- -- --
T. Rowe Price Associates, Inc.(13) 808,250 5.6% -- -- -- -- --
100 E. Pratt Street
Baltimore, Maryland 21202
William Blair & Company, L.L.C.(14) 1,327,180 9.3 -- -- -- -- --
222 West Adams Street
Chicago, Illinois 60606-5312
All directors and executive officers as a 66,671 * -- 12,334,685(15) 36.3 11,584,685 34.2
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 upon
transfer to persons who are not members of the Jacobson or Gershwind
families. See "Description of Capital Stock."
(2) Excludes 1,950,111 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.
30
<PAGE>
(4) Includes 17,413,700 shares of Class B Common Stock and 16,429,119 shares
of Class A Common Stock to be outstanding after this Offering.
(5) 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, 112,500 additional shares of
Class B Common Stock 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 26.0%.
(6) Marjorie Gershwind is the sister of Mitchell Jacobson. If the
Underwriters' over-allotment option is exercised in full, 112,500
additional shares of Class B Common Stock held by Marjorie Gershwind will
be converted and sold to the Underwriters. See "Underwriting." In such
event, the total shares benefically owned by Marjorie Gershwind after the
Offering will be 13.4%.
(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.
(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) If the Underwriters' over-allotment option is exercised in full, 7,500
additional shares of Class A Common Stock will be sold to the Underwriters.
(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 1,016,000 shares of Class B Common Stock beneficially
held by Joseph Getraer as Trustee for Joshua Jacobson pursuant to The
Joshua Jacobson 1994 Trust Agreement, dated January 31, 1994.
(13) Based on Schedule 13G dated February 11, 1997.
(14) Based on Schedule 13G dated February 18, 1997.
(15) Includes an aggregate of 12,268,685 shares of Class B Common Stock and
66,671 shares of Class A Common Stock.
(16) Represents shares of Class B Common Stock that will be converted
simultaneously with the Offering.
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 July 18, 1997, there were approximately 485 holders of record of Class A
Common Stock and 14,929,119 shares of Class A Common Stock were issued and
outstanding. At July 18, 1997, there were 9 holders of record of Class B Common
Stock and 18,913,700 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.
31
<PAGE>
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
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.
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.
32
<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 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....................................... 1,550,000
================
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.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. Underwriters may bid for and purchase shares of Class
A Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Class A Common
Stock in the open market to stabilize the price of the Class A Common Stock.
These activities may stabilize or maintain the market price of the Class A
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end these activities at any time.
The Company and the Selling Shareholders have 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.
33
<PAGE>
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.
34
<PAGE>
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 4,800 shares of Class A Common Stock. An additional
1,256,000 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 as Trustee for the Joshua Jacobson 1994
Trust.
EXPERTS
The annual financial statements of MSC Industrial Direct Co., Inc. and
Subsidiaries 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-3 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1996; and
(ii) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended November 30, 1996, March 1, 1997 and May 31, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock hereunder
35
<PAGE>
shall be deemed to be incorporated by reference herein and such documents shall
be deemed to be a part hereof from the date of filing of such reports and
documents.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of any
or all of the documents incorporated herein by reference (exclusive of exhibits
to such documents unless such exhibits are specifically incorporated by
reference herein). Requests for such copies should be directed to Shelley Boxer,
Vice President, MSC Industrial Direct Co., Inc., 151 Sunnyside Boulevard,
Plainview, New York, 11803-1592, telephone (516) 349-7100.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Annual Financial Statements
- ---------------------------
Report of Independent Public Accountants....................................F-2
Consolidated Balance Sheets as of September 2, 1995 and
August 31, 1996...........................................................F-3
Consolidated Statements of Income for the three fiscal years ended
August 31, 1996...........................................................F-4
Consolidated Statements of Shareholders' Equity for the three fiscal
years ended August 31, 1996...............................................F-5
Consolidated Statements of Cash Flows for the three fiscal years ended
August 31, 1996...........................................................F-6
Notes to Consolidated Financial Statements .................................F-7
Unaudited Interim Financial Statements
- --------------------------------------
Consolidated Balance Sheets as of May 31, 1997 and
August 31, 1996 (Audited).................................................F-22
Consolidated Statements of Income for the nine month periods ended
May 31, 1997 and June 1, 1996 ............................................F-23
Consolidated Statement of Shareholders' Equity for the nine month
period ended May 31, 1997.................................................F-24
Consolidated Statements of Cash Flows for the nine month periods ended
May 31, 1997 and June 1, 1996.............................................F-25
Notes to Consolidated Financial Statements..................................F-26
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MSC Industrial Direct Co., Inc. and Subsidiaries:
We have audited the accompanying balance sheets of MSC Industrial Direct
Co., Inc. (a New York corporation) and Subsidiaries as of September 2, 1995
(Note 2) and August 31, 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended August 31, 1996. 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 MSC Industrial Direct Co.,
Inc. and Subsidiaries as of September 2, 1995 and August 31, 1996, and the
results of their operations and their cash flows for each of the three years in
the period then ended August 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 6, 1996
F-2
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 2, August 31,
1995 1996
------------ ----------
(Note 2)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 681 $ 1,679
Accounts receivable, net of allowance for doubtful accounts of
$877 and $1,319, respectively 31,078 41,042
Inventories 83,448 152,620
Due from officers, employees and affiliated companies 791 1,052
Prepaid expenses and other current assets 1,070 1,792
Current deferred income tax assets - 9,920
Prepaid Federal income tax payments - 4,512
-------- ---------
Total current assets 117,068 212,617
-------- ---------
Property, Plant and Equipment, net 14,648 38,989
-------- ---------
Other Assets:
Goodwill - 8,224
Prepaid Federal income tax payments 3,115 -
Other 4,201 5,654
-------- ---------
7,316 13,878
-------- ---------
$139,032 $ 265,484
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,821 $ 13,270
Accrued liabilities 18,811 33,076
Current portion of long-term notes payable 51 2,486
Current portion of subordinated debt to shareholders 9,157 -
-------- ---------
Total current liabilities 35,840 48,832
Long-Term Notes Payable 28,348 42,191
Subordinated Debt to Shareholders 2,621 -
Other Long-Term Liabilities 135 110
Deferred Income Tax Liabilities - 1,780
-------- ---------
Total liabilities 66,944 92,913
-------- ---------
Commitments and Contingencies (Note 14)
Shareholders' Equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized;
none outstanding - -
Class A common stock; $0.001 par value; 100,000,000 shares
authorized; 0 and 8,311,394 shares, respectively, issued and
outstanding - 8
Class B common stock; $0.001 par value; 50,000,000 shares
authorized; 24,000,000 and 23,475,000 shares, respectively,
issued and outstanding 24 24
Additional paid-in capital 8,034 145,628
Retained earnings 64,030 29,482
-------- ---------
72,088 175,142
Deferred stock compensation - (2,571)
-------- ---------
Total shareholders' equity 72,088 172,571
-------- ---------
$139,032 $ 265,484
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
------------------------------------------
August 27, September 2, August 31,
1994 1995 1996
---------- ------------ ----------
(Note 2) (Note 2)
<S> <C> <C> <C>
Net Sales $ 174,682 $ 248,483 $ 305,294
Cost of Goods Sold 99,830 145,195 178,519
--------- --------- ---------
Gross Profit 74,852 103,288 126,775
Operating expenses 50,811 69,532 83,666
Distribution center restructuring charge (Note 5) - - 8,600
--------- --------- ---------
Income from operations 24,041 33,756 34,509
--------- --------- ---------
Other income (expense):
Income on rental property 113 118 123
Interest expense (870) (1,870) (1,534)
Interest income 164 29 647
Other income (expense), net (62) 430 289
--------- --------- ---------
(655) (1,293) (475)
--------- --------- ---------
Income before Provision for Income Taxes 23,386 32,463 34,034
Provision for Income Taxes 813 765 5,531
--------- --------- ---------
Net Income $ 22,573 $ 31,698 $ 28,503
========= ========= =========
Pro Forma Information (Note 3):
Income before provision for income taxes $ 34,034
Pro forma provision for income taxes 13,443
---------
Pro forma net income $ 20,591
=========
Pro forma net income per common share $ 0.67
=========
Pro forma weighted average number of common
shares outstanding 30,696
=========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED AUGUST 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock 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>
BALANCE, August 28, 1993 - $- 24,000 $24 $ 8,034 $ 41,650 $ - $ 49,708
Net income - - - - - 22,573 - 22,573
Distributions to shareholders - - - - - (16,531) - (16,531)
----- -- ------ --- -------- -------- ------- --------
BALANCE, August 27, 1994 - - 24,000 24 8,034 47,692 - 55,750
Net income - - - - - 31,698 - 31,698
Distributions to shareholders - - - - - (15,360) - (15,360)
----- -- ------ --- -------- -------- ------- --------
BALANCE, September 2, 1995 (Note 2) - - 24,000 24 8,034 64,030 - 72,088
Initial public offering of common stock,
net of costs of offering of $10,352
(Note 1) 7,525 8 - - 132,623 - - 132,631
Exchange of Class B Common stock for
Class A common stock 525 - (525) - - - - -
Issuance of restricted common stock
(Note 12) 157 - - - 2,981 - (2,981) -
Cancellation of restricted common stock (1) - - - (10) - 10 -
Amortization of deferred stock
compensation - - - - - - 400 400
Issuance of common stock for acquisition
of subsidiary (Note 4) 105 - - - 2,000 - - 2,000
Net income - - - - - 28,503 - 28,503
Distributions to shareholders (Note 1) - - - - - (63,051) - (63,051)
----- -- ------ --- -------- -------- ------- --------
BALANCE, August 31, 1996 8,311 $8 23,475 $24 $145,628 $ 29,482 $(2,571) $172,571
===== == ====== === ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
---------------------------------------
August 27, September 2, August 31,
1994 1995 1996
---------- ------------ ----------
(Note 2) (Note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,573 $ 31,698 $ 28,503
-------- -------- ---------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,501 1,932 3,087
Amortization of deferred stock compensation - - 400
Loss (gain) on disposal of property, plant and equipment 96 (2) 29
Provision for doubtful accounts 489 694 1,019
Deferred income taxes - - (7,811)
Changes in operating assets and liabilities, net of effect
from acquisitions:
Accounts receivable (5,626) (8,578) (7,758)
Inventories (4,089) (30,561) (59,866)
Prepaid expenses and other current assets 1,845 26 510
Prepaid federal income tax payments (695) (1,036) (1,397)
Other assets (2,366) (1,435) (1,334)
Accounts payable and accrued liabilities 7,222 6,081 14,523
Other long-term liabilities 10 (3) (781)
-------- -------- ---------
Total adjustments (1,613) (32,882) (59,379)
-------- -------- ---------
Net cash provided by (used in) operating activities 20,960 (1,184) (30,876)
-------- -------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,163) (9,495) (26,886)
Proceeds from sale of property, plant and equipment 40 11 10
Cash paid for acquisitions, net of cash acquired (629) - (10,530)
-------- -------- ---------
Net cash used in investing activities (2,752) (9,484) (37,406)
-------- -------- ---------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock - - 132,631
Net (borrowings) proceeds under notes payable (10,900) 21,349 11,616
Payments under capital leases (84) (478) -
Proceeds from subordinated debt to shareholders 17,232 20,144 -
Repayment of subordinated debt to shareholders (9,423) (17,263) (11,778)
Repayments from (advances to) affiliates 4,715 (539) (138)
Distributions to shareholders (16,531) (15,360) (63,051)
-------- -------- ---------
Net cash provided by (used in) financing activities (14,991) 7,853 69,280
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 3,217 (2,815) 998
Cash and cash equivalents, beginning of year 279 3,496 681
-------- -------- ---------
Cash and cash equivalents, end of year $ 3,496 $ 681 $ 1,679
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 866 $ 1,883 $ 2,022
======== ======== =========
Income taxes $ 624 $ 561 $ 12,376
======== ======== =========
Supplemental schedule of noncash investing and financing
activities:
Issuance of stock for purchase of subsidiary (Note 4) - - $ 2,000
======== ======== =========
Issuance of stock for restricted stock plan (Note 12) - - $ 2,981
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
1. BUSINESS AND ORGANIZATION:
Organization
MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was
incorporated in the State of New York on October 24, 1995 as a holding company
for the purpose of (i) issuing 8,050 shares of Class A Common Stock in an
initial public offering ("IPO") and (ii) issuing 24,000 shares of Class B Common
Stock to the shareholders of Sid Tool Co., Inc. (the "Operating Subsidiary") in
exchange for their then outstanding 30 shares of common stock of the Operating
Subsidiary immediately prior to the effective date of MSC's IPO.
On December 20, 1995, the Company consummated the IPO relating to the
offer and sale of 8,050 shares of Class A Common Stock, 7,525 of which shares
were offered by the Company and 525 of which shares were offered by a principal
shareholder of the Company, at a price of $19.00 per share. The 525 shares
offered and sold by a principal shareholder were converted to Class A Common
Stock from previously issued Class B Common Stock. Net proceeds received by the
Company were approximately $132,600. As a result of the IPO, the Operating
Subsidiary no longer qualified as a subchapter "S" corporation, and became
subject to subchapter "C" corporation taxation. Prior to the offering, the
Operating Subsidiary declared an "S" corporation dividend to the then existing
shareholders in the aggregate amount of approximately $63,000, 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 year ended August 31,
1996 reflects "S" corporation taxation through the date of the public offering,
and "C" corporation taxation thereafter (Note 2).
Business
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
thirty-three local branches in twenty states, concentrated in the Eastern and
Southern United States, regional distribution centers in Plainview/Central
Islip, New York; Elkhart, Indiana and Atlanta, Georgia and a planned
distribution center near Harrisburg, Pennsylvania (Note 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
MSC Industrial Direct Co., Inc. and its wholly-owned subsidiaries Sid Tool Co.,
Inc.; Swiss Precision Instruments, Inc.; Cut-Rite Tool Corp.; D.T.C. Tool Corp.;
Primeline International, Inc.; Kaja Productions, Inc. and MSC Services, Inc.
All intercompany accounts and transactions have been eliminated in
consolidation.
The 1994 and 1995 financial statements included herein are those of
the Operating Subsidiary and have been retroactively restated to give effect to
the recapitalization of the Company related to the IPO (Note 1). 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.
F-7
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Fiscal Year
The Company's fiscal year ends on the Saturday closest to August 31.
The financial statements for fiscal 1994, 1995 and 1996 contain activity for
fifty-two weeks, fifty-three weeks and fifty-two 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
127,000 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.
Property, plant and equipment are stated at cost. 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 of distribution centers is capitalized as
part of the cost of related buildings during the period prior to which such
facilities are available and ready for use. The amount of interest included in
property, plant and equipment at September 2, 1995 and August 31, 1996 is $231
and $719, respectively.
The Company capitalizes certain payroll costs associated with the
development of internal computer systems. These costs are included within
property, plant and equipment in the accompanying consolidated balance sheets.
These costs are amortized on a straight-line basis over the estimated useful
lives of the related computer systems, not to exceed five years.
F-8
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Goodwill
Goodwill shown in the consolidated balance sheet at August 31, 1996
relates to several acquisitions completed during fiscal 1996 (Note 4). Goodwill
is being amortized on a straight-line basis over a 40-year period. Accumulated
amortization was $44 at August 31, 1996. There was no goodwill at September 2,
1995.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal
catalogs ($3,546 and $4,488 at September 2, 1995 and August 31, 1996,
respectively) are deferred and included in other assets in the Company's
consolidated balance sheet in accordance with Statement of Position ("SOP")
93-7, "Reporting on Advertising Costs". These costs are charged to expense over
the period that the catalogs remain the most current source of sales, which
period is typically one year or less. The costs associated with brochures and
catalog supplements are charged to expense as incurred.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
The Company provides for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". Under the asset and liability method
specified by SFAS No. 109, the deferred income 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 5.
Deferred tax assets and liabilities, which were established in the second
quarter of fiscal 1996 due to the Company's taxation as a subchapter "C"
corporation since the closing date of the IPO in December 1995, resulted in a
credit to the provision for income taxes of $3,966 for the year ended August 31,
1996.
Affiliates
The Company is affiliated with MSC International Korea, Inc. and various
real estate entities (together, the "affiliates"). The affiliates are owned
primarily by the Company's principal shareholders. In connection with the
F-9
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
IPO during fiscal 1996, the Company acquired two affiliated companies, Primeline
International, Inc. and Kaja Productions, Inc. See Notes 4, 6 and 13 for
discussion of certain related party transactions.
New Accounting Pronouncements
During March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for 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 stock-based 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 during fiscal 1997. The effect, if
any, on the consolidated financial statements of the implementation of SFAS No.
121 is not expected to be material. The Company will adopt the provisions of
SFAS No. 123 by providing the pro forma disclosures.
Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform with the classifications used in the current
year.
3. PRO FORMA NET INCOME PER COMMON SHARE:
Pro forma net income per common share for the year ended August 31,
1996 includes the pro forma effect of a "C" corporation income tax provision for
the entire fiscal year (Notes 1 and 2). Pro forma weighted average common shares
outstanding include (i) the weighted average shares of Class A and Class B
Common Stock outstanding during the year, (ii) the impact of approximately 262
shares issued for the acquisition of Primeline International, Inc. (Note 4) and
the Restricted Stock Plan (Note 12) assumed outstanding for the entire year,
(iii) the impact of 3,318 shares issued in the initial public offering, the
proceeds of which were used to pay the final "S" corporation distribution (Note
1), assumed outstanding for the entire year, and (iv) the common stock
equivalent impact of 756 outstanding options issued under the Company's 1995
Stock Option Plan based upon the grant date of the options.
F-10
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
4. ACQUISITION OF BUSINESSES:
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.
During fiscal 1996 the Company acquired five businesses, two of which
were from related parties. The acquisitions were accounted for based on the
purchase method and were valued based on management's estimate of the fair value
of the assets acquired and liabilities assumed with respect to each acquisition
at the dates of acquisition. The results of operations of the acquired entities
from the respective dates of acquisition through fiscal year end are included in
the accompanying consolidated statement of income for the fiscal year ended
August 31, 1996. The Company acquired Primeline International, Inc. for a
purchase price of approximately $2,000 payable in shares of Class A common
stock, which resulted in the issuance of 105 shares of Class A common stock.
Costs in excess of net assets acquired in these acquisitions of $8,268 were
allocated to goodwill.
Summarized below are the unaudited pro forma results of operations as
though these fiscal 1996 acquisitions had occurred at the beginning of fiscal
1995. Adjustments have been made for pro forma income taxes and amortization of
goodwill related to these transactions.
For the Fiscal
Years Ended
--------------------------------
September 2, August 31,
1995 1996
-------------- --------------
Pro Forma:
Net sales $278,300 $329,100
======== ========
Net income $ 20,000 $20,100
======== ========
Net income per common share $0.65
========
F-11
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
5. DISTRIBUTION CENTER RESTRUCTURING CHARGE:
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, Company-owned facility near Harrisburg, Pennsylvania.
The Pennsylvania distribution center commenced shipping in September 1996, and
is expected to be fully operational in the first half of fiscal 1997. The
estimated cost associated with the relocation of the Company's existing Long
Island facilities is approximately $8,600, which is primarily comprised of
personnel relocation and severance costs, lease abandonment costs, moving costs
and disposal costs, and this amount has been reflected as a charge to income
from operations for the year ended August 31, 1996. Costs of approximately $644,
primarily relating to labor and travel associated with the move were charged
against the liability as of August 31, 1996, and the remaining liability of
$7,956 is included in accrued liabilities in the accompanying consolidated
balance sheet as of August 31, 1996 (Note 9).
6. DUE FROM AFFILIATED COMPANIES:
The amounts due from affiliated companies bear interest at the prime
rate (8.25% at August 31, 1996).
7. 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 September 2, August 31,
Years 1995 1996
--------- ------------ ----------
Land $ 637 $ 2,949
Building 40 5,799 14,569
Building and leasehold
improvements The lesser
of the life
of the lease
or 31.5 2,532 2,563
Furniture, fixtures and
equipment 3-10 16,526 29,034
Automobiles 5 364 321
Computer systems-related 3-15 - 3,704
------- -------
25,858 53,140
Less: Accumulated
depreciation and
amortization 11,210 14,151
------- -------
$14,648 $38,989
======= =======
8. INCOME TAXES:
The Company was required to make certain Federal income tax
depository payments in order to maintain its fiscal year end as a subchapter "S"
corporation. Concurrent with the consummation of the IPO during fiscal 1996, the
Company no longer qualified as a subchapter "S" corporation and became a
subchapter "C" corporation. The balance in prepaid Federal income tax payments
as of August 31, 1996 represents the prepayments made prior to the Company's
subchapter "C" corporation status which will be
F-12
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
returned to the Company prior to the end of fiscal 1997. As of September 2,
1995 and August 31, 1996, these Federal tax deposits amounted to $3,115 and
$4,512, respectively.
The provision for income taxes is comprised of the following:
For the Fiscal Year Ended
---------------------------------------------------
August 27, 1994 September 2, 1995 August 31, 1996
--------------- ----------------- ---------------
Current:
Federal $ - $ - $10,744
State and local 813 765 2,598
---- ---- -------
813 765 13,342
---- ---- -------
Deferred:
Federal - - (3,128)
State and local - - (717)
---- ---- -------
- - (3,845)
---- ---- -------
Subchapter "C" impact
of SFAS No. 109 - - (3,966)
---- ---- -------
Total $813 $765 $ 5,531
==== ==== =======
Significant components of deferred tax assets and liabilities are as
follows:
August 31, 1996
---------------
Current and non-current deferred tax liabilities:
Depreciation $ (183)
Prepaid advertising (1,773)
-------
(1,956)
Current and non-current deferred tax assets:
Accounts receivable 679
Inventory 4,382
Restructuring charge accrual 3,143
Bonus accrual 944
Deferred stock compensation 158
Other 790
-------
10,096
-------
Net Deferred Tax Assets $ 8,140
=======
The Company believes that, based upon its lengthy and consistent history
of profitable operations, it is probable that the net deferred tax assets of
$8,140 will be realized, primarily from the generation of future taxable income.
F-13
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
Fiscal Year Ended
August 31, 1996
-----------------
U.S. Federal statutory rate 35.0%
State income taxes, net of Federal benefit 4.5
Income from "S" corporation period taxable to shareholders (11.9)
Subchapter "C" impact of SFAS No. 109 (11.7)
All other, net 0.4
------
Effective income tax rate 16.3%
======
9. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
September 2, August 31,
1995 1996
------------ -----------
Accrued purchases $ 6,755 $10,349
Accrued payroll and bonus 3,618 4,408
Accrued restructuring charge - 7,956
Accrued other 8,438 10,363
------- -------
Total accrued liabilities $18,811 $33,076
======= =======
F-14
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
10. LONG-TERM NOTES PAYABLE:
Long-term notes payable consist of the following:
September 2, 1995 August 31, 1996
----------------- ---------------
Revolving credit agreement (a) $27,800 $40,000
Term notes payable (b) 599 2,307
Credit agreement of subsidiary (c) - 2,300
Other - 70
------- --------
28,399 44,677
Less: Current portion 51 2,486
------- --------
$28,348 $42,191
======= =======
Maturities of long-term notes payable are as follows:
Fiscal
------
1997 $ 2,486
1998 222
1999 40,568
2000 126
2001 130
Thereafter 1,145
-------
$44,677
=======
(a) As of August 31, 1996, the Company had an unsecured revolving credit
agreement with a bank, as agent for a group of banks, with borrowings of
$40,000. The credit agreement provides for maximum borrowings of $80,000
expiring on April 30, 1999. During the term of the agreement, the Company can
borrow at the bank's base rate (8.25% at August 31, 1996), bankers acceptance
rate or LIBOR rate plus margins, which vary from 0.45% to 0.75% 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 (0.125%) 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 August 31, 1996, the
Company was not in compliance with the maximum capital expenditure covenant,
however, the Company received a waiver from the bank.
(b) The term notes payable consist of three separate notes. The first
note represents the Company's share of a loan payable under a 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 (Note 2). This note bears
interest at the LIBOR rate plus margins which vary from 0.45% to 0.75% per
annum, and is payable in monthly
F-15
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
principal installments of $4, plus interest, through April 1999, at which time
the balance of the unpaid principal and any accrued interest is due. The
balance as of August 31, 1996 is $548.
The second note is payable to the Pennsylvania Industrial Development
Authority and is secured by the land on which the Harrisburg, Pennsylvania
distribution center is located. The loan bears interest at 3% per annum and is
payable in monthly installments of $14 through September 2011. The Company
received 80% of the approved loan amount and will receive the remaining 20% upon
approval of the final construction cost of the Pennsylvania distribution center.
The outstanding balance under this note is $1,600 as of August 31, 1996.
The third note is payable to the Pennsylvania Department of Community
and Economic Development and is unsecured. The loan bears interest at 3% per
annum and is payable in monthly installments of $1 through August 2011. The
balance as of August 31, 1996 is $159.
(c) The Company assumed obligations of $2,300 under a $3,750 line of
credit in connection with the acquisition of Swiss Precision Instruments, Inc.
(Note 4). Borrowings under the line bear interest at the bank's reference rate
(8.25% at August 31, 1996) plus 1%. The line of credit is available through
November 30, 1996. Subsequent to August 31, 1996, this amount was repaid by the
Company.
11. SUBORDINATED DEBT TO SHAREHOLDERS:
During fiscal 1992, the Company entered into subordinated debt
agreements with its shareholders. Borrowings under these agreements were
subordinated to the long-term notes payable described in Note 10. Subordinated
debt to shareholders was comprised of the following:
September 2, 1995
-----------------
Subordinated debt to shareholders $11,778
Less: Current portion 9,157
-------
$ 2,621
=======
During fiscal 1996, subordinated debt was repaid with the proceeds from the IPO.
12. EMPLOYEE BENEFIT PLANS:
Sid Tool Savings 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 27, 1994, September 2, 1995 and August 31, 1996, the Company
contributed $623, $1,350 and $216, respectively, to the Sid Tool Savings Plan.
Company contributions are discretionary.
F-16
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Option and Restricted Stock Plans
In connection with the IPO, MSC adopted the MSC Industrial Direct
Co., Inc. 1995 Stock Option Plan, pursuant to which options to purchase 2,000
shares of Class A common stock may be granted.
MSC also adopted the Restricted Stock Plan, whereby MSC awarded 157
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. The value of these
shares at the grant date ($2,981) is included as a separate component of
shareholders' equity, and the related compensation charge is being recorded
ratably over the five year vesting period.
Information regarding the Company's option and restricted stock plans
is summarized below:
<TABLE>
<CAPTION>
1995 Stock Restricted
Option Plan Stock Plan
-------------------------- ------------------------
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at September 2, 1995 - - - -
Granted 853 $19.00 - $30.75 157 19.00
Exercised - - - -
Cancelled (97) 19.00 - 28.38 (1) 19.00
--- ---
Outstanding at August 31, 1996 756 $19.00 - $30.75 156 19.00
=== ===
</TABLE>
13. RELATED PARTY TRANSACTIONS:
For the fiscal years ended August 27, 1994, September 2, 1995 and
August 31, 1996, respectively, sales to and purchases from Primeline
International, Inc. were as follows:
1994 1995 1996
-------- --------- ----------
(a)
Sales to affiliate $1,732 $1,744 $492
Purchases from affiliate 1,416 967 210
(a) On December 13, 1995, the Company purchased Primeline International,
Inc. (Note 4). All intercompany transactions subsequent to that date have been
eliminated and are not included in the table above (Note 2).
F-17
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
14. COMMITMENTS AND CONTINGENCIES:
Leases
The operations of the Company are conducted, in part, on leased premises,
some of which are 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 2010. At August 31, 1996,
approximate minimum annual rentals on such leases are as follows:
Total
(Including Related
Related Party Party
Fiscal Year Commitments) Commitments
----------- ------------- -----------
1997 $2,896 $1,845
1998 2,073 1,392
1999 1,825 1,190
2000 1,415 1,097
2001 1,235 1,050
Thereafter 8,632 8,482
Total rental expense (exclusive of real estate taxes, insurance and
other operating costs) for all operating leases for the fiscal years ended
August 27, 1994, September 2, 1995 and August 31, 1996 was $3,100, $2,964 and
$3,290, respectively, including $2,800, $2,511 and $2,519, respectively, paid to
affiliates. In the opinion of the Company's management, the leases with
affiliates are on terms which approximate fair market value.
The Company is obligated under certain equipment and automobile
operating leases, which expire on varying dates through fiscal 2001. At August
31, 1996, approximate minimum annual rentals on such leases are as follows:
Fiscal Year
-----------
1997 $1,341
1998 978
1999 583
2000 73
2001 3
F-18
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Guarantees
As of August 31, 1996, the Company was a guarantor on loans made to
affiliated real estate companies aggregating approximately $1,700.
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 September 1 plan year. Benefits paid in excess of $100 are
reimbursed to the plan under the Company's stop loss policy. Group health
insurance expense for the fiscal years ended August 27, 1994, September 2, 1995
and August 31, 1996 was approximately $2,400, $3,200 and $4,100, respectively.
Letters of Credit
As of August 31, 1996, the Company had outstanding letters of credit
aggregating approximately $3,600.
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. Under
this agreement, the Chairman receives an annual base salary of $250 and is
entitled to participate in benefits available to Company employees. 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 for the remainder of the term of
the agreement.
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
benefits available to Company employees. The agreement also provides for certain
payments in the event of his disability or death.
The Company has an agreement with another officer which provides for
annual benefit payments to the employee for seven years upon his retirement or,
in the event of his death, to his designated beneficiary. The benefit is based
upon a percentage of the growth in shareholders' equity over a certain base
amount. The expense associated with this agreement was $300 in 1996.
F-19
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
In connection with the various acquisitions during fiscal 1996 (Note 4),
the Company entered into employment and consulting agreements with the selling
shareholders of the acquired businesses. The future minimum commitments under
these agreements are as follows:
Aggregate
Number of Annual
Individuals Term Amount
----------- ---- ---------
2 June 1996 - June 1998 $125
2 June 1996 - June 1999 180
1 May 1996 - December 1998 62
1 July 1996 - July 2004 100
1 July 1996 - July 2004 25
Litigation
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
15. SUBSEQUENT EVENTS:
Secondary Offering
In September 1996, the Company completed a secondary offering of 6,500
shares of Class A Common Stock, of which 2,000 shares were sold by the Company
and 4,500 shares were converted from Class B to Class A Common Stock and sold by
existing shareholders. This offering generated net proceeds to the Company of
approximately $64,390.
Supplemental pro forma net income for the fiscal year ended August
31, 1996 reflects the tax-effected impact of the reduction of interest expense
of $1,450 attributable to debt outstanding at August 31, 1996 which was repaid
from the proceeds of the secondary offering as though this debt was repaid at
the beginning of the year. Supplemental weighted average common shares
outstanding includes the pro forma weighted average common shares outstanding
(Note 3), as well as the supplemental effect of the issuance of 1,181 shares of
Class A common stock, which is the number of incremental shares that would have
been needed to be issued at the secondary offering price to provide proceeds
sufficient to pay the outstanding amounts of such debt at August 31, 1996. These
incremental shares were not issued and outstanding for any other purpose and are
included in this calculation solely to illustrate their effect on a supplemental
basis.
F-20
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
1996
----
Supplemental pro forma information:
Supplemental pro forma net income $21,468
=======
Supplemental pro forma net income per common share $ 0.67
=======
Supplemental pro forma weighted average number of common shares
outstanding 31,877
=======
Acquisition
In November 1996, the Company completed the acquisition of a company.
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.
F-21
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
----------- ---------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,187 $ 1,679
Accounts receivable, net of allowance for doubtful
accounts of $1,785 and $1,319, respectively 54,909 41,042
Inventories 163,829 152,620
Due from officers, employees and affiliated companies 611 1,052
Prepaid expenses and other current assets 1,514 1,792
Deferred income tax assets 8,135 9,920
Prepaid Federal income tax payments 568 4,512
--------- ---------
Total current assets 238,753 212,617
--------- ---------
Property, Plant and Equipment, net 49,100 38,989
--------- ---------
Other Assets:
Goodwill 25,557 8,224
Other 3,502 5,654
--------- ---------
29,059 13,878
--------- ---------
$ 316,912 $ 265,484
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,988 $ 13,270
Accrued liabilities 36,003 31,568
Income taxes payable - 1,508
Current portion of long-term debt 59 2,486
--------- ---------
Total current liabilities 48,050 48,832
Long-Term Notes Payable 2,590 42,191
Other Long-Term Liabilities 84 110
Deferred Income Tax Liabilities 1,217 1,780
--------- ---------
Total liabilities 51,941 92,913
--------- ---------
Shareholders' Equity:
Preferred stock; $0.001 par value; 5,000,000 shares
authorized; none outstanding
Class A common stock; $0.001 par value; 100,000,000 15 8
shares authorized; 14,851,858 and 8,311,394 shares,
respectively, issued and outstanding
Class B common stock; $0.001 par value; 50,000,000 shares 19 24
authorized; 18,975,000 shares and 23,475,000 shares,
respectively, issued and outstanding
Additional paid-in capital 210,884 145,628
Retained earnings 56,184 29,482
--------- ---------
267,102 175,142
Deferred stock compensation (2,131) (2,571)
--------- ---------
Total shareholders' equity 264,971 172,571
--------- ---------
$ 316,912 $ 265,484
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-22
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
Thirty-nine Weeks Ended
-----------------------
May 31, June 1,
1997 1996
--------- ---------
(Note 1)
Net Sales $ 320,794 $ 224,527
Cost of Goods Sold 189,374 131,264
--------- ---------
Gross Profit 131,420 93,263
Operating Expenses 87,626 61,214
Distribution center Restructuring Charge (Note 5) - 8,600
--------- ---------
Income from Operations 43,794 23,449
Other Income (Expense):
Interest income 806 748
Interest expense (658) (1,293)
Other income (expense), net 178 289
--------- ---------
326 (256)
--------- ---------
Income before Provision for Income Taxes 44,120 23,193
Provision for Income Taxes (Note 3) 17,418 1,947
--------- ---------
Net Income $ 26,702 $ 21,246
========= =========
Net Income per Common Share (Note 5) $ 0.79
=========
Weighted Average Number of Common Shares Outstanding 33,930
=========
The accompanying notes are an integral part of
these consolidated statements.
F-23
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine weeks ended May 31, 1997:
Class A Class B Deferred
Common Stock Common Stock Additional Stock
-------------- ---------------- Paid-In Retained Compen-
Shares Amount Shares Amount Capital Earnings sation Total
------ ------ ------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1996 (Note 1) 8,311 $ 8 23,475 $24 $145,628 $29,482 $(2,571) $172,571
Exchange of Class B common stock for 4,500 5 (4,500) (5) - - - -
Class A common stock
Secondary public offering of common stock, 2,000 2 - - 64,442 - - 64,444
net of costs of offering of $3,306
Exercise of common stock options 41 - - - 814 - - 814
Net income - - - - - 26,702 - 26,702
Amortization of deferred stock compensation - - - - - - 440 440
------ --- ------- --- -------- ------- ------- --------
Balance, May 31, 1997 14,852 $15 18,975 $19 $210,884 $56,184 $(2,131) $264,971
====== === ======= === ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of
this consolidated statement.
F-24
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------
May 31, June 1,
1997 1996
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 26,702 $ 21,246
-------- ---------
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Deferred income taxes 3,944 (7,542)
Depreciation and amortization 3,974 2,282
Provision for doubtful accounts 566 618
Gain on disposal of property and equipment - (33)
Changes in operating assets and liabilities, net of
effect from acquisitions:
Accounts receivable (9,106) (9,043)
Inventories 8,594 (45,637)
Prepaid expenses and other current assets 2,341 (700)
Other assets 2,181 (1,056)
Accounts payable and other current liabilities (5,038) 12,611
Other long-term liabilities (589) (21)
-------- ---------
6,867 (48,521)
-------- ---------
Net cash provided by (used in)
operating activities 33,569 (27,275)
-------- ---------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (11,351) (15,359)
Cash paid for acquisitions, net of cash acquired (27,771) -
-------- ---------
Net cash used in investing activities (39,122) (15,359)
-------- ---------
Cash Flows from Financing Activities:
Net proceeds from public offering of common stock 64,444 131,466
Net proceeds from exercise of common stock options 814 -
Long-term borrowings 10,672 67,614
Repayments of long-term debt (63,310) (82,386)
Repayments of subordinated debt to shareholders - (11,778)
Repayments from officers, employees and affiliates 441 791
Distributions to shareholders - (61,963)
-------- ---------
Net cash provided by financing activities 13,061 43,744
-------- ---------
Net Increase in Cash and Cash Equivalents 7,508 1,110
Cash and Cash Equivalents - beginning of period 1,679 681
-------- ---------
Cash and Cash Equivalents - end of period $ 9,187 $ 1,791
======== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
F-25
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands except per share data)
(unaudited)
1. MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was incorporated
in the State of New York on October 25, 1995, as a holding company for the
purpose of (i) issuing 8,050 shares of Class A Common Stock in an initial
public offering ("IPO") and (ii) issuing 24,000 shares of Class B Common
Stock to the shareholders of Sid Tool Co., Inc. (the "Operating Subsidiary")
in exchange for their then outstanding 30 shares of common stock of the
Operating Subsidiary immediately prior to the effective date of MSC's IPO.
MSC did not have any significant operating activity from its inception
until December 20, 1995, the closing date of the IPO.
The consolidated financial statements for the thirty-nine weeks ended
June 1, 1996 include the results of operations of the operating
subsidiary only, through the date of the IPO, and MSC's consolidated
results of operations thereafter. 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 Consolidated Financial Statements contained
within the Company's audited financial statements for the year ended August
31, 1996 included elsewhere in this Prospectus and in the Company's annual
report on Form 10- K. 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. As a result of the IPO, the Operating Subsidiary no longer qualified as a
Subchapter "S" corporation, and became subject to "C" corporation taxation.
The provision for income taxes for the thirty-nine weeks ended June 1, 1996
reflects "S" corporation rates through the date of the IPO, and "C"
corporation rates thereafter.
On September 25, 1996, the Company completed a secondary offering of 6,500
shares of Class A Common Stock, of which 2,000 shares were sold by the
Company and 4,500 shares were converted from Class B to Class A Common Stock
and sold by existing shareholders. Net proceeds received by the Company as a
result of this offering were approximately $64,444.
4. During the third quarter of 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, Company-owned
facility near Harrisburg, Pennsylvania. The Pennsylvania distribution
center commenced shipping in September 1996, and became fully operational
during the second quarter of fiscal 1997. The estimated cost associated
with the relocation of the Company's existing Long Island facilities is
approximately $8,600, which is primarily comprised of personnel relocation
and severance costs, lease abandonment costs, and moving and disposal costs,
and this amount was reflected as a charge to income from operations in the
3rd quarter of fiscal 1996. Expenditures of approximately $5,719 have been
charged against the liability as of May 31, 1997, and the remaining $2,881
is included in accrued liabilities in the accompanying consolidated balance
sheet as of May 31, 1997.
5. 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
earnings per share would have resulted in pro forma net income and
earnings per share as follows:
F-26
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
June 1, June 1,
1996 1996
---- ----
<S> <C> <C>
Including Restructuring (Note 4)
Pro forma net income $2,758 $14,033
Pro forma earnings per share $0.09 $0.45
Excluding Restructuring (Note 4)
Pro forma net income $7,958 $19,233
Pro forma earnings per share $0.25 $0.61
</TABLE>
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. Deferred income tax assets and
liabilities were initially established during 1996 due to the Company's
taxation as a "C" Corporation since the closing date of its IPO in December
1995.
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 (fiscal 1997 for the Company).
During October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting
and reporting standards for stock-based 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
(fiscal 1997 for the Company).
The effect, if any, on the consolidated financial statements, of
implementation of SFAS No. 121 is not expected to be material. The Company
will adopt the provisions of SFAS No. 123 by providing the pro forma
disclosures in its annual report on Form 10-K for fiscal 1997.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("EPS").
This statement establishes standards for computing and presenting EPS,
replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS
on the face of the consolidated statements of operations. Under this new
standard, Basic EPS is computed based on weighted average shares outstanding
and excludes any potential dilution; Diluted EPS reflects potential dilution
from the exercise or conversion of securities into
F-27
<PAGE>
common stock or from other contracts to issue common stock and is similar to
the currently required fully diluted EPS. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 (the
second quarter of fiscal 1998 for the Company), including interim periods,
and earlier application is not permitted. When adopted, the Company will be
required to restate its EPS data for all periods presented. The Company does
not expect the impact of the adoption of this statement to be material to
previously reported EPS amounts.
F-28
<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.......................................................... 3
Risk Factors................................................................ 7
Use of Proceeds ............................................................ 9
Selected Financial and Operating Data....................................... 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 11
Business.................................................................... 17
Management.................................................................. 27
Principal and Selling Shareholders.......................................... 30
Description of Capital Stock................................................ 31
Underwriting................................................................ 33
Legal Matters............................................................... 35
Experts..................................................................... 35
Additional Information...................................................... 35
Index to Financial Statements............................................... F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,550,000 Shares
[LOGO]
Class A Common Stock
-------------------
P R O S P E C T U S
-------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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........... $0
NASD Filing Fee............................................... 0
Printing and Engraving........................................ 0
Counsel Fees and Expenses..................................... 0
Accountants' Fees and Expenses................................ 0
Blue Sky Qualification Fees and Expenses...................... 0
Transfer Agent and Registrar Fees and Expenses................ 0
New York Stock Exchange Listing Fee........................... 29,500
Miscellaneous................................................. 0
----
Total......................................................... $29,500
</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.
II-1
<PAGE>
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
No. Description
- ------- -----------
<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 Credit Agreement, dated as of June 12, 1997, between the
Registrant and the banks named therein.
+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.
+ Filed as an Exhibit to the Company's Registration Statement on Form S-3,
Registration Statement No. 333-31837, dated July 23, 1997.
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
II-2
<PAGE>
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3/A and has duly caused this Pre-effective
Amendment No. 1 to the Registration Statement 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 July 29, 1997.
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 has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sidney Jacobson Chairman of the Board
- --------------------- of Directors July 29, 1997
Sidney Jacobson
/s/ Mitchell Jacobson President, Chief
- --------------------- Executive Officer
Mitchell Jacobson and Director July 29, 1997
/s/ James Schroeder Vice President,
- --------------------- Chief Operating Officer,
James Schroeder and Director July 29, 1997
/s/ Shelley M. Boxer Vice President, Chief
- --------------------- Financial Officer,
Shelley M. Boxer Principal Accounting
Officer and Director July 29, 1997
/s/ Denis Kelly Director July 29, 1997
- ---------------------
Denis Kelly
/s/ Melvin Redman Director July 29, 1997
- ---------------------
Melvin Redman
/s/ Raymond Langton Director July 29, 1997
- ---------------------
Raymond Langton
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <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 Credit Agreement, dated as of June 12, 1997 between the
Registrant and the banks named therein.......................
+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.
+ Filed as an Exhibit to the Company's Registration Statement on Form S-3,
Registration Statement No. 333-31837, dated July 23, 1997.
II-5
L&W REVISED DRAFT
July 25, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MSC INDUSTRIAL DIRECT CO., INC.
---------------------------------------------------
1,550,000 Shares
of
Class A Common Stock
---------------------------------------------------
------------------------------------------------
UNDERWRITING AGREEMENT
DATED AS OF JULY __, 1997
------------------------------------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1,550,000 Shares
MSC INDUSTRIAL DIRECT CO., INC.
Class A Common Stock
UNDERWRITING AGREEMENT
July __, 1997
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:
The shareholders of MSC Industrial Direct Co., Inc., a New York
corporation (the "Company") named in Part A of Schedule II hereto (collectively,
the "Selling Shareholders") severally propose to sell to the several
underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
1,550,000 shares of Class A Common Stock, par value $.001 per share (the "Common
Stock"), of the Company (the "Firm Shares").
The 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 232,500 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."
Terms not otherwise defined herein shall have the meaning given them
in the Prospectus (as defined below).
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
<PAGE>
Commission promulgated thereunder (collectively, the "Act"), a registration
statement on Form S-3 (No. 333-31837) 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-3 (No. 333-31837), 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 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 Commission 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) 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 (ii) each of the Underwriters agrees, severally and not
jointly, to purchase from the Selling Shareholders 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 the number of Additional
Shares set forth opposite each such Option Selling Shareholder's name on
Schedule II hereof (aggregating up to 232,500 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 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.
2
<PAGE>
The Company and the Selling Shareholders 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 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, for a period of 180 days after the date of the Prospectus, without
the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation
("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 Selling Shareholders 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.
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
3
<PAGE>
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 wire transfer of immediately available funds.
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 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
the 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.
4
<PAGE>
(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 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
5
<PAGE>
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 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 (j) 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").
(k) To pay all costs, expenses, fees and taxes (but only to the
extent that such costs, expenses, fees and taxes are not paid by the
Selling Shareholders in accordance with Sections 8(a) and 8(b) hereof
(other than with respect to clause (6) below, which the Company shall
pay)) 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);
(3) the registration with the Commission, and the 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, if any, 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
<PAGE>
(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.
(l) 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.
(m) 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
(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)
7
<PAGE>
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 or, 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 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
(including, without limitation, the Shares to be sold by the Selling
Stockholders) have been duly authorized and validly issued and are fully
paid and non-assessable and not 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.
(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
8
<PAGE>
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 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 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
9
<PAGE>
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) or (2) 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.
(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
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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 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.
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(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, 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.
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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.
(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
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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.
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 or other taxes
with respect to the Shares to be sold by such Selling Shareholder; and
(b) To pay all costs, expenses, fees and taxes with respect to
the Shares to be sold by each Selling Shareholder, including the costs,
expenses, fees and taxes 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);
(3) the registration with the Commission, and the 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, if any);
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(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; and
(6) 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.
(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 in reliance upon and
in conformity with information relating to any Underwriter furnished
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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 may be one or more legal defenses available to it
which are different from or additional to
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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 compromise 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.
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(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
Selling Shareholders 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.
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(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 of the Selling Shareholders 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 Selling Shareholder 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 Selling Shareholder 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 Selling
Shareholder 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 sale 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
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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 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. Each Selling Shareholder shall have performed or complied in
all material respects with all of the obligations and agreements contained
herein and satisfied all conditions to be performed, complied with or
satisfied by it on or prior to the Closing Date.
(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:
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<PAGE>
(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;
(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 enter and perform its obligations under this Agreement;
(5) the execution, delivery and performance of this
Agreement by the Company and each Selling Shareholder and the sale of
the Shares by the Selling Shareholders 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;
21
<PAGE>
(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,
without limitation, 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, except as described in the Prospectus or
contained in contracts filed as exhibits to the Registration
Statement, contractual rights;
(9) 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;
(10) the authorized capital stock of the Company,
including the Common Stock, conforms as to legal matters to the
description thereof contained in the Prospectus;
(11) 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;
(12) 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;
(13) 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;
(14) the statements contained in 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;
(15) the Company is not an "investment company" within
the meaning of the Investment Company Act of 1940, as amended;
and
(16) 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
22
<PAGE>
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.
(i) The Shares shall have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance.
23
<PAGE>
(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 executed 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 Company and the Selling
Shareholders 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 States or
elsewhere or any other substantial national or international
calamity or emergency, if the effect of such outbreak,
escalation, calamity, crisis, change or
24
<PAGE>
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 National 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 satisfactory
to the Representatives and the applicable Selling Shareholders for
purchase of such Shares are not made within 48 hours after such default,
this Agreement will terminate
25
<PAGE>
without liability on the part of any non-defaulting Underwriter and the
applicable Selling Shareholders. In any such case which does not result in
termination of this Agreement, either the Representatives or the
applicable Selling Shareholders 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 Selling Shareholders, the officers or directors of the
Company or 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 Selling Shareholders to comply with the terms
or to fulfill any of the conditions of this Agreement, the Selling
Shareholders 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(k) hereof and the Selling Stockholders
shall be liable for all expenses which they have agreed to pay pursuant to
Section 8(b) 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
-------------------------------
Jacobson Family Foundation
By:
<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:
Title:
29
<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriters Firm Shares
- ------------ -----------
Donaldson, Lufkin & Jenrette Securities Corporation...............
Prudential Securities Incorporated................................
----------
1,550,000
<PAGE>
SCHEDULE II
PART A
SELLING SHAREHOLDERS
Firm Shares
-----------
Jacobson Family Foundation........................................ 50,000
Mitchell Jacobson................................................. 750,000
Marjorie Gershwind................................................ 750,000
1,550,000
PART B
OPTION SELLING SHAREHOLDERS
Additional
Shares
----------
Jacobson Family Foundation.......................................... 7,500
Mitchell Jacobson ................................................ 112,500
Marjorie Gershwind................................................ 112,500
232,500
<PAGE>
ANNEX I
LOCK-UP AGREEMENTS
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>
July 28, 1997
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-3 (Registration Number
333-31837), with respect to the registration of 1,782,500 shares (the "Shares")
of the Company's Class A Common Stock, par value $.001 per share.
We have made such examination as we have 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 and
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 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:
<PAGE>
EXECUTION
CREDIT AGREEMENT
dated as of June 12, 1997
among
MSC INDUSTRIAL DIRECT CO., INC.
the Banks signatory hereto
and
FLEET BANK, NATIONAL ASSOCIATION
as Agent and as Issuing Bank
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS....................................................................... 2
Section 1.01. Definitions ..................................................................................... 2
Section 1.02. Accounting Terms................................................................................. 14
Section 1.03. Interpretation................................................................................... 14
ARTICLE 2. THE LOANS........................................................................................... 14
Section 2.01. The Loans Generally.............................................................................. 14
Section 2.02. The Notes ..................................................................................... 16
Section 2.03. Use of Proceeds.................................................................................. 16
Section 2.04. Borrowing Procedures for Pro Rata Loans.......................................................... 16
Section 2.05. Bid Procedure.................................................................................... 17
Section 2.06. Interest on Loans................................................................................ 19
Section 2.07. Reductions in Commitments........................................................................ 20
Section 2.08. Adjustments to Applicable Margin................................................................. 20
ARTICLE 2A. LETTERS OF CREDIT.................................................................................. 20
Section 2A.01. Agreement to Issue.............................................................................. 20
Section 2A.02. Amounts; Tenor.................................................................................. 20
Section 2A.03. Conditions ..................................................................................... 21
Section 2A.04. Issuance of Letters of Credit................................................................... 21
Section 2A.05. Letter of Credit Obligations; Duties of Issuing Bank............................................ 22
Section 2A.06. Participations.................................................................................. 23
Section 2A.07. Payment of Letter of Credit Reimbursement Obligations........................................... 24
Section 2A.08. Indemnification; Exoneration.................................................................... 25
Section 2A.09. Sid Tool Letters of Credit...................................................................... 26
ARTICLE 3. GENERAL CREDIT PROVISIONS; FEES AND PAYMENTS........................................................ 26
Section 3.01. Certain Notices.................................................................................. 26
Section 3.02. Prepayments ..................................................................................... 27
Section 3.03. Agency Fees ..................................................................................... 27
Section 3.04. Facility Fee..................................................................................... 27
Section 3.05. Compensation for Letters of Credit............................................................... 27
Section 3.06. Payments Generally............................................................................... 28
Section 3.07. Conversion and Continuation of Pro Rata Loans.................................................... 30
ARTICLE 4. YIELD PROTECTION, ETC............................................................................... 32
Section 4.01. Additional Costs................................................................................. 32
Section 4.02. Limitation on Types of Loans..................................................................... 34
</TABLE>
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<TABLE>
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<S> <C>
Section 4.03. Illegality ..................................................................................... 34
Section 4.04. Certain Loans Pursuant To Sections 4.01, 4.02 and 4.03........................................... 34
Section 4.05. Certain Compensation............................................................................. 35
ARTICLE 5. CONDITIONS PRECEDENT................................................................................ 36
Section 5.01. Documentary Conditions Precedent................................................................. 36
Section 5.02. Additional Conditions Precedent.................................................................. 38
ARTICLE 6. REPRESENTATIONS AND WARRANTIES...................................................................... 40
Section 6.01. Incorporation, Good Standing and Due Qualification; Compliance with Law.......................... 40
Section 6.02. Power and Authority; No Conflicts................................................................ 41
Section 6.03. Legally Enforceable Agreements................................................................... 41
Section 6.04. Litigation....................................................................................... 42
Section 6.05. Financial Statements............................................................................. 42
Section 6.06. Ownership and Liens.............................................................................. 42
Section 6.07. Taxes............................................................................................ 43
Section 6.08. ERISA............................................................................................ 43
Section 6.09. Subsidiaries and Ownership of Stock.............................................................. 43
Section 6.10. Credit Arrangements.............................................................................. 44
Section 6.11. Operation of Business............................................................................ 44
Section 6.12. No Default on Outstanding Judgments or Orders.................................................... 44
Section 6.13. No Defaults on Other Agreements.................................................................. 45
Section 6.14. Labor Disputes and Acts of God................................................................... 45
Section 6.15. Governmental Regulation.......................................................................... 45
Section 6.16. Partnerships..................................................................................... 45
Section 6.17. No Forfeiture Proceedings........................................................................ 45
Section 6.18. No Default or Event of Default................................................................... 46
Section 6.19. Solvency......................................................................................... 46
Section 6.20. Material Adverse Change.......................................................................... 46
Section 6.21. Name............................................................................................. 46
Section 6.22. Debt............................................................................................. 46
Section 6.23. Nature of Business............................................................................... 46
Section 6.24. Fiscal Year End.................................................................................. 46
ARTICLE 7. AFFIRMATIVE COVENANTS............................................................................... 47
Section 7.01. Maintenance of Existence......................................................................... 47
Section 7.02. Conduct of Business.............................................................................. 47
Section 7.03. Maintenance of Properties........................................................................ 48
Section 7.04. Maintenance of Records........................................................................... 48
Section 7.05. Maintenance of Insurance......................................................................... 48
Section 7.06. Compliance with Laws............................................................................. 48
Section 7.07. Right of Inspection.............................................................................. 48
Section 7.08. Reporting Requirements........................................................................... 48
Section 7.09. Payment of Obligations........................................................................... 51
Section 7.10. Subsidiary Guarantee............................................................................. 52
Section 7.11. Notices With Respect to Certain Debts............................................................ 52
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Section 7.12. Use of Proceeds.................................................................................. 52
Section 7.13. Solvency......................................................................................... 52
ARTICLE 8. NEGATIVE COVENANTS.................................................................................. 52
Section 8.01. Debt............................................................................................. 52
Section 8.02. Liens............................................................................................ 53
Section 8.03. Investments ..................................................................................... 54
Section 8.04. Sale of Assets................................................................................... 55
Section 8.05. Transactions with Affiliates..................................................................... 55
Section 8.06. Mergers, Etc..................................................................................... 56
Section 8.07. Acquisitions..................................................................................... 56
Section 8.08. No Activities Leading to Forfeiture.............................................................. 56
Section 8.09. Corporate Documents; Fiscal Year................................................................. 56
Section 8.10. Redemptions, Etc................................................................................. 56
Section 8.11. Creation of Subsidiaries, Etc.................................................................... 56
Section 8.12. Real Estate Loans to Affiliates.................................................................. 57
Section 8.13. Loans to Affiliates; Distributions............................................................... 57
Section 8.14. Broker's Fees.................................................................................... 57
Section 8.15. Dividends........................................................................................ 57
Section 8.16. Nature of Business............................................................................... 57
ARTICLE 9. FINANCIAL COVENANTS................................................................................. 57
Section 9.01. Minimum Effective Net Worth...................................................................... 57
Section 9.02. Current Ratio.................................................................................... 58
Section 9.03. Maximum Leverage................................................................................. 58
Section 9.04. Maximum Capital Expenditures..................................................................... 58
Section 9.05. Minimum Interest Coverage Ratio.................................................................. 58
Section 9.06. Positive Earnings................................................................................ 59
ARTICLE 10. EVENTS OF DEFAULT.................................................................................. 59
Section 10.01. Events of Default............................................................................... 59
Section 10.02. Remedies........................................................................................ 61
ARTICLE 11. THE AGENT AND THE ISSUING BANK; RELATIONS AMONG BANKS.............................................. 62
Section 11.01. Appointment, Powers and Immunities of Agent..................................................... 62
Section 11.02. Reliance by Agent and Issuing Bank.............................................................. 63
Section 11.03. Defaults........................................................................................ 63
Section 11.04. Rights of Agent and Issuing Bank................................................................ 64
Section 11.05. Indemnification of Agent........................................................................ 64
Section 11.06. Documents....................................................................................... 65
Section 11.07. Non-Reliance on Agent, Issuing Bank and Other Banks............................................. 65
Section 11.08. Failure of Agent or the Issuing Bank to Act..................................................... 66
Section 11.09. Resignation or Removal of Agent................................................................. 66
Section 11.10. Amendments Concerning Agency and Issuing Bank Function.......................................... 66
</TABLE>
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<TABLE>
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Section 11.11. Liability of Agent, Issuing Bank and Banks...................................................... 67
Section 11.12. Transfer of Agency Function..................................................................... 67
Section 11.13. Non-Receipt of Funds by the Agent............................................................... 67
Section 11.14. Withholding Taxes............................................................................... 67
Section 11.15. Several Obligations and Rights of Banks......................................................... 68
Section 11.16. Pro Rata/Non Pro Rata Treatment of Loans........................................................ 69
Section 11.17. Sharing of Payments Among Banks................................................................. 69
ARTICLE 12. MISCELLANEOUS ..................................................................................... 70
Section 12.01. Amendments and Waivers.......................................................................... 70
Section 12.02. Usury........................................................................................... 71
Section 12.03. Expenses........................................................................................ 71
Section 12.04. Survival........................................................................................ 71
Section 12.05. Assignment; Participation....................................................................... 72
Section 12.06. Special Provisions with Respect to Permitted Acquisitions....................................... 73
Section 12.07. Notices......................................................................................... 73
Section 12.08. Setoff.......................................................................................... 74
Section 12.09. JURISDICTION; WAIVER OF JURY TRIAL; IMMUNITIES.................................................. 75
Section 12.10. Table of Contents; Headings..................................................................... 76
Section 12.11. Severability.................................................................................... 76
Section 12.12. Counterparts.................................................................................... 76
Section 12.13. Integration..................................................................................... 76
Section 12.14. Governing Law................................................................................... 76
Section 12.15. Treatment of Certain Information................................................................ 76
Section 12.16. Further Rights of the Agent..................................................................... 77
</TABLE>
EXHIBITS
Exhibit A Form of Note
Exhibit B-1 Form of Bid Request
Exhibit B-2 Form of Bid
Exhibit B-3 Form of Bid Acceptance/Rejection
Exhibit C Form of Subsidiary Guarantee
Exhibit D [Intentionally Omitted]
Exhibit E-1 Form of Notice of Borrowing
Exhibit E-2 Form of Notice of Conversion/Continuation
Exhibit F Opinion of New York Counsel for the
Borrower and its Subsidiaries
SCHEDULES
Schedule 6.01 Good Standing
Schedule 6.02 Consents; Conflicts
Schedule 6.04 Litigation
<PAGE>
Schedule 6.08 Unfunded Vested Liabilities
Schedule 6.09 Subsidiaries
Schedule 6.10 Indebtedness/Liens
Schedule 6.16 Partnerships
Schedule 6.17 Forfeiture Proceedings
Schedule 6.21 Names; Trade Styles
<PAGE>
CREDIT AGREEMENT dated as of June 12, 1997, among MSC
INDUSTRIAL DIRECT CO., INC., a corporation organized under the laws of New York
(the "Borrower"), each of the banks now or hereafter parties hereto and FLEET
BANK, NATIONAL ASSOCIATION, a national banking association organized under the
laws of the United States of America, as agent for the Banks (in such capacity,
together with its successors in such capacity, the "Agent") and as issuing bank
(in such capacity, together with its successors in such capacity, the "Issuing
Bank").
W I T N E S S E T H:
WHEREAS, Sid Tool Co., Inc. ("Sid Tool") and certain of its
affiliates (the "Real Estate Borrowers"), certain banks parties thereto (the
"Sid Tool Banks") and the Agent entered into a Credit Agreement dated as of
April 27, 1992, as amended and restated by an Amended and Restated Credit
Agreement dated as of April 27, 1995, as further amended by the First Amendment
to Credit Agreement dated as of August 25, 1995, the Waiver and Second Amendment
to Credit Agreement dated as of December 12, 1995 and the Third Amendment to
Credit Agreement dated as of January 5, 1996 (as so amended, the "Sid Tool
Credit Agreement"), pursuant to which the Sid Tool Banks made certain financial
accommodations thereunder on the terms and subject to the conditions contained
therein; and
WHEREAS, the Borrower has completed the Reorganization (as
defined below) and initial public offering of its Class A common stock; and
WHEREAS, upon consummation of the Reorganization, Sid Tool
became a wholly-owned Subsidiary (as defined below) of the Borrower; and
WHEREAS, the Borrower intends to finance (i) the working
capital and Capital Expenditures needs of its Consolidated Subsidiaries (as
defined below) and (ii) Permitted Acquisitions by the Borrower and any of its
Acquisition Affiliates and (iii) to refinance revolving credit loans made to Sid
Tool, in each such case by obtaining Loans and the issuance of Letters of Credit
for the account of the Borrower and on behalf of the Borrower and its
Subsidiaries; and
WHEREAS, the Borrower has requested the Banks to provide a
commitment to make Loans to the Borrower and issue the aforementioned Letters of
Credit; and
WHEREAS, the Banks are willing to make such Loans and issue
such Letters of Credit on the terms and subject to the conditions contained
herein.
<PAGE>
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS
Section 1.01. Definitions. As used in this Agreement the
following terms have the following meanings (terms defined in the singular to
have a correlative meaning when used in the plural and vice versa):
"Acquisition Affiliate" shall have the meaning given to that
term in Section 12.06 hereof.
"Additional Costs" shall have the meaning given to that term
in Article 4 hereof.
"Affiliate" means any Person: (a) which directly or indirectly
controls, or is controlled by, or is under common control with, the Borrower;
(b) which directly or indirectly beneficially owns or holds 5% or more of any
class of voting stock of the Borrower; (c) 5% or more of the voting stock of
which is directly or indirectly beneficially owned or held by the Borrower; or
(d) which is a partnership in which the Borrower is a general partner. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract, or otherwise.
"Aggregate Bid Loan Outstandings" means, at a particular time,
the aggregate principal amount of the Borrower's obligations to the Banks, or
any of them, in connection with Bid Loans.
"Aggregate Letter of Credit Outstandings" means, at a
particular time, the sum of (a) the aggregate maximum amount then available or
available in the future to be drawn under all Letters of Credit outstanding and
all Sid Tool Letters of Credit at such time plus (b) the aggregate amount of any
payments made by the Issuing Bank or any Bank under, or with respect to, any
Letter of Credit or Sid Tool Letter of Credit that has not theretofore been
reimbursed by or on behalf of the Borrower or one or more of its Subsidiaries.
"Aggregate Outstandings" means, without duplication, at a
particular time, the sum of (a) the Aggregate Letter of Credit Outstandings at
such time, plus (b) the Aggregate Pro Rata Loans Outstandings at such time, plus
(c) the Aggregate Bid Loan Outstandings at such time. plus (d) the Aggregate Sid
Tool Loan Outstandings.
<PAGE>
"Aggregate Pro Rata Loans Outstandings" means, at a particular
time, the aggregate principal amount of the Borrower's obligations to the Banks,
or any of them, in connection with Pro Rata Loans.
"Aggregate Sid Tool Loan Outstandings" means, at a particular
time, the aggregate principal amount of Sid Tool's obligations to the Banks, or
any of them, in connection with the Sid Tool Loans.
"Agreement" means this Credit Agreement, as amended or
supplemented from time to time. References to Articles, Sections, Exhibits,
Schedules and the like refer to the Articles, Sections, Exhibits, Schedules and
the like of this Agreement unless otherwise indicated.
"Banking Day" means any day on which commercial banks are not
authorized or required to close in New York City and whenever such day relates
to a LIBOR Loan or notice with respect to any LIBOR Loan, a day on which
dealings in Dollar deposits are also carried out in the London interbank market.
"Banks" means each Bank listed on the signature pages hereof
under the caption "Banks" and any of their permitted assigns pursuant to Section
12.05 hereof, and any successors of any of the foregoing.
"BA Rate" means, with respect to any Borrowing consisting of
BA Rate Loans, the rate per annum quoted at approximately 11:00 a.m. (New York
time) by the Principal Office on the first day of the Interest Period for such
Borrowing for the acceptance of drafts by the Agent (in its capacity as a Bank)
having a maturity and in a face amount comparable to such Interest Period and
principal amount of the BA Rate Loan to be made by the Agent in its capacity as
a Bank with respect to such Borrowing.
"BA Rate Loan" means any Pro Rata Loan when and to the extent
the interest rate therefor is based on the BA Rate.
"Base Rate" means that rate of interest from time to time
announced by the Agent at the Principal Office as its base commercial lending
rate.
"Base Rate Loan" means any Loan when and to the extent the
interest rate therefor is based on the Base Rate.
"Bid" means an offer by a Bank to make a Bid Loan pursuant to
Section 2.05 hereof substantially in the form of Exhibit B-2 hereto.
<PAGE>
"Bid Acceptance/Rejection" means a notification made by the
Borrower pursuant to Section 2.05 hereof substantially in the form of Exhibit
B-3 hereto.
"Bid Loan" means a Loan made pursuant to the bidding procedure
described in Section 2.05 hereof. Each Bid Loan shall be a Fixed Rate Loan
unless otherwise provided by Article 4, Article 10 or any other applicable
provisions of this Agreement.
"Bid Request" means a request made pursuant to Section 2.05
hereof substantially in the form of Exhibit B-1 hereto.
"Borrowing" means the aggregate amount of Pro Rata Loans to be
made by the Banks, or any of them, to the Borrower pursuant to any one Notice of
Borrowing.
"Capital Expenditures" means expenditures by the Borrower and
the Borrower's Consolidated Subsidiaries for any fixed assets or improvements,
replacements, substitutions, or additions thereto which have a useful life of
more than one (1) year and which would be treated as capital expenditures under
GAAP including, but not limited to, payments under any Capital Leases.
"Capital Lease" means any lease which has been capitalized on
the balance sheet of the lessee in accordance with GAAP.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Commitment" means, with respect to each Bank, the obligation
of such Bank to extend credit to the Borrower hereunder in the aggregate
principal amounts listed on the signature pages hereof with respect to such Bank
or in the assignment agreement pursuant to which such Bank became a "Bank"
hereunder in accordance with Section 12.05 hereof (as such amounts may be
reduced or otherwise modified from time to time as provided in this Agreement).
"Commitment Proportion" means, with respect to each Bank at
the time of determination, that proportion that its Commitment bears to the
Total Commitment.
"Consolidated Subsidiary" means any Subsidiary of any Person
the financial statements of which are, or should be, consolidated with the
financial statements of such Person in accordance with GAAP.
"Debt" means, with respect to any Person (without
duplication): (a) indebtedness of such Person for borrowed money;
(b) indebtedness for the deferred purchase price of property or
<PAGE>
services; (c) Unfunded Vested Liabilities of such Person; (d) the face amount of
any outstanding letters of credit issued for the account of such Person and any
unreimbursed amounts owing with respect to any letters of credit; (e)
obligations arising under acceptance facilities; (f) guaranties, endorsements
(other than for collection in the ordinary course of business) and other
contingent obligations to purchase, to provide funds for payment, to supply
funds to invest in any Person, or otherwise to assure a creditor against loss;
(g) obligations secured by any Lien on property of such Person; (h) obligations
of such Person as lessee under Capital Leases; and (i) indebtedness
of such Person evidenced by a note, bond, indenture or similar instrument.
"Default" means any event which with the giving of notice or
lapse of time, or both, would become an Event of Default.
"Default Rate" means, with respect to any Loan, a rate per
annum equal to 2% above the rate of interest otherwise (assuming no Event of
Default has occurred and is continuing) applicable to the relevant Loan and,
with respect to each Letter of Credit, a rate per annum equal to 2% above the
rate of commission fee otherwise (assuming no Event of Default has occurred and
is continuing) applicable to such Letter of Credit.
"Dividends" means, for any period, dividends paid by the
Borrower, other than dividends payable solely in capital stock of the Borrower.
"Dollars" and the sign "$" mean lawful money of the
United States of America.
"EBIT" means, at any particular date, Net Income plus (i) all
taxes paid, accrued or payable to any government or government instrumentality
(other than real estate taxes, franchise taxes not in the nature of income
taxes, sales taxes, or use taxes), and (ii) all interest paid, accrued or
payable to the Banks or any other holder of Debt.
"Effective Date" means the date this Agreement has been
executed by the Borrower, the Banks, the Issuing Bank and the Agent.
"Effective Net Worth" means, at any particular date, (i) the
amount of the excess of Total Assets over Total Liabilities, excluding, however,
from the determination of Total Assets all intangible assets, including, without
limitation, organizational expenses, patents, trademarks, copyrights, goodwill,
covenants not to compete, research and developmental costs, training costs, and
deferred charges, and excluding, however, from the determination of Total
Liabilities the principal amount of, and the accrued interest with respect to,
<PAGE>
any Debt referenced in Section 8.01(c) hereof, less (ii) all amounts due at any
time and from time to time from Affiliates (other than all amounts (the
"Amounts") due at any time and from time to time from any Affiliates which have
guaranteed the obligations of the Borrower to the Banks under the Facility
Documents in form and substance (with respect to such guarantee) reasonably
satisfactory to the Banks to the extent that such Amounts are included in the
determination of Total Assets) less (iii) all treasury stock.
"Environmental Law" has the meaning ascribed to such term in
the Second Amended and Restated Credit Agreement.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, including any rules and regulations
promulgated thereunder.
"ERISA Affiliate" means any corporation or trade or business
which is aggregated with the Borrower under Section 414(b), (c), (m) or (o) of
the Code or Section 4001 of ERISA.
"Eurocurrency Reserve Requirements" means, with respect to
each Interest Period for each LIBOR Loan, the aggregate (without duplication) of
the maximum rates (expressed as a decimal fraction) of reserve requirements
current on the date two Banking Days prior to the beginning of such Interest
Period (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Federal Reserve Board or other
governmental authority having jurisdiction with respect thereto), as now and/or
from time to time hereafter in effect, dealing with reserve requirements
prescribed for eurocurrency funding maintained by a member bank of such System.
"Event of Default" has the meaning ascribed to such
term in Section 10.01 hereof.
"Facility Documents" means this Agreement, the Notes, the
Subsidiary Guarantees and all other agreements, documents and instruments
executed in connection herewith or therewith including, but not limited to, all
documents and instruments executed by the Borrower or an Acquisition Affiliate
in connection with a Permitted Acquisition.
"Facility Fee" means the facility fee payable by the Borrower
to the Agent for the account of the Banks pursuant to Section 3.04 hereof.
"Federal Funds Rate" means, for any day, the rate per annum
(expressed on an actual number of days to 365/366 days basis of calculation)
equal to the weighted average of the rates on overnight federal funds
transactions as published by the
<PAGE>
Federal Reserve Bank of New York for such day (or for any day that is not a
Banking Day, for the immediately preceding Banking Day).
"Federal Reserve Board" shall mean the Board of Governors of
the Federal Reserve Board, and its successors.
"Final Prospectus" means the final prospectus dated December
14, 1995, relating to the initial public offering of Class A Common Stock of the
Borrower.
"Fixed Rate" means, with respect to any Borrowing consisting
of Fixed Rate Loans, the rate of interest established by each Bank as the rate
of interest for the Bid Loan bearing interest at a fixed rate made or to be made
by such Bank pursuant to a Bid Request.
"Fixed Rate Loan" means each Bid Loan that bears interest at a
Fixed Rate.
"Forfeiture Proceeding" means the commencement of any action
or proceeding affecting the Borrower or any of its Subsidiaries before any
court, governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which may result in the seizure or
forfeiture of any of their property which would cause a material adverse effect
upon the operations, business, properties or financial condition of the Borrower
and its Subsidiaries, taken as a whole, or, when the term (Forfeiture
Proceeding) is used in Section 6.17 hereof, on the ability of the Borrower or
any of its Subsidiaries to perform its obligations hereunder, or, when the term
(Forfeiture Proceeding) is used in Section 10.01(h) hereof, on the ability of
the Borrower and its Subsidiaries, taken as a whole, to perform their
obligations hereunder.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the financial statements
referred to in Section 6.05.
"Hazardous Substance" has the meaning ascribed to such term in
the Second Amended and Restated Credit Agreement.
"Interest Expense" means the Borrower's interest expense as
reflected in its financial statements and calculated in accordance with GAAP.
"Interest Payment Date" means (i) in the case of LIBOR Loans
and BA Rate Loans, the last day of the Interest Period applicable thereto and,
in the case of an Interest Period for any BA Rate Loan longer than 90 days or an
Interest Period for any LIBOR Loan longer than three months, every 90 days and
every
<PAGE>
three months, respectively, (ii) in the case of any Fixed Rate Loans and Base
Rate Loans, the last day of each calendar month, commencing June 30, 1997, (iii)
in the case of all Loans, no later than the Loan Maturity Date.
"Interest Period" means (a) in the case of LIBOR Loans, the
period commencing on the date a LIBOR Loan is made or deemed made pursuant to a
conversion or continuation and ending, as the Borrower may select, on the
numerically corresponding day in the first, second, third, or (as available)
fourth or sixth calendar month thereafter, (b) in the case of BA Rate Loans, the
period commencing on the date a BA Rate Loan is made or deemed made pursuant to
a conversion or continuation and ending, as the Borrower may select, on the
30th, 60th, 90th or (as available) 120th or 180th day thereafter, and (c) in the
case of Fixed Rate Loans, the period commencing on the date a Fixed Rate Loan is
made and ending such number of days thereafter (which shall be not less than 30
days or more than 180 days after the date such Fixed Rate Loan is made), as the
Borrower may select; provided that (x) if any Interest Period would otherwise
end on a day that is not a Banking Day, such Interest Period shall be extended
to the next succeeding Banking Day unless, in the case of an Interest Period
pertaining to a LIBOR Loan, the result of such extension would be to carry such
Interest Period into another calendar month, in which event such Interest Period
shall end on the immediately preceding Banking Day and (y) each such Interest
Period which commences on the last Banking Day of a calendar month, or on any
day for which there is no numerically corresponding day in the appropriate
subsequent calendar month, shall end on the last Banking Day of the appropriate
calendar month. In no event shall any Interest Period extend beyond the Loan
Maturity Date.
"Lending Office" means, for each Bank and for each type of
Loan, the lending office of such Bank (or of an affiliate of such Bank)
designated as such for such type of Loan on its signature page hereof or in an
assignment agreement pursuant to Section 12.05 hereof or such other office of
such Bank (or of an affiliate of such Bank) as such Bank may from time to time
specify to the Agent and the Borrower as the office by which its Loans of such
type are to be made and maintained.
"Letter of Credit" means any letter of credit (including,
without limitation, any Special Letter of Credit) issued by the Issuing Bank for
the account of the Borrower directly or as a financial accommodation for a
Subsidiary of the Borrower pursuant to the terms of this Agreement.
"Letter of Credit Commission Fee" means the letter of credit
commission fee payable by the Borrower to the Agent pursuant to Section 3.05(a)
hereof.
<PAGE>
"L/C Subfacility" means that portion of the Total Commitment
available for the issuance by the Issuing Bank of Letters of Credit, in an
aggregate amount not to exceed $20,000,000 at any time.
"LIBOR" means with respect to any Borrowing consisting of
LIBOR Loans, the rate per annum (rounded upwards if necessary to the nearest
1/16 of 1%) quoted at approximately 11:00 a.m. London time by the principal
London office of the Agent two Banking Days prior to the first day of the
Interest Period for such Borrowing for the offering to leading banks in the
London interbank market of Dollar deposits in immediately available funds, for a
period, and in an amount, comparable to such Interest Period and principal
amount of the LIBOR Loan which shall be made by the Agent (in its capacity as a
Bank) with respect to such Borrowing.
"LIBOR Loan" means any Pro Rata Loan when and to the extent
the interest rate therefor is determined on the basis of Reserve Adjusted LIBOR
Rate.
"Lien" means any lien (statutory or otherwise), security
interest, mortgage, deed of trust, priority, pledge, charge, conditional sale,
title retention agreement, Capital Lease or other encumbrance or similar right
of others, or any agreement to give any of the foregoing.
"Loan" means any Pro Rata Loan or Bid Loan made by a Bank
pursuant to Article 2 hereof or any Sid Tool Loan.
"Loan Maturity Date" means the earlier of (a) the date on
which the (i) Loans shall be indefeasibly paid in full, (ii) Letters of Credit
shall be indefeasibly reimbursed in full, (iii) Commitments shall terminate
hereunder and (iv) obligations of the Borrower in connection with the Loans,
Letters of Credit and Commitments have been satisfied or (b) May 31, 2001;
provided that if such date is not a Banking Day, the Loan Maturity Date shall be
the next succeeding Banking Day (or, with respect to LIBOR Loans, if such next
succeeding Banking Day falls in the next calendar month, the next preceding
Banking Day).
"Margin" means, with respect to BA Rate Loans and LIBOR Loans,
(i) if the ratio of Total Liabilities to Effective Net Worth is less than
0.75:1.00, 0.45%; (ii) if the ratio of Total Liabilities to Effective Net Worth
is equal to or greater than 0.75:1.00 but less than 1.00:1.00, 0.50%; (iii) if
the ratio of Total Liabilities to Effective Net Worth is l.00:1.00 or greater
but less than 1.25:1.00, 0.625%; and (iv) if the ratio of Total Liabilities to
Effective Net Worth is 1.25:1.00 or greater, 0.75%. Nothing contained in this
definition of "Margin" shall affect the rights of the Banks under Article 10 of
this Agreement.
<PAGE>
"Multiemployer Plan" means a Plan defined as such in Section
4001(a)(3) of ERISA to which contributions have been made by the Borrower, any
Subsidiary of the Borrower or any ERISA Affiliate and which is covered by Title
IV of ERISA.
"Net Income" means, with respect to any Person for any period,
such Person's and its Consolidated Subsidiaries' net income for such period
determined on a consolidated basis as reflected on such Person's consolidated
financial statements.
"Note" means a promissory note of the Borrower in the form of
Exhibit A hereto evidencing the Pro Rata Loans made or to be made by a Bank
hereunder and any other promissory note of the Borrower issued in addition
thereto or in substitution therefor.
"Notice of Borrowing" means an irrevocable notice,
substantially in the form of Exhibit E-1 hereto, given by the Borrower to the
Agent in connection with any Borrowing consisting of Pro Rata Loans.
"Notice of Conversion/Continuation" means an irrevocable
notice, substantially in the form of Exhibit E-2 hereto, given by the Borrower
to the Agent with respect to the conversion of Base Rate Loans to LIBOR Loans or
BA Rate Loans, BA Rate Loans to Base Rate Loans or LIBOR Loans or LIBOR Loans to
Base Rate Loans or BA Rate Loans, as the case may be, or a continuation of Base
Rate Loans, BA Rate Loans or LIBOR Loans as such, as the case may be.
"Obligations" means all present and future loans, advances,
liabilities, obligations, covenants, duties, and debts, owing by the Borrower to
the Agent, the Issuing Bank or any Bank, arising under or relating to this
Agreement or any other Facility Document, whether or not evidenced by any note,
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment from others, and any participation by the Banks in any of
the Borrower's debts owing to others), absolute or contingent, due or to become
due, primary or secondary, as principal or guarantor, and including, without
limitation, all interest, charges, expenses, fees, attorneys' fees, filing fees
and any other sums chargeable to the Borrower hereunder, under another Facility
Document, or under any other agreement or instrument with the Agent, the Issuing
Bank or any Bank.
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
<PAGE>
"Permitted Acquisition" means an acquisition permitted by the
terms of Section 12.06 hereof.
"Permitted Assumed Acquisition Debt" means, with respect to
any Subsidiary that is acquired in a Permitted Acquisition, any of the following
Debt of such Subsidiary that was outstanding immediately prior to the closing of
such Permitted Acquisition, was not created or incurred by such Subsidiary in
contemplation of such Permitted Acquisition, remains outstanding Debt of such
Subsidiary on and after such closing or is assumed by the Borrower or an
Acquisition Affiliate, and does not breach (and does not cause or result in any
breach of) any term of this Agreement:
(a) Mortgage term loans secured by Liens on interests
in real estate owned by or leased to such Subsidiary;
(b) Debt in respect of industrial revenue bonds issued for the
benefit of, or issued to finance projects for the benefit of, such
Subsidiary, which Debt may be secured by Liens on interests in the
projects so financed and owned by or leased to such Subsidiary;
(c) Unsecured term debt evidenced by publicly-traded notes
issued by such Subsidiary pursuant to a trust indenture and subject to
the Trust Indenture Act of 1940, as amended; and
(d) Debt arising in respect of revolving credit facilities,
letter of credit facilities, bankers' acceptance facilities and other
similar credit facilities, which Debt may be secured by Liens on
current assets of such Subsidiary; provided, however, that (i) the
maximum amount of all Debt outstanding and available under all of the
foregoing facilities shall not exceed $10,000,000 in the aggregate at
any time, and (ii) within six months after the date of the closing of
such Permitted Acquisition, all of the foregoing facilities shall have
been terminated, all Debt thereunder shall have been repaid in full or
otherwise extinguished, and all Liens securing the same shall have been
released and extinguished.
"Permitted Liens" means those certain Liens defined in Section
8.02 hereof.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association, joint
venture, governmental authority or other entity of whatever nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been
<PAGE>
made, by the Borrower or any ERISA Affiliate.
"Principal Office" means the principal office of the
Agent, presently located at 300 Broadhollow Road, Melville, New York 11747.
"Pro Rata Loan" means any Loan made by a Bank pursuant to
Section 2.01(a) hereof. Each Pro Rata Loan shall be a LIBOR Loan, a BA Rate Loan
or a Base Rate Loan, unless otherwise provided by Article 4, Article 10 or any
other applicable provisions of this Agreement.
"Regulation D" means Regulation D of the Federal Reserve Board
as the same may be amended or supplemented from time to time.
"Regulatory Change" means, with respect to any Bank, any
change in United States federal, state, municipal or foreign laws or regulations
(including Regulation D) or the adoption or making of any interpretations,
directives or requests applying to a class of banks including such Bank of or
under any United States, federal, state, municipal or foreign laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Reorganization" has the meaning given such term in the
Final Prospectus.
"Reportable Event" means any of the events set forth in
Section 4043(b) of ERISA as to which events the PBGC by regulation has not
waived the requirement of Section 4043(a) of ERISA that it be notified within 30
days of the occurrence of such event, provided that a failure to meet the
minimum funding standard of Section 412 of the Code or Section 302 of ERISA
shall be a Reportable Event regardless of any waivers given under Section 412(d)
of the Code.
"Required Banks" means, at any time, Banks having at least
66-2/3% of the aggregate amount of the Commitments and, if the Commitments have
been terminated, Banks having at least 66 2/3% of the Loans outstanding at such
time and participation interests in Aggregate Letter of Credit Outstandings at
such time.
"Reserve Adjusted LIBOR Rate" means, with respect to the
Interest Period for each LIBOR Loan, the rate per annum (rounded upwards to the
nearest whole multiple of 1/100th of one percent) equal to the following:
LIBOR
1.00 - Eurocurrency Reserve Requirements.
<PAGE>
"Revolving Credit Facility" means the Revolving Credit
Facility provided for in Article 2 hereof.
"Second Amended and Restated Credit Agreement" means the Sid
Tool Credit Agreement as amended and restated by a Second Amended and Restated
Credit Agreement dated as of the date hereof among Mitchmar Delaware Properties
Inc., ESCO Management Corp., Sid Tool, Milford Industrial Tool Supply Co., Inc.,
the banks parties thereto and Fleet Bank, National Association, as agent for the
banks parties thereto.
"Sid Tool Letter of Credit" means all letters of credit issued
under the Sid Tool Credit Agreement and not returned to the Issuing Bank (as
defined in the Sid Tool Credit Agreement) and or prior to the date hereof.
"Sid Tool Loan" means each BA Rate Loan or LIBOR Loan which is
a Revolving Credit Loan (as each such term is defined in the Sid Tool Credit
Agreement) made under the Sid Tool Credit Agreement and which are outstanding on
the date hereof.
"Solvent" means, when used with respect to any Person on a
particular date, that on such date: (a) the fair saleable value of its assets is
in excess of the total amount of its liabilities, including, without limitation,
the reasonably expected amount of such Person's obligations with respect to
contingent liabilities, (b) the present fair saleable value of the assets of
such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts and liabilities as they become
absolute and matured, (c) such Person does not intend to, and does not believe
that it will, incur debts or liabilities beyond such Person's ability to pay as
such debts and liabilities mature and (d) such Person is not engaged in business
or a transaction for which such Person's property would constitute an
unreasonably small capital.
"Special Letter of Credit" means each standby Letter of Credit
issued to the respective beneficiary thereof by the Issuing Bank for the account
of the Borrower pursuant to the terms of this Agreement, having an expiration
date not more than one (1) year after the date of issuance thereof and having a
face amount which, when added to all Letters of Credit then outstanding or
issued contemporaneously therewith, would not exceed the L/C Subfacility.
"Special Letter of Credit Commission Fee" means the special
letter of credit commission fee payable by the Borrower to the Agent pursuant to
Section 3.05(c) hereof.
<PAGE>
"Subordinated Debt" means unsecured Debt of the Borrower that
is subordinated on terms satisfactory to the Banks to the Borrower's obligations
to the Banks under this Agreement and the other Facility Documents.
"Subsidiary" means, as to any Person, any corporation or other
entity of which at least a majority of the securities or other ownership
interests having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by such Person.
"Subsidiary Guarantee" means the guarantees of the Obligations
of the Borrower by each Subsidiary of the Borrower and in favor of the Agent and
the Banks in the form of Exhibit C, as the same may be amended, supplemented or
otherwise modified from time to time in accordance with its terms and executed
as of the Effective Date or, if later, on the date of the Permitted Acquisition
pursuant to which a Person became a Subsidiary of the Borrower.
"Total Assets" means, at a particular date, all amounts which
would, in conformity with GAAP, be included as assets on a balance sheet of the
Borrower and its Consolidated Subsidiaries as at such date.
"Total Commitment" means, at any time, the aggregate of
the Commitments in effect at such time. On the Effective Date,
the Total Commitment is $80,000,000.
"Total Current Assets" means, at a particular time, all
amounts which would, in conformity with GAAP, be included as current assets on a
balance sheet of the Borrower and its Consolidated Subsidiaries as at such date.
"Total Current Liabilities" means, at a particular date, all
amounts which would, in conformity with GAAP, be included as current liabilities
on a balance sheet of the Borrower and its Consolidated Subsidiaries as at such
date and shall include, without limitation (a) all obligations payable on demand
or within one year after the date on which the determination is made, and (b)
all obligations of the Borrower under the Revolving Credit Facility.
"Total Liabilities" means, at a particular date, all amounts
which would, in conformity with GAAP, be included as liabilities on a balance
sheet of the Borrower and its Consolidated Subsidiaries as at such date.
"Unfunded Vested Liabilities" means, with respect to any Plan,
the amount (if any) by which the present value of all vested benefits under the
Plan exceeds the fair market value of
<PAGE>
all Plan assets allocable to such benefits, as determined on the most recent
valuation date of the Plan and in accordance with the provisions of ERISA for
calculating the potential liability of the Borrower or any ERISA Affiliate to
the PBGC or the Plan under Title IV of ERISA.
Section 1.02. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP, and all
financial data required to be delivered hereunder shall be prepared in
accordance with GAAP.
Section 1.03. Interpretation. All references in this Agreement
to any other agreement or instrument shall include such other agreement or
instrument as the same may be amended, modified or supplemented from time to
time in accordance with this Agreement. In the computation of interest and fees
payable from a specified date to a later specified date, unless otherwise
indicated, the word "from" means "from and including" and the words "to" and
"until" both mean "to but not including." Wherever appropriate in the context,
terms used herein in the singular also include the plural, and vice versa, and
each masculine, feminine or neuter pronoun shall also include the other genders.
ARTICLE 2. THE LOANS
Section 2.01. The Loans Generally
(a) Subject to the terms and conditions of this Agreement
(including, but not limited to, the provisions of Section 11.16 hereof) and in
reliance upon the representations and warranties set forth herein and upon the
provisions of each Subsidiary Guarantee, each of the Banks severally agrees to
make revolving credit loans in Dollars on a pro rata basis based on its
Commitment Proportion (the "Pro Rata Loans") to the Borrower and to purchase on
a pro rata basis based on its Commitment Proportion participation interests in
Aggregate Letter of Credit Outstandings from time to time from and including the
Effective Date to but excluding the Loan Maturity Date up to but not exceeding
at any one time outstanding the amount of its Commitment; provided, that (i) at
no time shall any Pro Rata Loan be made if after giving effect to such Loan the
sum of the Aggregate Outstandings at the time of such Loan plus the aggregate
principal amount of Loans to be made pursuant to a Bid Acceptance/Rejection or a
Notice of Borrowing would exceed the Total Commitment in effect at such time and
(ii) at all times the outstanding aggregate principal amount of all Pro Rata
Loans and Sid Tool Loans made by each Bank shall equal the product of (a) its
Commitment Proportion times (b) the sum of (i) the aggregate outstanding
principal amount of all Pro Rata Loans and (ii) the aggregate outstanding
principal amount of all Sid Tool Loans.
<PAGE>
Subject to the foregoing limits, the Borrower may borrow, repay and reborrow, on
or after the Effective Date and prior to the Loan Maturity Date, all or a
portion of the Commitments hereunder.
(b) Each Pro Rata Loan shall be made as part of a Borrowing
consisting of Loans made by the Banks ratably in accordance with their
respective Commitment; provided, however, that the failure of any Bank to make
any Pro Rata Loan shall not in itself relieve any other Bank of its obligation
to lend hereunder (it being understood, however, that no Bank shall be
responsible for the failure of any other Bank to make any Loan required to be
made by such other Bank). Each Bid Loan shall be made in accordance with the
procedures set forth in Section 2.05. Each Borrowing of Pro Rata Loans or Bid
Loans shall be (i) in the case of a Borrowing consisting of Bid Loans, in an
aggregate principal amount which is not less than $2,000,000 and not more than
$25,000,000 (or an aggregate principal amount equal to the remaining balance of
the Total Commitment) and (ii) in the case of a Borrowing consisting of Pro Rata
Loans, (A) with respect to BA Rate Loans, in an aggregate principal amount which
is an integral multiple of $100,000 and not less than $1,500,000, (B) with
respect to LIBOR Loans, in an aggregate principal amount which is an integral
multiple of $100,000 and not less than $2,500,000 and (C) with respect to Base
Rate Loans, in an aggregate principal amount which is not less than $250,000,
and, if greater than $250,000, which is an integral multiple of $100,000 (or an
aggregate principal amount equal to the remaining balance of the available
Commitments). Subject to the provisions of Article 3 and Article 10 hereof, the
Borrower shall pay the principal amount of each Pro Rata Loan and each Sid Tool
Loan in full on the Loan Maturity Date.
(c) Each Borrowing of Bid Loans shall be comprised entirely of
Fixed Rate Loans, and each Borrowing consisting of Pro Rata Loans shall be
comprised entirely of LIBOR Loans, BA Rate Loans or Base Rate Loans, as the
Borrower may request pursuant to Section 2.04 hereof. Borrowings of more than
one type of Loan may be outstanding at the same time. For purposes of the
foregoing, Loans having different Interest Periods, regardless of whether they
commence on the same date, shall be considered separate Loans.
Section 2.02. The Notes. The Pro Rata Loans of each Bank shall
be evidenced by a single Note in favor of such Bank, with appropriate
insertions, duly executed and completed by the Borrower. Each Bank is hereby
authorized to record the date and amount of each Pro Rata Loan, the date and
amount of each payment of principal thereof, and the principal amount subject
thereto and interest rate with respect thereto in such Bank's records and/or on
the schedules annexed to and constituting a part of its Note, and, absent
manifest error, any such recordation shall
<PAGE>
constitute conclusive evidence of the information so recorded; provided that the
failure to make any such recordation shall not in any way affect the Borrower's
obligation to repay the Pro Rata Loans. Each Note (a) shall be dated the
Effective Date, (b) be stated to mature on the Loan Maturity Date and (c) shall
bear interest from and including the Effective Date on the unpaid principal
amount thereof from time to time outstanding as provided herein.
Section 2.03. Use of Proceeds. The Borrower shall use the
proceeds of the Loans solely to refinance the revolving credit loans made to Sid
Tool and outstanding on the date hereof under the Sid Tool Credit Agreement, to
finance the working capital and Capital Expenditures needs of its Consolidated
Subsidiaries and to finance Permitted Acquisitions by the Borrower and any of
its Acquisition Affiliates and to refinance any Loans made in connection with
any of the foregoing. No part of the proceeds of any of the Loans will be used
for any purpose which violates the provisions of Regulation G, T, U or X of the
Federal Reserve Board as in effect on the date of making such Loans.
Section 2.04. Borrowing Procedures for Pro Rata Loans. In
order to request Pro Rata Loans, the Borrower shall give the Agent a duly
completed Notice of Borrowing (i) for each Borrowing consisting of BA Rate Loans
or Base Rate Loans, not later than 10:00 a.m. (New York time) on the date of
such Borrowing; and (ii) for each Borrowing consisting of LIBOR Loans, not later
than 10:00 a.m. (New York time) two Banking Days before the date of such
Borrowing. Each such Notice of Borrowing shall specify: (i) the type of Loans
comprising such Borrowing; (ii) the amount of such Borrowing; (iii) the date of
such Borrowing, which shall be a Banking Day prior to the Loan Maturity Date;
and (iv) in the case of a Borrowing consisting of LIBOR Loans or BA Rate Loans,
the duration of the Interest Period applicable to the Loans comprising such
Borrowing, which shall be a period permitted by the definition of "Interest
Period" in Article 1 hereof. Each Borrowing consisting of Pro Rata Loans shall
be made ratably from the Banks in proportion to each Bank's Commitment
Proportion. Upon receipt by the Agent of a Notice of Borrowing as aforesaid, the
Agent shall promptly advise each Bank thereof (i) by telephone (confirmed in
writing), in the case of BA Rate Loans and Base Rate Loans and (ii) by telecopy,
in the case of LIBOR Loans. Not later than 11:00 a.m. (New York time) on the
date of such Borrowing, each Bank shall, through its Lending Office and subject
to the conditions of this Agreement, make the amount of the Pro Rata Loan to be
made by it on such day available to the Agent, at the Principal Office and in
immediately available funds for the account of the Borrower. The amount received
by the Agent shall, subject to the conditions of this Agreement, be made
available by the Agent to the Borrower, not later than 1:00 p.m. on such date,
in immediately available funds, by the Agent
<PAGE>
crediting an account of the Borrower designated by the Borrower and maintained
with the Agent at 300 Broadhollow Road, Melville, New York 11747.
Section 2.05. Bid Procedure.
(a) In order to request Bid Loans, the Borrower shall hand
deliver or telecopy to the Agent a duly completed Bid Request, to be received by
the Agent not later than 10:00 a.m. (New York time) one Banking Day before such
proposed Borrowing. A Bid Request that does not conform substantially to the
format of Exhibit B-1 may be rejected in the Agent's sole discretion, and the
Agent shall promptly notify the Borrower of such rejection by telecopy. Each Bid
Request shall refer to this Agreement and specify (x) the date of such Borrowing
of Bid Loans (which shall be a Banking Day) and the aggregate principal amount
of such Borrowing which shall be in a minimum principal amount of $2,000,000 and
a maximum principal amount of $25,000,000, subject to the provisions of Section
2.05(d) hereof and (y) the Interest Period with respect thereto. In no event
shall the Aggregate Bid Loan Outstandings at any time exceed fifty percent (50%)
of the Total Commitment at such time. Promptly after its receipt of a Bid
Request that is not rejected as aforesaid, the Agent shall telecopy to the Banks
a copy of the Bid Request inviting the Banks to bid, on the terms and conditions
of this Agreement, to make Bid Loans.
(b) Each Bank may, in its sole discretion, make one or more
Bids to the Borrower responsive to such Borrower's Bid Request. Each Bid by a
Bank must be received by the Agent by telecopy not later than 10:00 a.m. (New
York time) on the day of such proposed Borrowing. Multiple Bids will be accepted
by the Agent. Bids that do not conform substantially to the format of Exhibit
B-2 may be rejected by the Agent, and the Agent shall notify the Bank making
such nonconforming bid of such rejection as soon as practicable. Each Bid shall
refer to this Agreement and specify (x) the principal amount (which shall be in
a minimum principal amount of $2,000,000 and a maximum principal amount of
$25,000,000 and which may equal the entire principal amount of the Bid Loans
requested) of the Bid Loan or Bid Loans that the Bank is willing to make, (y)
the Fixed Rate or Fixed Rates at which the Bank is prepared to make the Bid Loan
or Bid Loans and (z) the Interest Period and the last day thereof. If any Bank
invited to bid shall elect not to make a Bid, such Bank shall so notify the
Agent by telecopy not later than 10:00 a.m. (New York time) on the day of such
proposed Borrowing; provided, however, that failure by any Bank to give such
notice shall be deemed to be an election not to make a Bid, and such failure
shall accordingly not cause such Bank to be obligated to make any Bid Loan as
part of such Borrowing.
(c) The Agent shall promptly notify the Borrower, by
telecopy, of all the conforming Bids made, the Fixed Rate and the principal
amount of each Bid Loan in respect of which a Bid was made and the identity of
the Bank that made each Bid. The Agent shall send a copy of all Bids to the
Borrower for its records as
<PAGE>
soon as practicable after completion of the bidding process set forth in this
Section 2.05.
(d) The Borrower may in its sole and absolute discretion,
subject only to the provisions of this paragraph (d), accept or reject any Bid
referred to in paragraph (c) above. The Borrower shall notify the Agent by
telephone, confirmed by telecopy in the form of a Bid Acceptance/Rejection,
whether and to what extent it has decided to accept or reject any of or all the
bids referred to in paragraph (c) above not more than one hour after it shall
have been notified of such bids by the Agent pursuant to such paragraph (c);
provided, however, that (i) the failure of the Borrower to give such notice
shall be deemed to be a rejection of all the Bids referred to in paragraph (c)
above, (ii) the Borrower shall not accept a Bid made at a particular Fixed Rate
if it has decided to reject a Bid made at a lower Fixed Rate, (iii) the
aggregate amount of the Bids accepted by the Borrower shall not exceed the
principal amount specified in the Bid Request, (iv) if the Borrower shall accept
a Bid or Bids made at a particular Fixed Rate but the amount of such Bid or Bids
shall cause the total amount of Bids to be accepted to exceed the amount
specified in the Bid Request, then the Borrower shall accept a portion of such
Bid or Bids in an amount equal to the amount specified in the Bid Request less
the amount of all other Bids accepted with respect to such Bid Request, which
acceptance, in the case of multiple Bids at such Fixed Rate, shall be made pro
rata in accordance with the amount of each such bid at such Fixed Rate, and (v)
except pursuant to clause (iv) above, no Bid shall be accepted for a Bid Loan
unless such Bid Loan is in a minimum principal amount of $2,000,000 and a
maximum principal amount of $25,000,000 provided further, however, that if a Bid
Loan must be in an amount less than $2,000,000 because of the provisions of
clause (iv) above, such Bid Loan shall be for a minimum of $1,000,000, and in
calculating the pro rata allocation of acceptances of portions of multiple Bids
at a particular Fixed Rate pursuant to clause (iv) the amounts shall be rounded
to integral multiples of $1,000,000 in a manner which shall be in the discretion
of the Agent.
(e) The Agent shall promptly notify each bidding Bank whether
or not its Bid has been accepted (and if so, in what amount and at what Fixed
Rate) by telecopy, and each successful bidder will thereupon become bound,
subject to the other applicable conditions hereof, to make the Bid Loan in
respect of which its bid has been accepted.
(f) No Bid Loan shall be requested or made hereunder
if after giving effect thereto any of the conditions set forth in clauses (i)
or (ii) of Section 2.01(a) would not be met.
(g) If the Agent shall elect to submit a Bid in its capacity
as a Bank, it shall submit such Bid directly to the
<PAGE>
Borrower one quarter of an hour earlier than the latest time at which the other
Banks are required to submit their bids to the Agent pursuant to paragraph (b)
above.
(h) All notices, submissions and other communications
pursuant to this Section 2.05 shall be irrevocable.
(i) Subject to the provisions of Article 3 and Article 10
hereof, the Borrower shall pay the principal amount of each Bid Loan in full on
the last day of the Interest Period thereof.
Section 2.06. Interest on Loans.
(a) Subject to the provisions of subsection (e) of this
Section 2.06, LIBOR Loans and BA Rate Loans shall bear interest (computed on the
basis of the actual number of days elapsed over a year of 360 days) at a rate
per annum equal to the LIBOR Rate or BA Rate, as the case may be, for the
Interest Period in effect for such Loan plus the Margin from time to time in
effect.
(b) Subject to the provisions of subsection (e), Base Rate
Loans shall bear interest (computed on the basis of the actual number of days
elapsed over a year of 360 days) at a rate per annum equal to the Base Rate.
Each change in the interest rate for any Base Rate Loans shall take effect
simultaneously with the corresponding change in the Base Rate.
(c) Subject to the provisions of subsection (e), each Fixed
Rate Loan shall bear interest at a rate per annum (computed on the basis of the
actual number of days elapsed over a year of 360 days) equal to the fixed rate
of interest offered by the Bank making such Loan and accepted by the Borrower
pursuant to Section 2.05.
(d) Interest on each Loan shall be payable on each Interest
Payment Date applicable to such Loan except as otherwise provided in this
Agreement. The applicable BA Rate for each Interest Period applicable to BA Rate
Loans shall be determined by the Agent, and such determination shall be
conclusive absent manifest error.
(e) Any amount not paid when due (at maturity, on
acceleration, or otherwise) shall bear interest thereafter until paid at the
Default Rate. Such interest shall be payable on demand.
Section 2.07. Reductions in Commitments.
(a) At any time after the date twelve (12) months after the
date of this Agreement, the Borrower shall have the right on three Banking Days
prior written notice to reduce or
<PAGE>
terminate the amount of the unused Total Commitment, provided that: (i) the
Borrower shall give notice of each such reduction or termination to the Agent as
provided in Section 3.01; and (ii) each partial reduction shall be in an
aggregate amount at least equal to $10,000,000 or, if greater, in integral
multiples of $1,000,000.
(b) The Total Commitment, once reduced or terminated,
may not be reinstated or increased.
(c) Each reduction in the Total Commitment pursuant to this
Section 2.07 shall reduce each Bank's obligation to make Loans proportionately
in accordance with its Commitment Proportion.
Section 2.08. Adjustments to Applicable Margin. The applicable
Margin shall be reset quarterly for the next succeeding fiscal quarter, based
upon the Borrower's ratio of Total Liabilities to Effective Net Worth, as
reflected in the Borrower's quarterly and year-end financial statements,
effective, in each case, as of the date such financial statements are required
to be delivered hereunder.
ARTICLE 2A. LETTERS OF CREDIT
Section 2A.01. Agreement to Issue. Subject to the terms and
conditions of this Agreement and in reliance upon the representations and
warranties of the Borrower herein set forth and upon the provisions of each
Subsidiary Guarantee, the Issuing Bank hereby agrees to issue for the account of
the Borrower and as a financial accommodation for the Borrower's Subsidiaries,
or any of them, one or more Letters of Credit in accordance with this Article
2A, from time to time during the period commencing on the Effective Date and
ending on the Loan Maturity Date.
Section 2A.02. Amounts; Tenor. The Issuing Bank shall
not have any obligation to issue any Letter of Credit at any
time:
(a) if, after giving effect to the issuance of the requested
Letter of Credit, (i) the sum of the Aggregate Letter of Credit Outstandings of
the Borrower would exceed the L/C Sub-facility then in effect, or (ii) the
Aggregate Outstandings would exceed the Total Commitment; or
(b) (i) in the case of any Special Letter of Credit, if such
Letter of Credit has an expiration date more than one (1) year after the date of
issuance thereof, and (ii) in the case of any other Letter of Credit, if such
Letter of Credit has an expiration date more than 180 days after the date of
issuance thereof.
<PAGE>
Section 2A.03. Conditions. In addition to being subject to the
satisfaction of the conditions precedent contained in Article 5 hereof, the
obligation of the Issuing Bank to issue any Letter of Credit is subject to the
following conditions precedent having been satisfied in a manner satisfactory to
the Issuing Bank and the Agent:
(a) The Borrower shall have delivered to the Issuing Bank at
such times and in such manner as the Issuing Bank may prescribe an application
in form and substance satisfactory to the Issuing Bank for the issuance of the
Letter of Credit and such documents as may be required pursuant to the terms
thereof, and the form and terms of the proposed Letter of Credit shall be
satisfactory to the Agent and the Issuing Bank;
(b) as of the date of issuance, no order of any court,
arbitrator or public authority having jurisdiction or authority over the
proposed issuer shall purport by its terms to enjoin or restrain money center
banks generally from issuing letters of credit of the type and in the amount of
the proposed Letter of Credit and no law, rule or regulation applicable to money
center banks generally and no request or directive (whether or not having the
force of law) from any public authority with jurisdiction over money center
banks generally shall prohibit, or request that the Issuing Bank refrain from,
the issuance of letters of credit generally or the issuance of such Letter of
Credit, as the case may be; and
(c) the Borrower shall have appointed the Agent as its
attorney, with full power and authority: (i) to sign and/or endorse the
Borrower's name upon any warehouse or other receipts or Letter of Credit
applications; (ii) to sign the Borrower's name on bills of lading; (iii) to
clear inventory through U.S. Customs in the Borrower's name or the name of the
Agent, and to sign and deliver to U.S. Customs officials powers of attorney in
the Borrower's name for such purpose; (iv) to complete in the Borrower's name or
Agent's name any order, sale or transaction, obtain the necessary documents in
connection therewith and collect the proceeds thereof; and (v) to do such other
acts and things as are necessary to carry out the terms of this Agreement in
order to enable the Agent to obtain payment of all obligations of the Borrower
hereunder.
Section 2A.04. Issuance of Letters of Credit.
(a) Request for Issuance. The Borrower shall give the
Agent written notice, no later than one (1) Banking Day prior to the proposed
date of issuance of the Letter of Credit, containing the original signature of
an authorized officer of the Borrower, of the Borrower's request for the
issuance of a Letter of Credit. Such notice shall be irrevocable and shall
specify the face
<PAGE>
amount of the Letter of Credit requested, the effective date (which date shall
be a Banking Day) of issuance of such requested Letter of Credit, the date on
which such requested Letter of Credit is to expire (which date shall be a
Banking Day), the purpose for which such Letter of Credit is to be issued, the
beneficiary of the requested Letter of Credit, whether such Letter of Credit may
be drawn in a single or in partial draws and whether such Letter of Credit is to
be issued to replace a letter of credit (including letters of credit issued
other than pursuant to this Agreement). The Borrower shall attach to such notice
the form of the Letter of Credit that the Borrower requests that the Issuing
Bank issue.
(b) Responsibilities of the Agent; Issuance. The Agent shall
determine, as of the Banking Day immediately preced- ing the requested effective
date of issuance of the Letter of Credit set forth in the notice from the
Borrower, the amount of the unused L/C Subfacility and the unused Total
Commitment as of such date. If (i) the form of the Letter of Credit delivered
by the Borrower to the Agent is acceptable to the Agent in its reasonable
discretion, (ii) the undrawn face amount of the requested Letter of Credit is
less than or equal to each of such unused L/C Subfacility and the unused Total
Commitment, and (iii) the applicable conditions set forth in Article 5 hereof
have been satisfied, then the Agent shall direct the Issuing Bank to issue such
Letter of Credit for the account of the Borrower.
Section 2A.05. Letter of Credit Obligations; Duties of
Issuing Bank.
(a) Reimbursement. Notwithstanding any provisions to the
contrary in any document or documents delivered pursuant to Section 2A.03
hereof, the Borrower shall reimburse the Issuing Bank for any drawings or
payments (whether partial or full) under any Letter of Credit immediately after
the payment by the Issuing Bank. Any drawings not paid when due under the terms
of such Letter of Credit or any document pertaining thereto shall bear interest,
payable on demand, at the Default Rate until the Issuing Bank is reimbursed in
full.
(b) Duties of Issuing Bank. Any action taken or omitted to be
taken by the Issuing Bank under or in connection with any Letter of Credit, if
taken or omitted in the absence of gross negligence or willful misconduct, shall
not put the Issuing Bank under any resulting liability to any Bank, or relieve
any Bank of its obligations hereunder to the Issuing Bank. In determining
whether to pay under any Letter of Credit, the Issuing Bank shall have no
obligation relative to any Bank other than to confirm that any documents
required to have been delivered under such Letter of Credit appear to comply
on their face with the requirements of such Letter of Credit.
<PAGE>
Section 2A.06. Participations.
(a) Purchase of Participations. Immediately upon issuance by
the Issuing Bank of any Letter of Credit in accordance with Section 2A.04
hereof, each Bank shall be deemed to have irrevocably and unconditionally
purchased and received, without recourse or warranty, an undivided interest and
participation in such Letter of Credit equal to such Bank's Commitment
Proportion of the face amount thereof (including, without limitation, all
obligations of the Borrower with respect thereto, other than amounts owing to
the Issuing Bank under Section 3.05 hereof, and any security therefor or
guaranty pertaining thereto).
(b) Sharing of Letter of Credit Payments. In the event that
the Issuing Bank makes a payment under any Letter of Credit and the Issuing Bank
shall not have been repaid such amount pursuant to Section 2A.07 hereof, the
Agent shall notify each Bank, and each Bank shall unconditionally pay to the
Agent at its principal office for the account of the Issuing Bank, as and when
provided hereinbelow, an amount equal to such Bank's Commitment Proportion of
the amount of such payment in Dollars and in immediately available funds. If the
Agent so notifies the Banks by not later than 11:00 a.m. (New York time) on any
Banking Day, each Bank shall make available to the Agent the amount of such
payment, as provided in the immediately preceding sentence, on such Banking Day.
If the Agent so notifies the Banks after 11:00 a.m. (New York time) on any
Banking Day, each Bank shall make available to the Agent the amount of such
payment, as provided in the second preceding sentence, together with interest
thereon at the Federal Funds Rate, by not later than 11:00 a.m. (New York time)
on the next Banking Day. Such amounts paid by the Banks to the Agent shall
constitute Loans which shall be deemed to have been requested by the Borrower
pursuant to Article 2 hereof.
(c) Sharing of Reimbursement Obligation Payments. Whenever the
Agent receives a payment from the Borrower on account of a reimbursement
obligation as to which the Agent has previously received for the account of the
Issuing Bank payment from a Bank pursuant to this Section 2A.06, the Agent shall
promptly pay to such Bank, such Bank's Commitment Proportion of such payment
from the Borrower in Dollars. Each such payment shall be made by the Agent on
the Banking Day on which the Agent receives immediately available funds paid to
such Person pursuant to the immediately preceding sentence, if received prior to
11:00 a.m. (New York time) on such Banking Day and otherwise on the next
succeeding Banking Day.
(d) Obligations Irrevocable. The obligations of each Bank to
make payments to the Agent with respect to any Letter of Credit or with respect
to any guaranty or reimbursement obligation of the Agent with respect to any
Letter of Credit, and the obligations
<PAGE>
of the Borrower to make payments to the Agent, for the account of the Banks,
shall be irrevocable, not subject to any qualification or exception whatsoever
and shall be made in accordance with the terms and conditions of this Agreement
(assuming, in the case of the obligations of the Banks to make such payments,
that the Agent has caused such Letter of Credit to be issued in accordance with
Section 2A.04 hereof), including, without limitation, any of the following
circumstances:
(i) Any lack of validity or enforceability
of this Agreement or any of the other Facility Documents;
(ii) The existence of any claim, set-off, defense or
other right which the Borrower may have at any time against a
beneficiary named in a Letter of Credit or any transferee of any Letter
of Credit (or any Person for whom any such transferee may be acting),
any Bank, the Issuing Bank, or any other Person, whether in connection
with this Agreement, any Letter of Credit, the transactions
contemplated herein or any unrelated transactions (including any
underlying transactions between the Borrower or any other Person and
the beneficiary named in any Letter of Credit) or any failure of the
Agent to notify a Bank of the issuance, extension or renewal of a
Letter of Credit;
(iii) Any draft, certificate or any other document
presented under any Letter of Credit upon which payment has been made
in good faith and according to its terms proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect;
(iv) The surrender or impairment of any
security for the performance or observance of any of
the terms of any of the Facility Documents; or
(v) The occurrence of any Default or Event
of Default.
Section 2A.07. Payment of Letter of Credit
Reimbursement Obligations.
(a) Payment to Issuing Bank. The Borrower absolutely and
unconditionally agrees to pay to the Agent the amount of all Letter of Credit
reimbursement obligations and other amounts payable to the Issuing Bank under
or in connection with any Letter of Credit immediately when due in immediately
available funds, irrespective of any claim, set-off, defense or other right
which the Borrower may have at any time against the Issuing Bank
<PAGE>
or any other Person. The obligation of the Borrower to reimburse or pay the
Agent, the Issuing Bank or the Banks as provided hereunder in respect of
drawings under Letters of Credit shall rank pari passu with the obligation of
the Borrowers to repay the Loans hereunder, and shall be absolute and
unconditional under any and all circumstances. Without limiting the generality
of the foregoing, the obligation of the Borrower to reimburse the Agent in
respect of drawings under Letters of Credit shall not be subject to any defense
based on the non-application or misapplication by the beneficiary of any of the
proceeds of any such payment or the legality, validity, regularity or
enforceability of the Letters of Credit or any related document or any dispute
between or among the Borrowers, the beneficiary of any Letter of Credit or any
financing institution or other party to which any Letter of Credit may be
transferred.
(b) Recovery or Avoidance of Payments. In the event any
payment by or on behalf of the Borrower received by the Agent with respect to
any Letter of Credit (or any guaranty or reimbursement obligation relating
thereto) and distributed by the Agent to the Banks on account of their
respective participations therein is thereafter set aside, avoided or recovered
from the Agent or the Issuing Bank in connection with any receivership,
liquidation or bankruptcy proceeding, the Banks shall, upon demand by the Agent,
pay to the Agent, for its account or the account of the Issuing Bank, their
respective Commitment Proportions of such amount set aside, avoided or recovered
together with interest at the rate required to be paid by the Agent or the
Issuing Bank upon the amount required to be repaid by it.
Section 2A.08. Indemnification; Exoneration.
(a) Indemnification. In addition to amounts payable as
elsewhere provided in this Article 2A, the Borrower agrees to protect,
indemnify, pay and save the Banks, the Issuing Bank and the Agent harmless from
and against any and all claims, demands, liabilities, damages, losses, costs,
charges and expenses (including reasonable attorneys' fees) which any Bank, the
Issuing Bank or the Agent may incur or be subject to as a consequence, directly
or indirectly, of (i) the issuance of any Letter of Credit other than as a
result of its gross negligence or willful misconduct, or (ii) the failure of the
Issuing Bank to honor a drawing under any Letter of Credit as a result of any
act or omission, whether rightful or wrongful, of any present or future de jure
or de facto public authority (all such acts or omissions being hereinafter
referred to collectively as "Government Acts").
(b) Assumption of Risk by the Borrower. As among the
Borrower, the Banks, the Issuing Bank and the Agent, the Borrower assumes all
risks of the acts and omissions of, or misuse of any Letter of Credit by, the
respective beneficiaries of such Letter
<PAGE>
of Credit. In furtherance and not in limitation of the foregoing, subject to the
provisions of the applications for the issuance of Letters of Credit, the Banks,
the Issuing Bank and the Agent shall not be responsible for: (i) the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted by any Person in connection with the application for and issuance of
and presentation of drafts with respect to any of the Letters of Credit, even if
it should prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (ii) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any Letter of
Credit or the rights or benefits thereunder or proceeds thereof, in whole or in
part, which may prove to be invalid or ineffective for any reason; (iii) errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher;
(iv) errors in interpretation of technical terms; (v) any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any Letter of Credit or of the proceeds thereof; (vi) the misapplication
by the beneficiary of any Letter of Credit or the proceeds of any drawing under
any Letter of Credit; or (vii) any consequences arising from causes beyond the
control of the Banks, the Issuing Bank or the Agent, including, without
limitation, any Government Acts. None of the foregoing shall affect, impair or
prevent the vesting of any of the Issuing Bank's, the Agent's or any Bank's
rights or powers under this Section 2A.08.
(c) Exoneration. In furtherance and extension, and not in
limitation, of the specific provisions set forth above, any action taken or
omitted by the Agent or Issuing Bank under or in connection with any Letter of
Credit or any related certificates, if taken or omitted in good faith, shall not
put any Bank, the Issuing Bank or the Agent under any resulting liability to the
Borrower or relieve the Borrower of any of its obligations hereunder to any such
Person.
Section 2A.09. Sid Tool Letters of Credit. In the event that
any Sid Tool Letter of Credit is outstanding on the date hereof, all provisions
of Section 2A.05, 2A.06, 2A.07, 2A.08 and 10.02 hereof shall apply to each such
Sid Tool Letter of Credit to the same extent as if it were a Letter of Credit
issued pursuant to the terms of this Agreement and, for purposes of determining
the available L/C Subfacility at any time, the face amount of such Sid Tool
Letters of Credit shall be added to the face amount of all Letters of Credit
then outstanding or to be issued at such time.
ARTICLE 3. GENERAL CREDIT PROVISIONS;
FEES AND PAYMENTS; NOTICE OF CONVERSION/CONTINUATION
<PAGE>
Section 3.01. Certain Notices. Notices by the Borrower to the
Agent of each Borrowing pursuant to Section 2.04 or Section 2.05 hereof, each
Notice of Conversion/Continuation pursuant to Section 3.07 hereof, each
prepayment pursuant to Section 3.02 hereof and each reduction or termination of
Commitments pursuant to Section 2.07 hereof shall be in writing and shall be
irrevocable. The Agent shall promptly notify the Banks of the contents of each
such notice.
Section 3.02. Prepayments.
(a) Mandatory Prepayment on Reduction of Total Commitment. On
the date of any reduction of the Commitments as provided in Section 2.07, the
Borrower shall pay or prepay so much of the Loans and the Aggregate Letter of
Credit Outstandings as shall be necessary in order that the Aggregate
Outstandings will not exceed the Total Commitment after giving effect to such
reduction. Such prepayment shall be accompanied by any and all amounts related
thereto under Article 4 hereof.
(b) Application of Mandatory Prepayments. All
prepayments required by paragraph (a) above shall be applied pro
rata to Loans outstanding and Aggregate Letter of Credit Outstandings.
(c) Accrued Interest. All prepayments made pursuant
to this Section 3.02 shall be accompanied by the payment of all accrued
interest on the amount so prepaid.
Section 3.03. Agency Fees.
(a) The Borrower shall pay to the Agent, for the Agent's own
account, the agency fees set forth in the letter agreement dated April 4, 1995,
as the same has been or hereafter may be amended, supplemented, restated or
otherwise modified, between the Borrower and the Agent.
Section 3.04. Facility Fee. The Borrower shall pay to the
Agent for the account of each Bank a facility fee for the period from and
including the Effective Date to the Loan Maturity Date equal to such Bank's
Commitment Proportion of one-eighth of one percent (0.125%) of the average daily
difference of (a) the Total Commitment minus (b) the Aggregate Outstandings. The
facility fee shall be calculated on the basis of a year of 360 days for the
actual number of days elapsed. The facility fee shall be due and payable monthly
in arrears on the last day of each calendar month in respect of such calendar
month, commencing June 30, 1997, and on the Loan Maturity Date. The facility fee
shall be earned as accrued and be non-refundable when paid.
Section 3.05. Compensation for Letters of Credit.
<PAGE>
(a) In connection with the establishment of each Letter of
Credit which is not also a Special Letter of Credit, the Borrower agrees to pay
to the Agent, for the sole account of the Issuing Bank, such fees and other
charges as are charged by the Issuing Bank for Letters of Credit issued by it,
including, without limitation, its standard fees for issuing, administering,
amending, renewing, paying and cancelling letters of credit, as and when
assessed.
(b) Notwithstanding subsection (a) of this Section 3.05 and
except as otherwise provided in subsection (c) of this Section 3.05, commission
fees on Letters of Credit (e.g., payment commissions) which are less than or
equal to the normal and customary minimum payment commission charged by the
Agent shall be allocated by the Agent to the Banks as follows:
(i) the portion of the minimum fee paid by the Borrower equal
to the actual payment commission shall be allocated by the Agent to the
Banks pro rata in accordance with their respective Commitment
Proportions; and
(ii) that portion of the minimum fee paid by the Borrower over
the actual payment commission shall be retained by the Agent for its
own account.
Commission fees on Letters of Credit (e.g., payment commissions) in excess of
the normal and customary minimum payment commission charged by the Agent shall
be allocated by the Agent to the Banks pro rata in accordance with their
respective Commitment Proportions.
(c) In connection with the establishment of each Special
Letter of Credit, the Borrower agrees to pay to the Agent a commission fee (the
"Special Letter of Credit Commission Fee") equal to one percent (1.0%) per annum
of the undrawn face amount of such Special Letter of Credit. The Special Letter
of Credit Commission Fee shall be payable in advance (i) upon the issuance of
each Special Letter of Credit for the number of days remaining in the month
during which such Special Letter of Credit was issued and (ii) thereafter,
monthly, on the first day of each month or part thereof during which such
Special Letter of Credit remains outstanding. The Letter of Credit Fee shall be
computed on the basis of a 360-day year for the actual number of days elapsed
and shall be allocated by the Agent to the Banks pro rata in accordance with
their respective Commitment Proportions.
Section 3.06. Payments Generally.
(a) Unless otherwise specified in this Agreement, all
payments under this Agreement or the Notes, other than payments of fees and
expenses with respect to Letters of Credit which shall be made directly by the
Borrower to the Issuing Bank pursuant to the procedures and requirements of
the Issuing Bank
<PAGE>
and the terms of this Agreement, shall be made in Dollars in immediately
available funds not later than 1:00 p.m. (New York time) on the relevant dates
specified above (each such payment made after such time on such due date to be
deemed to have been made on the next succeeding Banking Day) to the Agent, at
300 Broadhollow Road, Melville, New York 11747 for the benefit of the applicable
Lending Office of each Bank. The Borrower will notify each of the Banks of any
payment to the Agent pursuant to the provisions of this section at the same time
it makes any such payment and will notify the Agent of any payment to the
Issuing Bank of any amounts payable with respect to a Letter of Credit hereunder
at the same time it makes any such payment. The Agent may (but shall not be
obligated to) debit the amount of any such payment which is not made by such
time to any ordinary deposit account of the Borrower with the Agent and the
Agent may (but shall not be obligated to) require each of the Banks to debit its
pro rata portion (subject to Section 11.16 hereof) of the amount of any such
payment which is not made by such time to any ordinary deposit account of the
Borrower with any such Bank; provided, however, that no Bank shall be required
to debit any funds which are not available to the Borrower other than on an
overdraft basis. The Borrower shall, at the time of making each payment under
this Agreement or the Notes, specify to the Agent the principal or other amount
payable by the Borrower under this Agreement or the Notes to which such payment
is to be applied; provided, however, that in the event that the Borrower fails
to so specify, or if (x) a Default has occurred and is continuing, or (y) an
Event of Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if
due to fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section
10.01(h) of this Agreement has occurred, or (z) an Event of Default pursuant to
any of Section 10.01(b) (only if not due to fraud), any of Sections
10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g),
Section 10.01(i) or Section 10.01(j) of this Agreement has occurred and is
continuing, the Agent shall apply such payment as it may elect in its sole
discretion (subject to Section 11.16 hereof). If the due date of any payment
under this Agreement or the Notes would otherwise fall on a day which is not a
Banking Day, such date shall be extended to the next succeeding Banking Day and
interest shall be payable for any principal so extended for the period of such
extension. Each payment received by the Agent hereunder or under any Note for
the account of a Bank or the Issuing Bank shall be paid promptly to such Bank or
to the Issuing Bank, as the case may be, in immediately available funds, for the
account of such Bank's Lending Office or for the account of the office specified
by the Issuing Bank to the Agent, as the case may be.
(b) All payments made by the Borrower under this Agreement,
the Notes or the other Facility Documents shall be made free and clear of, and
without deduction or withholding for
<PAGE>
or on account of, any present or future income, stamp or other taxes, levies,
imposts, duties, charges, fees, deductions or withholdings, now or hereafter
imposed, levied, collected, withheld or assessed by any governmental or taxing
authority of any jurisdiction located outside of the United States, excluding,
in the case of the Agent, the Issuing Bank and each Bank, income taxes and
franchise taxes (imposed in lieu of income taxes) imposed on the Agent, the
Issuing Bank or such Bank, as the case may be, as a result of a connection
between the jurisdiction of the government or the taxing authority imposing
such tax and the Agent, the Issuing Bank or such Bank (excluding a connection
arising solely from the Agent, the Issuing Bank or such Bank having executed,
delivered, or performed its obligations or received a payment under, or
enforced, this Agreement, the Notes or the other Facility Documents) or any
political subdivision or taxing authority thereof or therein (all such
non-excluded taxes, levies, imposts, duties, charges, fees, deductions and
withholdings being hereinafter called "Taxes"). If any Taxes are withheld from
any amounts payable to the Agent, the Issuing Bank or any Bank hereunder or
under the Facility Documents, the amounts so payable to the Agent, the Issuing
Bank or such Bank shall be increased to the extent necessary to yield to the
Agent, the Issuing Bank or such Bank (after payment of all Taxes) interest or
any such other amounts payable hereunder at the rates or in the amounts
specified in this Agreement, the Notes and the other Facility Documents.
Whenever any Taxes are payable by the Borrower, as promptly as possible
thereafter, the Borrower shall send to the Agent, the Issuing Bank for its own
account or for the account of the Issuing Bank or such Bank, as the case may be,
a certified copy of an original official receipt received by such entity showing
payment thereof. If the Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to the Agent the required
receipts or other required documentary evidence, the Borrower shall indemnify
the Agent, the Issuing Bank and the Banks for any incremental taxes, interest or
penalties that may become payable by the Agent, the Issuing Bank or any Bank as
a result of any such failure.
Section 3.07. Conversion and Continuation of Pro Rata Loans.
The Borrower shall have the right at any time upon prior irrevocable notice to
the Agent (i) not later than 10:00 a.m. (New York time) on the day of the
conversion, to convert all or any part of any Borrowing consisting of LIBOR
Loans or BA Rate Loans into a Borrowing consisting of Base Rate Loans and (ii)
not later than 10:00 a.m. (New York time) two Banking Days prior to conversion
or continuation, to convert any Borrowing consisting of Base Rate Loans into a
Borrowing consisting of LIBOR Loans or BA Rate Loans, to convert any Borrowing
consisting of BA Rate Loans or LIBOR Loans into a Borrowing consisting of LIBOR
Loans or BA Rate Loans, respectively, or to continue any Borrowing consisting of
LIBOR Loans or BA Rate Loans for an additional Interest Period, subject in each
case to the following:
<PAGE>
(a) if less than all the outstanding principal amount of any
Borrowing shall be converted into or continued (i) as BA Rate Loans, the
aggregate principal amount of the Borrowing so converted or continued as BA Rate
Loans shall be an integral multiple of $100,000 and not less than $1,500,000,
(ii) as LIBOR Loans, the aggregate principal amount of the Borrowing so
converted or continued as LIBOR Loans shall be an integral multiple of $100,000
and not less than $2,500,000 or (iii) as Base Rate Loans, the aggregate
principal amount of the Borrowing so converted or continued as Base Rate Loans
shall be not less than $250,000, and, if greater than $250,000, shall be an
integral multiple of $100,000;
(b) accrued interest on a Borrowing (or portion thereof)
being converted shall be paid by the Borrower at the time of conversion;
(c) if any Borrowing consisting of LIBOR Loans or BA Rate
Loans is converted at a time other than the end of the Interest Period
applicable thereto, the Borrower shall pay, upon demand, any amounts due to the
Banks pursuant to Article 4;
(d) (i) any portion of a Borrowing maturing or required to be
repaid in less than one month may not be converted into or continued as a
Borrowing consisting of LIBOR Loans and (ii) any portion of a Borrowing maturing
or required to be repaid in less than 30 days may not be converted into or
continued as a Borrowing consisting of BA Rate Loans;
(e) any portion of a Borrowing consisting of LIBOR Loans or BA
Rate Loans which cannot be continued as such by reason of clause (d) above shall
be automatically converted at the end of the Interest Period in effect for such
Borrowing into a Borrowing consisting of Base Rate Loans;
(f) no Interest Period may be selected for any Borrowing
consisting of LIBOR Loans or BA Rate Loans that would end later than the Loan
Maturity Date except with the prior written consent of all Banks;
(g) all conversions and continuations shall be subject
to the provisions of Section 4.04 hereof; and
(h) no conversion of any Borrowing consisting of Base Rate
Loans into a Borrowing consisting of LIBOR Loans or BA Rate Loans and no
continuation of any Borrowing consisting of LIBOR Loans or BA Rate Loans shall
be effective if a Default or Event of Default has occurred and is continuing.
Each notice pursuant to this Section 3.07 shall be irrevocable
and shall refer to this Agreement and specify (i) the
<PAGE>
identity and amount of the Borrowing to be converted or continued, (ii) whether
such Borrowing is to be converted to or continued as a Borrowing consisting of
LIBOR Loans, BA Rate Loans or Base Rate Loans, (iii) if such notice requests a
conversion, the date of such conversion (which shall be a Banking Day) and (iv)
if such Borrowing is to be converted to or continued as a Borrowing consisting
of LIBOR Loans or BA Rate Loans, the Interest Period with respect thereto. If no
Interest Period is specified in any such notice with respect to any conversion
to or continuation as a Borrowing consisting of LIBOR Loans or BA Rate Loans,
the Borrower shall be deemed to have selected an Interest Period of one month's
duration, in the case of LIBOR Loans, or 30 days' duration, in the case of BA
Rate Loans. If no notice shall have been given in accordance with this Section
3.07 to convert or continue any Borrowing, such Borrowing shall, at the end of
the Interest Period applicable thereto (unless repaid pursuant to the terms
hereof), automatically be continued as a Borrowing consisting of Base Rate
Loans.
<PAGE>
ARTICLE 4. YIELD PROTECTION, ETC.
Section 4.01. Additional Costs.
(a) The Borrower shall pay directly to the Issuing Bank and
each Bank from time to time, within two days of the demand of the Issuing Bank
or such Bank, as the case may be, such amounts as the Issuing Bank or such Bank
may reasonably determine to be necessary to compensate it for any costs which
the Issuing Bank or such Bank reasonably determines are attributable to its
issuing or making or maintaining any BA Rate Loans, Fixed Rate Loans, LIBOR
Loans or Letters of Credit under this Agreement or its Note or its obligation
under any such Loans or Letters of Credit hereunder, or any reduction in any
amount receivable by the Issuing Bank or such Bank hereunder in respect of any
such Loans or Letters of Credit or such obligation (such increases in costs and
reductions in amounts receivable being herein called "Additional Costs"),
resulting from any Regulatory Change which: (i) changes the basis of taxation of
any amounts payable to the Issuing Bank or such Bank under this Agreement or its
Note in respect of any of such Loans or Letters of Credit or obligations (other
than taxes imposed on the overall net income of the Issuing Bank or such Bank or
of its Lending Office for any of such Loans or Letters of Credit by the
jurisdiction in which the Issuing Bank or such Bank has its principal office or
such Lending Office); or (ii) imposes or modifies any reserve, special deposit,
deposit insurance or assessment, minimum capital, capital ratio or similar
requirements relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of, the Issuing Bank or such Bank (including
any of such Loans or any deposits referred to in the definition of "LIBOR" in
Section 1.01); or (iii) imposes any other condition affecting this Agreement,
any Note (or any of such extensions of credit or liabilities) or any Letter of
Credit. The Issuing Bank and each Bank will notify the Agent of any event
occurring after the date of this Agreement which will entitle the Issuing Bank
or such Bank to compensation pursuant to this Section 4.01(a) as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation and the Agent on behalf of the Issuing Bank or such Bank will
promptly notify the Borrower of such event. If the Issuing Bank or any Bank
requests compensation from the Borrower under this Section 4.01(a), or under
Section 4.01(c), the Borrower may, by notice to the Agent (with a copy to the
Issuing Bank or such Bank), suspend the obligation of the Issuing Bank to issue
Letters of Credit or the obligation of such Bank to make Loans (but not to
purchase participation interests in reimbursement obligations under Letters of
Credit) or to otherwise extend credit of the type with respect to which such
compensation is requested (in which case the provisions of Section 4.04 shall be
applicable) provided that the provisions of this sentence shall not relieve the
Borrower of its obligation to make payments pursuant to this Section 4.01;
provided further that if at any time subsequent to such suspension, the causes
therefor cease to exist, the Issuing Bank or such Bank shall so notify the
Borrower and the obligation
<PAGE>
of the Issuing Bank to issue Letters of Credit, or such Bank's obligation to
make Loans of the applicable type, as the case may be, shall, subject to the
provisions of this Agreement, be reinstated.
(b) Without limiting the effect of the foregoing provisions of
this Section 4.01, in the event that, by reason of any Regulatory Change, any
Bank either (i) incurs Additional Costs based on or measured by the excess above
a specified level of the amount of a category of deposits or other liabilities
of such Bank which includes deposits by reference to which the interest rate on
LIBOR Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Bank which includes LIBOR Loans or
(ii) becomes subject to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if such Bank so elects by notice
to the Agent (with a copy to the Borrower), the obligation of such Bank to make
LIBOR Loans hereunder shall be suspended until the date such Regulatory Change
ceases to be in effect (in which case the provisions of Section 4.04 shall be
applicable).
(c) Without limiting the effect of the foregoing provisions of
this Section 4.01 (but without duplication), the Borrower shall pay directly to
the Issuing Bank and to each Bank from time to time on request such amounts as
the Issuing Bank or such Bank may reasonably determine to be necessary to
compensate the Issuing Bank or such Bank for any costs which it reasonably
determines are attributable to the maintenance by it or any of its affiliates
pursuant to any law or regulation of any jurisdiction or any interpretation,
directive or request (whether or not having the force of law and whether in
effect on the date of this Agreement or thereafter) of any court or governmental
or monetary authority of capital in respect of the Letters of Credit (or any
reimbursement obligations with respect thereto) or any Loans or other
obligations hereunder (such compensation to include, without limitation, an
amount equal to any reduction in return on assets or equity of the Issuing Bank
or such Bank to a level below that which it could have achieved but for such
law, regulation, interpretation, directive or request). The Issuing Bank and
each Bank will notify the Agent if it is entitled to compensation pursuant to
this Section 4.01(c) as promptly as practicable after it determines to request
such compensation, and the Agent on behalf of the Issuing Bank or such Bank will
promptly notify the Borrower.
(d) Determinations and allocations by the Issuing Bank or a
Bank for purposes of this Section 4.01 of the effect of any Regulatory Change
pursuant to subsections (a) or (b), or of the effect of capital maintained
pursuant to subsection (c), on its costs of making or maintaining Loans or
Letters of Credit (or any reimbursement obligations with respect thereto) or its
obligation to make Loans or Letters of Credit (or any reimbursement obligations
with respect thereto), or on amounts receivable by,
<PAGE>
or the rate of return to, it in respect of Loans or Letters of Credit (or any
reimbursement obligations with respect thereto), and of the additional amounts
required to compensate the Issuing Bank or such Bank under this Section 4.01,
shall be conclusive absent manifest error.
Section 4.02. Limitation on Types of Loans. Anything
herein to the contrary notwithstanding, if:
(a) the Agent determines (which determination shall be
conclusive) that quotations of interest rates for the relevant deposits referred
to in the definitions of "BA Rate" or "LIBOR" in Section 1.01 are not being
provided in the relevant amounts or for the relevant maturities for purposes of
determining the rate of interest for any BA Rate Loans or LIBOR Loans, as the
case may be, as provided in this Agreement; or
(b) any Bank determines (which determination shall be
conclusive absent manifest error) and notifies the Agent that the relevant rates
of interest referred to in the definitions of "BA Rate" or "LIBOR" in Section
1.01 upon the basis of which the rate of interest for any type of BA Rate Loans
or LIBOR Loans, as the case may be, is to be determined do not adequately cover
the cost to such Bank of making or maintaining such Loans; then the Agent shall
give the Borrower and each other Bank prompt notice thereof, and so long as such
condition remains in effect, such Bank shall be under no obligation to make BA
Rate Loans or LIBOR Loans, as the case may be.
Section 4.03. Illegality. Notwithstanding any other provision
in this Agreement, in the event that it becomes unlawful for the Issuing Bank to
issue any Letters of Credit or for any Bank or its Lending Office to honor its
obligation to make or maintain BA Rate Loans or LIBOR Loans hereunder, then the
Issuing Bank or such Bank shall promptly notify the Agent thereof (with a copy
to the Borrower) and the Issuing Bank's obligation to issue Letters of Credit,
or such Bank's obligation to make or maintain BA Rate Loans or LIBOR Loans
hereunder shall be suspended until such time as the Issuing Bank may again issue
Letters of Credit or such Bank may again make and maintain such affected Loans
in which case the provisions of Section 4.04 shall be applicable, and any such
request for a Borrowing consisting of LIBOR Loans or BA Rate Loans, as the case
may be, shall, with respect to such Bank, be deemed a request for a Base Rate
Loan from such Bank.
Section 4.04. Certain Loans Pursuant To Sections 4.01, 4.02
and 4.03. If an event referred to in Section 4.01(b), 4.02 or 4.03 has occurred
with respect to any Bank and such Bank so requests by notice to the Agent (with
a copy to the Borrower), all BA Rate Loans, Fixed Rate Loans or LIBOR Loans, as
the case may be, of such Bank then outstanding shall be automatically
<PAGE>
converted into Base Rate Loans on the date specified by such Bank in such
notice, and, to the extent that BA Rate Loans, Fixed Rate Loans or LIBOR Loans,
as the case may be, are so made as (or converted into) Base Rate Loans, all
payments of principal which would otherwise be applied to such Bank's BA Rate
Loans, Fixed Rate Loans or LIBOR Loans, as the case may be, shall be applied
instead to its Base Rate Loans. In the event of any conversion of any BA Rate
Loan, Fixed Rate Loan or LIBOR Loan to a Base Rate Loan pursuant to this Section
4.04 prior to the maturity date with respect to such BA Rate Loan, Fixed Rate
Loan or LIBOR Loan, the Borrower shall pay to the Agent for the account of the
relevant Bank all amounts required to be paid pursuant to Section 4.05 hereof.
Section 4.05. Certain Compensation. The Borrower shall pay to
any Bank for the account of such Bank, within two days after the demand of any
such Bank through the Agent, such amount or amounts as shall be sufficient (in
the reasonable opinion of such Bank) to compensate it for any loss, cost or
expense which such Bank determines is attributable to:
(a) any prepayment or conversion (on a date other than the
maturity date with respect to BA Rate Loans, Fixed Rate Loans or LIBOR Loans) by
the Borrower of any such Loans made by such Bank (whether by reason of the
mandatory or voluntary prepayment provisions of this Agreement or otherwise) or
any failure by the Borrower to pay principal or interest on any such Loan made
by such Bank when due or any conversion of any such Loan pursuant to Section
3.07 or Section 4.04 hereof; or
(b) any failure by the Borrower to borrow or continue any BA
Rate Loan, Fixed Rate Loan or LIBOR Loan to be made by such Bank on the date
specified therefor in the relevant notice under this Agreement; or
(c) any failure by the Borrower to prepay any BA Rate Loan,
Fixed Rate Loan or LIBOR Loan on the date specified therefor in the relevant
notice under Section 3.02.
Without limiting the foregoing, such compensation shall include an amount equal
to the excess, if any, of: (i) the amount of interest which otherwise would have
accrued on the principal amount so paid, or converted or not borrowed for the
period from and including the date of such payment or conversion or failure to
borrow to, but excluding the maturity date or the Loan Maturity Date, as
applicable, in the case of BA Rate Loans, Fixed Rate Loans or LIBOR Loans (or,
in the case of a failure to borrow, to but excluding the maturity date or the
Loan Maturity Date, as applicable, in the case of any other BA Rate Loans, Fixed
Rate Loans or LIBOR Loans which would have commenced on the date specified
therefor in the relevant notice) at the applicable rate of interest for such
Loan provided for herein; over (ii) the
<PAGE>
amount of interest (as reasonably determined by such Bank) such Bank would have
bid in the London interbank market (if such Loan is a LIBOR Loan) or, if
relevant, such other applicable market (if such Loan is a BA Rate Loan or Fixed
Rate Loan) for Dollar deposits for amounts comparable to such principal amount
and maturities comparable to such period. A determination of any Bank as to the
amounts payable pursuant to this Section 4.05 shall be conclusive absent
manifest error provided that such determination is made on a reasonable basis
and provided further that such Bank provides the Borrower with copies of the
calculations made by such Bank in making such determination.
ARTICLE 5. CONDITIONS PRECEDENT
Section 5.01. Documentary Conditions Precedent. The
obligations of the Banks to make the Loans constituting the
initial Borrowing are subject to the conditions precedent that:
(a) the Agent shall have received on or before the date of
such Loans each of the following, in form and substance reasonably satisfactory
to the Agent and its counsel:
(i) the Notes duly executed by the Borrower;
(ii) the return, from the respective
beneficiaries thereof, of all letters of credit, if any,
issued under the Sid Tool Credit Agreement that are to be
returned to the Issuing Bank (as defined in the Sid Tool
Credit Agreement) on or before the date of the initial
Borrowing;
(iii) a certificate of the Secretary or
Assistant Secretary of the Borrower and of each Subsidiary of
the Borrower, dated the Effective Date, attesting to all
corporate action taken by such Person, including resolutions
of its respective Board of Directors authorizing, as
applicable, the execution, delivery and performance of the
Facility Documents and each other document to be delivered
pursuant to this Agreement, together with certified copies of
the certificate or articles of incorporation and the by-laws
of the Borrower and each Subsidiary of the Borrower; and, such
certificate shall state that the resolutions and corporate
documents thereby certified have not been amended, modified,
revoked or rescinded as of the date of such certificate;
(iv) a certificate of the Secretary or
Assistant Secretary of the Borrower and of each Subsidiary of
the Borrower, dated the Effective Date, certifying the names
and true signatures of the officers of such entity authorized
to sign the Facility
<PAGE>
Documents and the other documents to be delivered by such
entity under this Agreement;
(v) a certificate of a duly authorized officer
of the Borrower and each Subsidiary of the Borrower dated the
Effective Date, stating that (i) the representations and
warranties in Article 6 are true and correct on such date as
though made on and as of such date, (ii) no Default or Event
of Default (as such terms are defined in the Sid Tool Credit
Agreement) has occurred or is continuing under the Sid Tool
Credit Agreement and (iii) no Default or Event of Default has
occurred or is continuing or would occur as a result of the
making of any Loan or the issuance of any Letter of Credit;
(vi) favorable opinions of counsel for the
Borrower and each Subsidiary of the Borrower, dated the
Effective Date, in substantially the form of Exhibit F;
(vii) evidence that the Borrower and each of
the Subsidiaries of the Borrower is duly organized,
validly existing and in good standing under the laws of
its jurisdiction of incorporation;
(viii) an audited consolidated and consolidating
balance sheet of the Borrower and its Consolidated
Subsidiaries as at August 31, 1996, and a consolidated income
statement and statement of cash flows of the Borrower and its
Consolidated Subsidiaries for the fiscal year then ended, all
prepared in accordance with GAAP together with unaudited
interim consolidated and consolidating financial statements of
the Borrower and its Consolidated Subsidiaries as of and for
the period ending February 28, 1997;
(ix) a Subsidiary Guarantee duly executed by
each Subsidiary of the Borrower;
(x) a copy of the Final Prospectus relating
to the issuance of the Class A Common Stock of the
Borrower;
(xi) such other documents, financial
statements, instruments, approvals, opinions and evidence as
the Agent may reasonably require.
(b) the Borrower shall have paid or caused to be paid all fees
required to be paid hereunder or in connection herewith and all accrued fees and
expenses of the Agent, the Issuing Bank and each of the Banks (subject to the
limitations set forth herein) in connection with the preparation, execution and
<PAGE>
delivery of this Agreement, and the other Facility Documents and the
consummation of the transactions contemplated thereby;
(c) all amounts due and payable under the Sid Tool Credit
Agreement as of the Effective Date and the amount of accrued but unpaid facility
fees pursuant to Section 4.04 of the Sid Tool Credit Agreement shall have been
paid in full;
(d) the Borrower and each of the Subsidiaries of the Borrower
shall have obtained all consents, permits and approvals required in connection
with the execution, delivery and performance by the Borrower and such
Subsidiaries of their obligations hereunder and such consents, permits and
approvals shall continue in full force and effect;
(e) all legal matters in connection with this financing shall
be reasonably satisfactory to the Issuing Bank, the Banks and their respective
counsel;
(f) no material adverse change in the business, condition
(financial or otherwise), operations, performance or properties of the Borrower
and its Subsidiaries taken as a whole, shall have occurred since August 31,
1996;
(g) there shall exist no action, suit, investigation,
litigation or proceeding pending or threatened in any court or before any
arbitrator or governmental instrumentality that could (i) have a material
adverse effect on the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Borrower and its Subsidiaries, taken
as a whole, or (ii) impair the Borrower or any such Subsidiary's ability to
perform satisfactorily under the Facility Documents to which it is a party;
(h) the Agent, the Issuing Bank and the Banks shall have
received reasonably satisfactory evidence that (i) neither the Borrower nor any
of its Subsidiaries is in default with respect to any contractual obligations to
which it is a party, the effect of which may be material and adverse to the
Borrower and the Subsidiaries of the Borrower, taken as a whole, or to the
ability of the Borrower or any such Subsidiary to perform its respective
obligations hereunder or under the other Facility Documents, (ii) no Default or
Event of Default (as such terms are defined in the Sid Tool Credit Agreement)
has occurred or is continuing under the Sid Tool Credit Agreement and (iii) no
Default or Event of Default has occurred or is continuing or would occur as a
result of the making of any Loan or the issuance of any Letter of Credit; and
(i) all conditions precedent with respect to the effectiveness
of the Second Amended and Restated Credit Agreement shall have been satisfied in
full.
<PAGE>
Section 5.02. Additional Conditions Precedent. The obligations
of the Banks to make any Loan or of the Issuing Bank to issue any Letter of
Credit shall be subject to the further conditions precedent (which shall be in
addition to, and shall not be deemed to limit or modify, any of the other terms
and conditions hereunder) that on the date of the making of such Loan or the
issuance of such Letter of Credit:
(a) the following statements shall be true:
(i) (A) with respect to any Loan made to,
and any Letter of Credit issued for the account of, the Borrower on the
Effective Date, the representations and warranties contained in Article 6 hereof
are true and correct on and as of the date, (B) and with respect to any Loan
made and any Letter of Credit issued after the Effective Date, the
representations and warranties contained in Article 6 hereof are true and
correct in all material respects on and as of the date of such Loan or Letter of
Credit, as the case may be, as though made on and as of such date; provided that
for the purposes of this Section 5.02(a)(i)(B) only, (x) whenever any of the
representations or warranties contained in Article 6 hereof are qualified by the
phrase "material adverse effect on the operations, business, property or
financial condition of the Borrower or any Subsidiary of the Borrower or on the
ability of the Borrower or Subsidiary of the Borrower to perform its obligations
hereunder" or by any phrase having a substantially similar meaning, any such
phrase shall be deemed deleted and the phrase "material adverse effect on the
operations, business, property or financial condition of the Borrower and its
Subsidiaries, taken as a whole, or on the ability of the Borrower and its
Subsidiaries, taken as a whole, to perform their obligations hereunder" or a
phrase of substantially similar meaning shall be deemed inserted in lieu
thereof, and (y) the representation/ warranty contained in Section 6.19 hereof
shall be deemed deleted and in lieu thereof "The Borrower and its Subsidiaries,
taken as a whole, are Solvent." shall be deemed inserted.
(ii) no Default has occurred and is
continuing or would result from any such Loan or Letter of Credit, no Event of
Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to
fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h)
of this Agreement has occurred or would result from any such Loan or Letter of
Credit and no Event of Default pursuant to any of Section 10.01(b) (only if not
due to fraud), any of Sections 10.01(c)(i)(C) or (ii), Section 10.01(d), Section
10.01(f), Section 10.01(g), Section 10.01(i) or Section 10.01(j) of this
Agreement has occurred and is continuing or would result from such Loan or
Letter of Credit; and
<PAGE>
(iii) no material adverse change shall have
occurred in the business, financial condition or operations of the Borrower and
its Subsidiaries, taken as a whole, or, with respect to any Loan made to, or any
Letter of Credit issued on behalf of, the Borrower on the Effective Date, in the
ability of the Borrower or any such Subsidiary to perform any of its obligations
under this Agreement or under any of the Facility Documents (the phrase "under
this Agreement or under any of the Facility Documents" is hereinafter,
"hereunder") or, with respect to any Loan made and any Letter of Credit issued
after the Effective Date, in the ability of the Borrower and its Consolidated
Subsidiaries, taken as a whole, to perform their obligations hereunder, since
the date of the most recent financial statements of the Borrower and its
Subsidiaries delivered to the Agent hereunder or in connection herewith; and
(b) the Agent shall have received such approvals, opinions,
documents or instruments as the Agent, the Issuing Bank or any Bank may
reasonably request.
Section 5.03. No Default Certificate and Deemed
Representations. Each notice of a Loan shall be accompanied by a certificate
of the president or chief financial officer of the Borrower certifying that the
statements contained in Section 5.02(a) are true and correct on the date of such
notice or submission and, unless the Borrower otherwise notifies the Agent prior
to such Borrowing or issuance of any Letter of Credit, the acceptance by the
Borrower of the proceeds of any Loan thereof and the request by such Borrower
for any Letter of Credit shall constitute a representation and warranty that
such statements are true and correct as of the date of such Loan or Letter of
Credit, as the case may be.
ARTICLE 6. REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
Section 6.01. Incorporation, Good Standing and Due
Qualification; Compliance with Law. Except as set forth in Schedule 6.01, the
Borrower and each of its Subsidiaries is duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation, has
the corporate power and authority to own its assets and to transact the business
in which it is now engaged or presently proposes to be engaged, and is duly
qualified as a foreign corporation and in good standing under the laws of each
other jurisdiction in which such qualification is required except where the
failure to so qualify and/or be in good standing would not in any case or in the
aggregate, have a material adverse effect on the operations, business, property
or financial condition of the Borrower or such any Subsidiary or on the ability
of the Borrower or any such
<PAGE>
Subsidiary to perform its obligations hereunder or under its respective
Subsidiary Guarantee, as the case may be. In addition, the Borrower and each of
its Subsidiaries is in compliance with all laws, treaties, rules or regulations,
or determination of an arbitration or a court or other governmental authority,
in each case applicable to or binding upon it or any of its material property or
to which it or any of its material property is subject, except to the extent
that the failure to so comply would not, in any case or in the aggregate, have a
material adverse effect on the operations, business, property or financial
condition of the Borrower or any such Subsidiary or on the ability of the
Borrower or any such Subsidiary to perform its obligations hereunder or under
its respective Subsidiary Guarantee, as the case may be.
Section 6.02. Power and Authority; No Conflicts. Except as set
forth in Schedule 6.02, the execution, delivery and performance by the Borrower
of each of the Facility Documents to which it is a party and by each Subsidiary
of the Borrower of its respective Subsidiary Guarantee have been duly authorized
by all necessary corporate action and do not and will not: (a) require any
consent or approval of its stockholders; (b) contravene its charter or by-laws;
(c) violate any provision of, or require any filing, registration, consent or
approval under, any law, rule, regulation (including, without limitation, the
provisions of Regulation G, T, U or X of the Federal Reserve Board as in effect
from time to time), order, writ, judgment, injunction, decree, determination or
award presently in effect having applicability to the Borrower or any such
Subsidiary; (d) result in a breach of or constitute a default or require any
consent under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which the Borrower or any Subsidiary of the Borrower is a
party or by which any of its properties may be bound or affected; (e) result in
or require the creation or imposition of any Lien upon or with respect to any of
the properties now owned or hereafter acquired by the Borrower or any of its
Subsidiaries except in favor of the Agent for the benefit of the Banks and the
Issuing Bank as herein provided; or (f) cause the Borrower or any of its
Subsidiaries to be in default under any such rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any such indenture,
agreement, lease or instrument, except, in the case of clauses (c), (d), (e) and
(f) above, where such violation, failure to satisfy such requirement, breach,
default, failure to obtain consent or creation or imposition of a Lien, as the
case may be, would not, in any case or in the aggregate, have a material adverse
effect upon the operations, business, property or financial condition of the
Borrower or any of its Subsidiaries or on the ability of the Borrower or any of
its Subsidiaries to perform its obligations hereunder or under its respective
Subsidiary Guarantee, as the case may be.
<PAGE>
Section 6.03. Legally Enforceable Agreements. Each Facility
Document to which the Borrower or any Subsidiary of the Borrower is a party is,
or when delivered under this Agreement will be, a legal, valid and binding
obligation of the Borrower or such Subsidiary, as the case may be, enforceable
against the Borrower or such Subsidiary, as the case may be, in accordance with
its respective terms, except to the extent that such enforcement may be limited
by applicable bankruptcy, insolvency and other similar laws affecting creditors'
rights generally.
Section 6.04. Litigation. Except as set forth in Schedule
6.04, there are no actions, suits or proceedings pending or, to the knowledge of
the Borrower or any of its Subsidiaries, threatened, against or affecting the
Borrower or any of its Subsidiaries before any court, governmental agency or
arbitrator, which may, in any one case or in the aggregate, materially adversely
affect the financial condition, operations, properties or business of the
Borrower or on the ability of the Borrower or any such Subsidiary to perform its
obligations hereunder or under its respective Subsidiary Guarantee, as the case
may be.
Section 6.05. Financial Statements. The balance sheet
of the Borrower and its Consolidated Subsidiaries as at August 31, 1996, and the
related income statements and statements of cash flow of the Borrower and its
Consolidated Subsidiaries for the fiscal year then ended, and the accompanying
notes, together with the opinion thereon, of Arthur Andersen & Co., independent
certified public accountants, and the interim financial statements of the
Borrower and its Consolidated Subsidiaries as at and as of (as the case may be)
November 30, 1996, copies of which have been furnished to the Issuing Bank and
each of the Banks, are complete and correct in all material respects and fairly
present the financial condition of the Borrower and its Consolidated
Subsidiaries as at such date and the results of the operations of the Borrower
and its Consolidated Subsidiaries for the periods covered by such statements,
all in accordance with GAAP consistently applied (subject, in the case of
interim financial statements, to year-end adjustments and except, in the case of
such interim financial statements, for the absence of GAAP notes thereto). As of
the date hereof, there are no liabilities of the Borrower or any of its
Consolidated Subsidiaries, fixed or contingent, which are material but are not
reflected in the financial statements referred to above, or in the notes
thereto, other than liabilities arising in the ordinary course of business since
August 31, 1996, and the liabilities created by this Agreement and the
Subsidiary Guarantees. No information, exhibit or report furnished by the
Borrower or any Subsidiary of the Borrower to the Issuing Banks or the Banks in
connection with the negotiation of this Agreement contained any material
misstatement of fact or omitted to state any fact necessary to make the
statements contained therein not materially misleading. Since the date of the
most recent financial
<PAGE>
statements delivered to the Banks hereunder, there has been no material adverse
change in the condition (financial or otherwise), business or operations of the
Borrower and its Subsidiaries, taken as a whole.
Section 6.06. Ownership and Liens. The Borrower and each of
its Subsidiaries has title to, or valid leasehold interests in, all of its
material properties and assets, real and personal, including the properties and
assets, and leasehold interests reflected in the financial statements referred
to in Section 6.05, and none of the property in which the Borrower or its
Subsidiaries, or any of them, has any right, title or interest and none of their
leasehold interests is subject to any Lien, except as disclosed in Schedule 6.10
or Permitted Liens.
Section 6.07. Taxes. Each of the Borrower, its Subsidiaries
and their respective Affiliates has filed all tax returns (federal, state and
local) required to be filed except where the failure to file would not, in any
case, or in the aggregate, have a material adverse effect upon the operations,
business, property or financial condition of the Borrower and its Subsidiaries,
taken as a whole, or on the ability of the Borrower or any of its Subsidiaries
to perform its obligations hereunder or under its respective Subsidiary
Guarantee, as the case may be and each of the Borrower, its Subsidiaries and
their respective Affiliates has paid all taxes, assessments and governmental
charges and levies shown thereon to be due, including interest and penalties,
other than taxes, assessments and governmental charges and levies being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves in conformity with GAAP shall have been provided on the books
of the Borrower, its Subsidiaries or their respective Affiliates, as the case
may be.
Section 6.08. ERISA. Each of the Borrower, its Subsidiaries
and their respective Affiliates is in compliance in all material respects with
all applicable provisions of ERISA and the employee benefit provisions of the
Code (including, without limitation, any provisions of the Code, compliance with
which is necessary for any intended favorable tax treatment). No Reportable
Event has occurred with respect to any Plan; no notice of intent to terminate a
Plan has been filed nor has any Plan subject to Title IV of ERISA been
terminated; no circumstance exists which constitutes grounds under Section 4042
of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any such proceedings;
neither the Borrower, its Subsidiaries nor any ERISA Affiliate has completely or
partially withdrawn under Sections 4201 or 4204 of ERISA from a Multiemployer
Plan and the liability thereof in the event of a withdrawal from all
Multiemployer Plans would not exceed $3,000,000; each of the Borrower, its
Subsidiaries and each of
<PAGE>
their ERISA Affiliates has met its minimum funding requirements under ERISA with
respect to all of its Plans and except as otherwise set forth on Schedule 6.08,
there are no Unfunded Vested Liabilities; and neither the Borrower, its
Subsidiaries nor any ERISA Affiliate has incurred any liability to the PBGC
under ERISA; and except as otherwise set forth on Schedule 6.08, neither the
Borrower, its Subsidiaries nor any its Affiliates have liability for welfare
plan coverage of employees after termination of employment except as may be
required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
Section 6.09. Subsidiaries and Ownership of Stock. The
Borrower has no Subsidiaries except for those Subsidiaries set forth on Schedule
6.09 and other Subsidiaries which, after the date hereof, shall have been
established pursuant to Section 8.11 hereof and which shall have been
theretofore disclosed in writing to the Agent and the Banks.
Section 6.10. Credit Arrangements. Schedule 6.10 is a
complete and correct list of all material credit agreements, indentures,
purchase agreements (other than agreements for the purchase or sale of inventory
entered into in the ordinary course of business), guaranties, Capital Leases and
other investments, agreements and arrangements in effect on the date of this
Agreement providing for or relating to extensions of credit to the Borrower, its
Subsidiaries, or any of them (including agreements and arrangements for the
issuance of letters of credit or for acceptance financing but excluding the
Facility Documents) in respect of which the Borrower, its Subsidiaries, or any
of them, is in any manner directly or contingently obligated (collectively,
"Debt Agreements"); and the maximum principal or face amounts of the credit in
question, outstanding and which can be outstanding, are correctly stated, and
all Liens of any nature given or agreed to be given as security therefor are
correctly described or indicated in such Schedule. For the purposes of this
Section 6.10, a Debt Agreement shall be deemed material if it either has a
noncancellable term which exceeds one (1) year in length or requires payments by
the Borrower, its Subsidiaries or any of them in an aggregate amount of $100,000
or more. The aggregate amount of payments by the Borrower, its Subsidiaries or
any of them required under all Debt Agreements which are not material Debt
Agreements does not exceed $1,000,000.
Section 6.11. Operation of Business. Each of the Borrower and
its Subsidiaries possesses all licenses, permits, franchises, patents,
copyrights, trademarks and trade names, or rights thereto, to conduct its
business substantially as now conducted and as presently proposed to be
conducted except where the failure to do so would not, in any case or in the
aggregate, have a material adverse effect upon the operations, business,
property or financial condition of the Borrower and its
<PAGE>
Subsidiaries, taken as a whole, or on the ability of the Borrower or any
Subsidiary to perform its obligations hereunder or under its respective
Subsidiary Guarantee, as the case may be.
Section 6.12. No Default on Outstanding Judgments or Orders.
Each of the Borrower and its Subsidiaries has satisfied all judgments and none
of the Borrower nor any of its Subsidiaries is in default with respect to any
judgment, writ, injunction, decree, rule or regulation of any court, arbitrator
or federal, state, municipal or other governmental authority, commission, board,
bureau, agency or instrumentality, domestic or foreign except to the extent that
such defaults would not, in any case or in the aggregate, have a material
adverse effect on the operations, business, property or financial condition of
the Borrower and its Subsidiaries, taken as a whole, or on the ability of the
Borrower or any of its Subsidiaries to perform its obligations hereunder or
under the respective Subsidiary Guarantee, as the case may be.
Section 6.13. No Defaults on Other Agreements. Neither the
Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit
agreement or any lease or other agreement or instrument or subject to any
charter or corporate restriction which would in any case or in the aggregate
have a material adverse effect on the business, properties, assets, operations
or condition, financial or otherwise, of the Borrower or any of its Subsidiaries
or on the ability of the Borrower or any of its Subsidiaries to perform its
obligations hereunder or under its respective Subsidiary Guarantee, as the case
may be. Neither the Borrower nor any of its Subsidiaries is in default in any
respect in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement or instrument material to its
business to which it is a party except where such default would not, in any case
or in the aggregate, have a material adverse effect on the business, properties,
assets, operations or condition, financial or otherwise of the Borrower or any
of its Subsidiaries or on the ability of the Borrower or any of its Subsidiaries
to perform its obligations hereunder or under its respective Subsidiary
Guarantee, as the case may be.
Section 6.14. Labor Disputes and Acts of God. Neither the
business nor the properties of the Borrower or of any of its Subsidiaries are
affected by any fire, explosion, accident, strike, lockout or other labor
dispute, drought, storm, hail, earthquake, embargo, act of God or of the public
enemy or other casualty (whether or not covered by insurance), materially and
adversely affecting such business or properties or the operations of the
Borrower and its Subsidiaries, taken as a whole, or the ability of the Borrower
or any of its Subsidiaries to perform its obligations hereunder or under its
respective Subsidiary Guarantee, as the case may be.
<PAGE>
Section 6.15. Governmental Regulation. Neither the Borrower
nor any of its Subsidiaries is subject to regulation under the Public Utility
Holding Company Act of 1935, the Investment Company Act of 1940 or any other
statute or regulation limiting its ability to incur indebtedness for money
borrowed as contemplated hereby.
Section 6.16. Partnerships. Except as disclosed on
Schedule 6.16 hereto, neither the Borrower nor any of its Subsidiaries is a
partner in any partnership.
Section 6.17. No Forfeiture Proceedings. Neither the Borrower
nor any of its Subsidiaries is engaged in nor proposes to be engaged in the
conduct of any business or activity which is likely to result in a Forfeiture
Proceeding and no Forfeiture Proceeding against any of them is pending or, to
the best knowledge of the Borrower or any of its Subsidiaries, threatened,
except as set forth on Schedule 6.17.
Section 6.18. No Default or Event of Default. No Default or
Event of Default has occurred and is continuing.
Section 6.19. Solvency. The Borrower is Solvent. Each of
the Borrower's Subsidiaries, before and after giving effect to its respective
Subsidiary Guarantee, is Solvent.
Section 6.20. Material Adverse Change.
(a) No event or series of events (including without limitation
the Reorganization) has occurred which would result in a material adverse effect
on the operations, business, property or financial condition of the Borrower and
its Subsidiaries, taken as a whole, or on the ability of the Borrower or any of
its Subsidiaries to perform its obligations hereunder or under the other
Facility Documents to which it is a party.
Section 6.21. Name. During the five years prior to the
Effective Date, neither the Borrower nor any of its Subsidiaries has been known
under, or transacted business using, any name or trade style except for the name
set forth above such entity's signature on this Agreement and except insofar as
such entity has used trade styles all of which are described on Schedule 6.21.
The Borrower possesses valid and enforceable rights to use (without payment)
each of the foregoing names and trade styles within the respective jurisdictions
in which such names or trade styles are currently being used and the Borrower
has no reason to believe that any of such names or trade styles conflict with
any rights of others.
Section 6.22. Debt. The Borrower and its Subsidiaries
have no Debt, except (a) the Obligations, (b) the Debt described
<PAGE>
on Schedule 6.10 and (c) other Debt permitted by Section 8.01
hereof.
Section 6.23. Nature of Business. The Borrower has no
business except its business as a holding company and any business in
connection with the transactions contemplated by this Agreement.
Section 6.24. Fiscal Year End. (a) Except as
otherwise provided in Section 6.24(b) hereof, the Borrower's
fiscal years set forth below will end on the dates set forth below opposite such
fiscal year:
Fiscal Year Ending Date
1996 August 31, 1996
1997 August 30, 1997
1998 August 29, 1998
1999 August 28, 1999
2000 September 2, 2000
2001 September 1, 2001
(b) The Borrower may, with the prior written consent of the
Agent (which consent shall not be withheld unreasonably), change its fiscal year
end dates set forth in Section 6.24(a) hereof for either or both of fiscal years
2000 and 2001, subject to the following conditions: and limitations:
(i) The Borrower shall notify the Agent that it proposes to
make such proposed change not later than the last day of fiscal year
1998, in the case of a change respecting fiscal year 2000, and not
later than the last day of fiscal year 1999, in the case of a change
respecting fiscal year 2001;
(ii) The change of fiscal year end date for either such year shall
not result in the new fiscal year end date being more than ten days
prior or subsequent to the date set forth in Section 6.24(a) hereof for
such fiscal year; and
(iii) In the event that the Borrower elects to change the fiscal
year end date for either of such fiscal years, the certificates
required to be delivered to the Agent, the Issuing Bank and each of the
Banks pursuant to Section 7.08 hereof demonstrating compliance with the
covenants contained herein for such fiscal period shall, at the
election of the Borrower or upon the request of the Agent or the
Required Banks, include calculations setting forth the adjustments
necessary to demonstrate how the Borrower is in compliance with the
financial covenants based upon the fiscal year end date set forth in
Section 6.24(a) hereof for such fiscal
<PAGE>
year.
ARTICLE 7. AFFIRMATIVE COVENANTS
So long as any of the Notes shall remain unpaid, or any Bank
shall have any Commitment under this Agreement or any Aggregate Letter of Credit
Outstandings shall be outstanding, the Borrower shall and shall cause each of
its Subsidiaries to:
Section 7.01. Maintenance of Existence. Except as otherwise
provided in this Agreement, preserve and maintain, its corporate existence and
remain in good standing in the jurisdiction of its organization, and qualify and
remain qualified, as a foreign corporation in each jurisdiction in which such
qualification is required except where the failure to so qualify and/or be in
good standing would not in any case or in the aggregate have a material adverse
effect on the operations, business, property or financial condition of the
Borrower or such Subsidiary or on the ability of the Borrower or such Subsidiary
to perform its obligations hereunder or under the other Facility Documents to
which it is a party.
Section 7.02. Conduct of Business. Continue to engage
in the business conducted by it (or related businesses) on the date hereof.
Section 7.03. Maintenance of Properties. Maintain, keep and
preserve, all of its properties (tangible and intangible) necessary or useful in
the proper conduct of its business in good working order and condition, ordinary
wear and tear excepted, except where to do so would not in any case or in the
aggregate have a material adverse effect on the operations, business, property
or financial condition of the Borrower or such Subsidiary or on the ability of
the Borrower or such Subsidiary to perform its obligations hereunder or under
the other Facility Documents to which it is a party.
Section 7.04. Maintenance of Records. Keep adequate records
and books of account, in which complete entries, reflecting all financial
transactions of such entity, will be made.
<PAGE>
Section 7.05. Maintenance of Insurance. Maintain insurance
with financially sound and reputable insurance companies or associations in such
amounts and covering such risks as are usually carried by companies engaged in
the same or a similar business and similarly situated and as are required by the
Facility Documents. The Borrower shall provide the Agent notice that such
policies have been paid in full and shall deliver the policy or policies of such
insurance or certificates of insurance to the Agent if the Agent so requests
and, in any event, at least once per calendar year.
Section 7.06. Compliance with Laws. Comply with all applicable
laws, rules, regulations and orders ("Laws"), except to the extent that the
failure to so comply would not have a material adverse effect on the operations,
business, property or financial condition of the Borrower or such Subsidiary or
on the ability of the Borrower or such Subsidiary to perform its obligations
hereunder or under the other Facility Documents to which it is a party; and
cause to be conducted, at the sole cost of the Borrower or its Subsidiaries, or
any of them, any real estate appraisals that may be required to be conducted
pursuant to any applicable Laws.
Section 7.07. Right of Inspection. Subject to the provisions
of Section 12.15 hereof, at any reasonable time upon reasonable notice during
normal business hours and from time to time, permit the Agent, the Issuing Bank
or any Bank or any agent or representative thereof, to examine and make copies
and abstracts from the records and books of account of, and visit the properties
of, such entity and to discuss the affairs, finances and accounts of such entity
with any of its officers and directors and such entity's independent
accountants.
Section 7.08. Reporting Requirements. Furnish
directly to the Agent, the Issuing Bank and each of the Banks:
<PAGE>
(a) as soon as available and in any event within 105 days
after the end of each fiscal year of the Borrower, audited consolidated and
unaudited consolidating financial statements of the Borrower and its
Consolidated Subsidiaries which shall include a balance sheet of the Borrower
and its Consolidated Subsidiaries as of the end of such fiscal year, together
with a consolidated and consolidating income statement, and statement of cash
flows of the Borrower and its Consolidated Subsidiaries for such fiscal year and
such other reports as the Agent, on behalf of the Issuing Bank and the Banks,
shall reasonably require, all in reasonable detail and stating in comparative
form the respective figures for the corresponding date and period in the prior
fiscal year and all prepared in accordance with GAAP and accompanied by an
unqualified opinion thereon by Arthur Andersen & Co., or other independent
certified public accountants reasonably acceptable to the Agent and the Required
Banks together with an executive summary of the management letter prepared by
such independent certified public accountants; provided, however, that if a
Default or Event of Default has occurred and is continuing, the full text of
such management letter shall be provided to the Agent, the Issuing Bank and the
Banks;
(b) as soon as available and in any event within 60 days after
the end of each fiscal quarter of the Borrower, an unaudited consolidated and
consolidating balance sheet of the Borrower and its Consolidated Subsidiaries as
of the end of such quarter, together with a consolidated and consolidating
income statement of the Borrower and its Consolidated Subsidiaries for the
period commencing at the end of the previous fiscal year and ending with the end
of such quarter, all in reasonable detail and stating in comparative form (with
respect to the first two financial statements to be furnished hereunder only)
the respective figures for the corresponding date and period in the previous
fiscal year and all (with respect to all financial statements to be furnished
hereunder, including the first two) prepared in accordance with GAAP (subject to
year-end adjustments and except for the absence of GAAP notes thereto) and
attested to by the president or chief financial officer of the Borrower, each in
form and substance reasonably satisfactory to the Agent;
(c) simultaneously with the delivery of the financial
statements referred to in Sections 7.08(a) and (b) above, a certificate of the
president or chief financial officer of the Borrower (i) certifying that to the
best of his knowledge no Default or Event of Default has occurred and is
continuing or, if a Default or Event of Default has occurred and is continuing,
a statement as to the nature thereof and the action which is proposed to be
taken with respect thereto, and (ii) with computations demonstrating compliance
with the covenants contained in Article 9;
<PAGE>
(d) simultaneously with the delivery of the annual financial
statements referred to in Section 7.08(a), a certificate of the independent
public accountants who audited such statements to the effect that, in making the
examination necessary for the audit of such statements, they have obtained no
knowledge of any condition or event which constitutes a Default or Event of
Default, or if such accountants shall have obtained knowledge of any such
condition or event, specifying in such certificate each such condition or event
of which they have knowledge and the nature and status thereof;
(e) as soon as available and in any event not more than 120
days after the end of each fiscal year of the Borrower, copies of the Borrower's
consolidated annual financial projections in form similar to those provided to
the Agent, the Issuing Bank and the Banks prior to the Effective Date for the
then current fiscal year, for information purposes only;
(f) promptly after the Borrower or any of its Subsidiaries
becomes aware of the commencement thereof, notice of all actions, suits, and
proceedings before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, affecting the Borrower
or any Subsidiary of the Borrower which could (i) have a material adverse effect
on the business, condition (financial or otherwise), operations, performance or
properties of the Borrower and its Subsidiaries, taken as a whole, (ii) impair
the Borrower or any such Subsidiary's ability to perform under the Facility
Documents to which it is a party, or (iii) subject the Borrower or any
Subsidiary to monetary liability in an amount of $100,000 or more;
(g) as soon as possible and in any event within five days
after any of (i) a Default has occurred and is continuing, or (ii) an Event of
Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to
fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h)
of this Agreement has occurred, or (iii) an Event of Default pursuant to any of
Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or
(ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or
Section 10.01(j) of this Agreement has occurred and is continuing, a written
notice setting forth the details of such Default or Event of Default and the
action which is proposed to be taken by the Borrower with respect thereto;
(h) as soon as possible and in any event within five days
after the Borrower or any of its Subsidiaries knows or has reason to know that
any of the events or conditions specified below with respect to any Plan or
Multiemployer Plan have occurred or exist, a statement signed by a senior
financial officer of the Borrower or such Subsidiary setting forth details
<PAGE>
respecting such event or condition and the action, if any, which the Borrower,
such Subsidiary or any ERISA Affiliate proposes to take with respect thereto
(and a copy of any report or notice required to be filed with or given to PBGC
by the Borrower, any of its Subsidiaries or an ERISA Affiliate with respect to
such event or condition):
(i) any Reportable Event;
(ii) the filing under Section 4041 of ERISA
of a notice of intent to terminate any Plan or the
termination of any Plan;
(iii) the institution by PBGC of proceedings
under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan, or the
receipt by the Borrower, or any of its Subsidiaries or any
ERISA Affiliate of a notice from a Multiemployer Plan that
such action has been taken by PBGC with respect to such
Multiemployer Plan;
(iv) the complete or partial withdrawal by the
Borrower, any of its Subsidiaries or any ERISA Affiliate under
Section 4201 or 4204 of ERISA from a Multiemployer Plan, or
the receipt by the Borrower, any of its Subsidiaries or any
ERISA Affiliate of notice from a Multiemployer Plan that it is
in reorganization or insolvency pursuant to Section 4241 or
4245 of ERISA or that it intends to terminate or has
terminated under Section 4041A of ERISA; and
(v) the institution of a proceeding by a
fiduciary or any Multiemployer Plan against the Borrower, any
of its Subsidiaries or any ERISA Affiliate to enforce Section
515 of ERISA, which proceeding is not dismissed within 30
days;
(i) promptly after the furnishing thereof, copies of any
statement or report furnished to any other party pursuant to the terms of any
indenture, loan or credit or similar agreement and not otherwise required to be
furnished to the Agent, the Banks and the Issuing Bank pursuant to any other
clause of this Section 7.08;
(j) promptly after the commencement thereof or promptly after
the Borrower or any of its Subsidiaries know of the commencement or threat
thereof, notice of any Forfeiture Proceeding;
(k) promptly after the sending or filing thereof, copies of
all reports which Borrower sends to its security holders generally, and copies
of all reports and registration
<PAGE>
statements which Borrower or any of its Subsidiaries files with the Securities
and Exchange Commission or any national securities exchange; and
(l) such other information respecting the condition or
operations, financial or otherwise of the Borrower, any of its Subsidiaries or
any Affiliates of any of the foregoing as the Agent may from time to time
reasonably request.
Section 7.09. Payment of Obligations. Pay, discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all of its material Debt and other material obligations of whatever
nature (including any obligation for taxes or wages), except for any Debt or
other material obligation which is being contested in good faith and with
respect to which, on a consolidated basis, adequate reserves in conformity with
GAAP shall have been provided on the books of the Borrower or the applicable
Subsidiary.
Section 7.10. Subsidiary Guarantee. In the event that
aggregate loans, Dividends or other distributions from the Borrower or any of
its Subsidiaries to any Affiliate thereof (excluding Dividends made by the
Borrower to any of its shareholders in accordance with Section 8.15 hereof)
exceed $5,000,000 in principal amount at any time, the Borrower shall cause such
Affiliate to immediately, and in any event, within 10 Banking Days thereafter,
execute and deliver to the Agent a guarantee of the Debt of the Borrower
hereunder, which guarantee shall be substantially in a form approved by the
Agent and the Required Banks.
Section 7.11. Notices With Respect to Certain Debts. Promptly
notify each of the Banks of the failure of any of the Borrower, any Subsidiary
or any Acquisition Affiliate to (a) pay any Debt or Debts when due and payable,
after giving effect to any applicable grace period, in the aggregate (with
respect to the Borrower, its Subsidiaries and the Acquisition Affiliates) amount
of $250,000 or more, or (b) perform or observe any term, covenant or condition
on the part of any of the foregoing entities to be performed or observed under
any agreement or instrument relating to any such Debt or Debts.
Section 7.12. Use of Proceeds. Use the proceeds of
the Loans only for the purposes enumerated in Section 2.03
hereof, in the case of the Borrower.
Section 7.13. Solvency. The Borrower shall continue
to be Solvent and ensure that it and each of its Subsidiaries continues to be
Solvent.
Section 7.14. Subsidiary Guarantees After Effective Date. The
Borrower shall cause each Person which becomes a
<PAGE>
Subsidiary of the Borrower after the Effective Date hereof to execute and
deliver a Subsidiary Guarantee to the Agent.
ARTICLE 8. NEGATIVE COVENANTS
So long as any of the Notes shall remain unpaid or any Bank
shall have any Commitment under this Agreement or any Aggregate Letter of Credit
Outstandings shall be outstanding, the Borrower shall not and shall not permit
its Subsidiaries to:
Section 8.01. Debt. Create, incur, assume or suffer
to exist any Debt, except:
(a) The Obligations;
(b) Debt described in Schedule 6.10, and any renewals,
extensions or refinancings thereof provided, that such renewals, extensions or
refinancings are on terms no less favorable to the Borrower or the relevant
Subsidiary of the Borrower than the original terms of such Debt; provided,
however, that neither the Borrower nor its Subsidiaries shall cause or permit
any letter of credit or other financial accommodation to be issued for its
account on or after December 1, 1997, under either of the credit facilities
described in Items 10 and 11 of Schedule 6.10;
(c) Subordinated Debt;
(d) Debt incurred in connection with operating leases entered
into by the Borrower or its Subsidiaries, or any of them, consistent with past
practice or in the ordinary course of business;
(e) Debt of the Borrower or its Subsidiaries, or any
of them, secured by Permitted Liens;
(f) Current liabilities in respect of taxes, assessments and
governmental charges and levies incurred, or claims for labor, materials,
inventory, services, supplies and rentals incurred, or for goods or services
purchased, incurred in the ordinary course of business;
(g) Capital Leases, provided that the aggregate
initial present value of such Capital Leases does not exceed
$1,000,000 in any fiscal year;
(h) Debt of the Borrower to any Subsidiary, or of any
Subsidiary to the Borrower or any other Subsidiary;
(i) Permitted Assumed Acquisition Debt, but only so
long as such Debt remains Permitted Assumed Acquisition Debt; and
(j) Additional unsecured Debt not contemplated by
<PAGE>
clauses (a) through (i) above, so long as such Debt shall not exceed $5,000,000
in the aggregate for the Borrower and all Subsidiaries at any one time
outstanding.
Section 8.02. Liens. Create, incur, assume or suffer to
exist any Lien, upon or with respect to any of its property, now owned or
hereafter acquired, except the following Liens ("Permitted Liens"):
(a) Liens in favor of the Agent (on behalf and for the
ratable benefit of the Banks) securing the Loans hereunder;
(b) Liens for taxes or assessments or other government charges
or levies if not yet due and payable or if due and payable if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained in conformity with GAAP;
(c) Liens imposed by law, such as mechanic's, materialmen's,
landlord's, warehousemen's and carrier's Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are not
past due for more than 30 days, or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves in accordance with
GAAP have been established;
(d) Liens under workers' compensation unemployment
insurance, social security or similar legislation (other than
ERISA);
(e) Liens, deposits or pledges to secure the performance of
bids, tenders, contracts (other than contracts for the payment of money),
leases, public or statutory obligations, surety, stay, appeal, indemnity,
performance or other similar bonds, or other similar obligations arising in the
ordinary course of business;
(f) judgment and other similar Liens arising in connection
with court proceedings; provided that the execution or other enforcement of such
Liens is effectively stayed and the claims secured thereby are being actively
contested in good faith and by appropriate proceedings;
(g) easements, rights-of-way, restrictions and other similar
encumbrances which, in the aggregate, do not materially interfere with the
occupation, use and enjoyment by the Borrower or any of its Subsidiaries of the
property or assets encumbered thereby in the normal course of its business or
materially impair the value of the property subject thereto;
(h) purchase money Liens on any personal property heretofore
or hereafter acquired or the assumption of any Lien on
<PAGE>
property existing at the time of such acquisition, or a Lien incurred in
connection with any conditional sale or other title retention agreement or a
Capital Lease; provided, that such Liens attach only to the property as acquired
and do not extend to any additional property of the Borrower or of any of its
Subsidiaries;
(i) Liens securing Permitted Assumed Acquisition Debt to the
extent described in the definition of Permitted Assumed Acquisition Debt; and
(j) Liens existing on the date hereof and described on
Schedule 6.10 hereto.
Section 8.03. Investments. Make any loan or advance to any
person or purchase or otherwise acquire, any capital stock, assets, obligations
or other securities of, make any capital contribution to, or otherwise invest
in, or acquire any interest in any Person (each of the foregoing, an
"Investment"). Notwithstanding the foregoing, the Borrower and its Subsidiaries
shall be entitled to make loans and advances to their vendors in an amount up to
$500,000 in the aggregate at any one time outstanding, loans and other
distributions to Affiliates in accordance with Section 8.13 hereof, Investments
in Acquisition Affiliates in accordance with Section 12.06 hereof and
Investments in Subsidiaries existing on the date hereof; and the Borrower and
each of its Subsidiaries shall be entitled to make the following Investments:
(i) obligations issued or guaranteed by states or municipalities within the
United States of America; (ii) obligations issued or guaranteed by the United
States of America or any agency or subdivision thereof; (iii) certificates of
deposit, time deposits, Eurodollar certificates of deposit, bankers acceptances
and other "money market instruments" issued by any bank, trust company or
financial institution organized under the laws of the United States of America
or any state thereof (or, in the case of Eurodollar certificates of deposit, a
branch of any such bank, trust company or financial institution) having capital
and surplus in an aggregate amount not less than $100,000,000; (iv) commercial
paper rated at least Prime-1 by Moody's Investors Service, Inc. or A-1 by
Standard & Poor's Ratings Group; (v) repurchase agreements entered into with any
bank, trust company or financial institution organized under the laws of the
United States of America or any state thereof having capital and surplus in an
aggregate amount not less than $100,000,000 and relating to any of the
obligations referred to in clauses (i), (ii) and (iii) above; in each case
maturing or being due or payable in full not more than one year after the
Borrower's or such Subsidiary's acquisition thereof; and (vi) other prudent
investments in readily-marketable publicly-traded securities, provided that the
amount of cash and other property invested in such other investments does not
exceed $5,000,000 in the aggregate and the making of such other investments has
been
<PAGE>
approved by the outside directors on the Borrower's Board of directors.
Section 8.04. Sale of Assets. Sell, lease, assign, transfer or
otherwise dispose of, any of its now owned or hereafter acquired assets, except:
(a) for assets disposed of in the ordinary course of business; (b) the sale or
other disposition of assets no longer used or useful in the conduct of its
business; (c) sales or dispositions of assets in arm's length transactions,
provided that the aggregate net proceeds of any such sale, when added to all
other sales made by the Borrower and its Subsidiaries in any fiscal year, shall
not exceed $500,000 in such fiscal year.
Section 8.05. Transactions with Affiliates. Enter into any
transaction, including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any Affiliate, except (a) (unless
elsewhere restricted hereunder) in the ordinary course of and pursuant to the
reasonable requirements of the Borrower's or its relevant Subsidiary's business
and (except with respect to intercompany transfer pricing transactions between
the Borrower and a Subsidiary or between two Subsidiaries) upon fair and
reasonable terms no less favorable to the Borrower or its relevant Subsidiary,
as the case may be, than would be obtained in a comparable arm's length
transaction with a Person not an Affiliate, (b) transactions described in the
Final Prospectus, and (c) Debt transactions permitted pursuant to Section
8.01(e). Additionally, and subject to the other provisions of this Agreement
(including, but not limited to, Section 8.03 hereof), the Borrower and its
Subsidiaries may continue to lease its existing facilities from the relevant
Real Estate Borrowers; the Borrower may make loans, Dividends and other
distributions in accordance with Sections 8.13 and 8.15 hereof; and the Borrower
and its Subsidiaries may engage in transactions with the Acquisition Affiliates
as provided in Section 12.06 hereof.
Section 8.06. Mergers, Etc. (a) Merge or consolidate with, or
sell, assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to, any Person, except for mergers, consolidations,
sales, assignments, leases or other dispositions described in the Final
Prospectus or (b) acquire all or substantially all of the assets or the business
of any Person (or enter into any agreement to do any of the foregoing), except
for Permitted Acquisitions.
Section 8.07. Acquisitions. Acquire or commit or agree to
acquire any material portion of the stock, securities or assets of any other
Person, except in the context of a Permitted Acquisition or except as
contemplated in the Final Prospectus.
<PAGE>
Section 8.08. No Activities Leading to Forfeiture.
Engage in the conduct of any business or activity which would be
likely to result in a Forfeiture Proceeding.
Section 8.09. Corporate Documents; Fiscal Year. Amend, modify
or supplement its certificate or articles of incorporation or by-laws in any way
which would materially adversely affect the ability of the Borrower or such
Subsidiary to perform its obligations hereunder or under its respective
Subsidiary Guarantee, as the case may be, or change its fiscal year.
Section 8.10. Redemptions, Etc. Notwithstanding Section 8.15
hereof, (a) purchase or redeem any of its stock or other securities, or retire
any of its stock, or take any action which would have an effect equivalent to
any of the foregoing or (b) pay any cash Dividends, make any capital
distribution in cash or other property or take any action which would have an
effect equivalent to any of the foregoing, if a Default or Event of Default has
occurred and is continuing or would result therefrom.
Section 8.11. Creation of Subsidiaries, Etc. Except as
permitted by Section 12.06 hereof, create any direct or indirect subsidiary or
divest itself of any material assets by transferring them to any existing or
future subsidiary or by entering into a partnership, joint venture or similar
arrangement, or make any material change to its capital structure or enter into
any management contract permitting any third party to have management rights
with respect to its business.
Section 8.12. Real Estate Loans to Affiliates. Make any loan
or otherwise extend credit to any Affiliate to provide funds to permit such
Affiliate to purchase real property.
Section 8.13. Loans to Affiliates; Distributions. Except as
permitted by Section 8.15 hereof in the case of the Borrower, permit loans or
Dividends or other distributions from the Borrower or any of its Subsidiaries to
any Affiliate thereof to exceed $500,000 at any time with respect to such
Affiliate, unless such Affiliate shall have executed a guarantee of the
obligations of the Borrower in accordance with Section 7.10 hereof.
Section 8.14. Broker's Fees. Pay any broker or finder
any compensation for services rendered with respect to the
transactions contemplated by this Agreement or any other Facility
Document.
Section 8.15. Dividends. Subject to Section 8.10
hereof, the Borrower shall not (a) declare or pay in any fiscal
year Dividends in excess of the sum of (i) fifty percent (50%) of
the accrued net income reflected in the immediately preceding
<PAGE>
fiscal year's financial statements plus (ii) $10,000,000, or (b) pay in any
fiscal year Dividends in excess of the sum of (i) fifty percent (50%) of the
accrued net income reflected in the immediately preceding fiscal year's
financial statements plus (ii) all Dividends declared in accordance with clause
(a) above in respect of any prior fiscal year to the extent not previously paid
plus (iii) $10,000,000.
Section 8.16. Nature of Business. In the case of the Borrower,
enter into any business other than the business contemplated by Section 6.23
hereof, and in the case of each Subsidiary, enter into any business except such
business except such business which is comparable to the business in which Sid
Tool is engaged as of the Effective Date.
ARTICLE 9. FINANCIAL COVENANTS
So long as any of the Notes shall remain unpaid, or any Bank
shall have any Commitment or any Aggregate Letter of Credit Outstandings shall
be outstanding under this Agreement:
Section 9.01. Minimum Effective Net Worth. The Borrower and
its Consolidated Subsidiaries shall maintain at all times during each of the
periods set forth below, an Effective Net Worth of not less than the amount set
forth below opposite such period:
<TABLE>
<CAPTION>
========================================================================================================================
Period Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
From and including the Effective $115,000,000
Date through and including the day
immediately preceding the last day
of fiscal year 1996
- ------------------------------------------------------------------------------------------------------------------------
From and including the last day of $130,000,000
fiscal year 1996 through and
including the day immediately
preceding the last day of fiscal
year 1997
- ------------------------------------------------------------------------------------------------------------------------
From and including the last day of $145,000,000
fiscal year 1997 through and
including the day immediately
preceding the last day of fiscal
year 1998
- ------------------------------------------------------------------------------------------------------------------------
From and including the last day of $160,000,000
fiscal year 1998 through and
including the Loan Maturity Date
========================================================================================================================
</TABLE>
Section 9.02. Current Ratio. The Borrower and its
<PAGE>
Consolidated Subsidiaries shall maintain at all times a ratio of Total Current
Assets to Total Current Liabilities (which shall include any and all Aggregate
Outstandings for purposes of this Section 9.02) of not less than 1.25:1.00.
Section 9.03. Maximum Leverage. The Borrower and its
Consolidated Subsidiaries shall maintain at all times a ratio of
Total Liabilities to Effective Net Worth of not more than
1.25:1.0.
Section 9.04. Maximum Capital Expenditures. The Borrower and
its Consolidated Subsidiaries shall not be permitted to make Capital
Expenditures averaging, on a cumulative basis through September 2, 2000 in
excess of $25,000,000 with respect to any fiscal year commencing September 1,
1996; provided, however, that if it is determined that Capital Expenditures in
an amount in excess of $25,000,000 have been made by the Borrower and its
Consolidated Subsidiaries for the fiscal year ending August 30, 1997, the amount
of such excess shall be subtracted from the amount of Capital Expenditures
otherwise permitted to be made by this Section 9.04.
Section 9.05. Minimum Interest Coverage Ratio. The Borrower
and its Consolidated Subsidiaries shall maintain at all times a ratio of EBIT to
Interest Expense of at least 2.50 to 1.0, as determined at the end of each
fiscal quarter for the then preceding four fiscal quarters.
Section 9.06. Positive Earnings. The Borrower and its
Consolidated Subsidiaries shall maintain at all times positive Net Income (after
taxes, dividends and other distributions and excluding the effect of
extraordinary items and any changes in accounting policies), as determined at
the end of each fiscal quarter for the then preceding four fiscal quarters.
Compliance with all of the financial covenants contained in
this Article 9 shall be determined by reference to the financial statements of
the Borrower delivered to the Banks in accordance with Section 7.08 hereof. All
financial covenants shall be applicable at all times and shall be tested on a
quarterly basis and on a combined (not combining) basis.
ARTICLE 10. EVENTS OF DEFAULT
Section 10.01. Events of Default. Any of the following
events shall be an "Event of Default":
(a) The Borrower or any Subsidiary or any Acquisition
Affiliate shall: (i) fail to pay the principal of or interest on any Loan as and
when due and payable or (ii) fail to pay any fee or other amount (including,
without limitation, any unreimbursed
<PAGE>
amount with respect to any Letter of Credit) due hereunder as and when due and
payable; if any such failure referred to in this clause (ii) shall continue for
two consecutive Banking Days after delivery to the Borrower of notice (pursuant
to Section 12.07 hereof) of such failure;
(b) Any representation or warranty made or deemed made by the
Borrower, any Subsidiary or any Acquisition Affiliate in this Agreement or in
any other Facility Document or which is contained in any certificate, document,
opinion, financial or other statement furnished at any time under or in
connection with any Facility Document shall prove to have been incorrect in any
material respect on or as of the date made or deemed made;
(c) The Borrower, any Subsidiary or any Acquisition Affiliate
shall: (i) fail to perform or observe any term, covenant or agreement contained
in any of (A) Section 2.03, (B) Article 9 hereof or (C) any Facility Document
(with respect to any such Facility Documents, other than the obligations
specifically referred to in Section 10.01(a) hereof, and in any event, after the
expiration of any applicable grace period provided in any such Facility
Document); or (ii) fail to perform or observe any term, covenant or agreement on
its part to be performed or observed (other than the obligations specifically
referred to in any of Section 10.01(a), Section 10.01(b), Section 10.01(c)(i) or
any of Sections 10.01(d)-(j) hereof) in this Agreement and (in the case of this
Section 10.01(c)(ii) only) such failure shall continue for 30 consecutive days;
(d) The Borrower or any Subsidiary or any Acquisition
Affiliate shall: (i) fail to pay any Debt or Debts for borrowed money (other
than the payment obligations described in (a) above or under the Second Amended
and Restated Credit Agreement) in the aggregate amount of $500,000 or more, as
the case may be, or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
after giving effect to any applicable grace period; or (ii) fail to perform or
observe any term, covenant or condition on its part to be performed or observed,
including the obligation to make payment, under any agreement or instrument
relating to any Debt or Debts (other than the payment obligations described in
(a) above and other than certain failures which exist at the date hereof and
described in Schedule 6.02) in the aggregate amount of $500,000 or more, when
required to be performed or observed, and the effect of such failure to perform
or observe is to accelerate the maturity of such Debt, after giving effect to
any applicable grace period;
(e) The Borrower, any Subsidiary or any Acquisition Affiliate
(i) shall generally not, or be unable to, or shall admit in writing its or their
inability to, pay its or their debts as such debts become due; or (ii) shall
make an assignment
<PAGE>
for the benefit of creditors, petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or a substantial part of
its assets; or (iii) shall commence any proceeding under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or (iv)
shall have had any such petition or application filed or any such proceeding
shall have been commenced, against it or them, in which an adjudication or
appointment is made or order for relief is entered, or which petition,
application or proceeding remains undismissed for a period of 45 days or more;
or shall be the subject of any proceeding under which its assets may be subject
to seizure, forfeiture or divestiture (other than a proceeding in respect of a
Permitted Lien under Section 8.02(b)); or (v) by any act or omission shall
indicate its consent to, approval of or acquiescence in any such petition,
application or proceeding or order for relief or the appointment of a custodian,
receiver or trustee for all or any substantial part of its property; (vi) shall
suffer any such custodianship, receivership or trusteeship to continue
discharged for a period of 30 days or more; or (vii) the Borrower, its
Subsidiaries and the Acquisition Affiliates, taken as a whole, shall cease to be
Solvent;
(f) One or more judgments, decrees or orders for the payment
of money in excess of $500,000 in the aggregate shall be rendered against the
Borrower and/or any Subsidiary and/or any Acquisition Affiliate and such
judgments, decrees or orders shall continue unsatisfied and in effect for a
period of 45 consecutive days without being vacated, discharged, satisfied or
stayed or bonded pending appeal;
(g) An event or condition specified in Section 7.08(h) hereof
shall occur or exist with respect to any Plan or Multiemployer Plan and, as a
result of such event or condition, together with all other such events or
conditions and all other events or conditions relating to a Plan or
Multiemployer Plan, the Borrower or any Subsidiary or any Acquisition Affiliate
or any ERISA Affiliate shall incur or in the opinion of the Required Banks shall
be reasonably likely to incur a liability to a Plan, a Multiemployer Plan, the
Internal Revenue Service or PBGC (or any combination of the foregoing) in excess
of $2,000,000 in the aggregate;
(h) Any Forfeiture Proceeding shall have been commenced
against the Borrower, any Subsidiary or any Acquisition Affiliate unless such
Borrower, Subsidiary or Acquisition Affiliate, as the case may be, timely
contests any such proceeding in good faith by appropriate proceedings and such
proceeding is dismissed within 30 days after the commencement thereof; provided,
however, that until such proceeding is dismissed as aforesaid, and
notwithstanding anything contained in this Agreement to the contrary, the Banks
will be under no
<PAGE>
obligation to make Loans available to, and the Issuing Bank will be under no
obligation to issue Letters of Credit for the account of, the Borrower after the
commencement of any such proceeding unless and until such time as any such
proceeding shall have been dismissed pursuant to the foregoing provisions;
(i) (i) Any of the Subsidiaries shall fail to perform or
observe any term, covenant or agreement contained in the Subsidiary Guarantee;
or (ii) any Subsidiary Guarantee or any provision of any Subsidiary Guarantee
shall cease to be in full force and effect for any reason; or
(j) Sid Tool Co., Inc. shall cease to be a wholly-owned
direct Subsidiary of the Borrower for any reason.
Section 10.02. Remedies. If any Event of Default pursuant to
any of Section 10.01(a), Section 10.01(b) (only if due to fraud) or any of
Sections 10.01(c)(i)(A)-(B) hereof shall occur, or if any Event of Default
pursuant to any of Section 10.01(b) (only if not due to fraud), any of Sections
10.01(c)(i)(C) or (ii), Section 10.01(d), Section 10.01(f), Section 10.01(g),
Section 10.01(i) or Section 10.01(j) hereof shall occur and be continuing the
Agent, after it has received notice or has become aware of any such Event of
Default, shall notify the Banks of the same, and if instructed by the Required
Banks, the Agent shall, by notice to the Borrower, (i) declare the Commitments
to be terminated, whereupon the same shall forthwith terminate, and (ii) declare
the outstanding principal of the Loans, all interest thereon and all other
amounts payable under this Agreement and the Notes (including, without
limitation, amounts payable in respect of any Letter of Credit) to be forthwith
due and payable, whereupon the Loans, all such interest and all such amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by the Borrower; provided that, in the case of an Event of Default referred to
in Section 10.01(e) or Section 10.01(h) above, the Commitments shall be
immediately terminated, and the Loans, all interest thereon and all other
amounts payable under this Agreement and the Notes (including amounts payable in
respect of any Letter of Credit) shall be immediately due and payable without
notice, presentment, demand, protest or other formalities of any kind, all of
which are hereby expressly waived by the Borrower. With respect to all Letters
of Credit that shall not have matured or with respect to which presentment for
honor shall not have occurred, the Borrower shall deposit in a cash collateral
account opened by the Agent an amount equal to the aggregate undrawn amount of
Letters of Credit, and the unused portion thereof, if any, shall be returned to
the Borrower after the respective expiration dates of the Letters of Credit and
after all obligations of the Borrower hereunder and under the Facility Documents
are paid in full. Furthermore, if an Event of
<PAGE>
Default pursuant to any of Section 10.01(a), Section 10.01(b) (only if due to
fraud), any of Sections 10.01(c)(i)(A)-(B), Section 10.01(e) or Section 10.01(h)
of this Agreement has occurred, or if an Event of Default pursuant to any of
Section 10.01(b) (only if not due to fraud), any of Sections 10.01(c)(i)(C) or
(ii), Section 10.01(d), Section 10.01(f), Section 10.01(g), Section 10.01(i) or
Section 10.01(j) of this Agreement has occurred and is continuing, interest and
each Letter of Credit Commission Fee and Special Letter of Credit Commission Fee
payable hereunder in connection with Loans, Letters of Credit and Special
Letters of Credit shall automatically be increased to the Default Rate.
<PAGE>
ARTICLE 11. THE AGENT AND THE ISSUING BANK;
RELATIONS AMONG BANKS
Section 11.01. Appointment, Powers and Immunities of Agent.
Each Bank and the Issuing Bank hereby irrevocably (but subject to removal by the
Required Banks pursuant to Section 11.09) appoint and authorize the Agent to act
as its agent hereunder and under any other Facility Document with such powers as
are specifically delegated to the Agent or any similar Person by the terms of
this Agreement and any other Facility Document, together with such other powers
as are reasonably incidental thereto. Neither the Agent nor the Issuing Bank
shall have any duties or responsibilities except those expressly set forth in
this Agreement and any other Facility Document, and shall not by reason of this
Agreement be a trustee for any Bank. Neither the Agent nor the Issuing Bank
shall be responsible to the Banks for any recitals, statements, representations
or warranties made by the Borrower or any Subsidiary or any officer or official
of the Borrower, any Subsidiary or any other Person contained in this Agreement
or any other Facility Document, or in any certificate or other document or
instrument referred to or provided for in, or received by any of them under,
this Agreement or any other Facility Document, or for the value, legality,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Facility Document or any other document or instrument
referred to or provided for herein or therein, or for any failure by the
Borrower or its Subsidiaries, or any of them, to perform any of their or its
respective obligations hereunder or thereunder. The Agent and the Issuing Bank
may employ agents and attorneys-in-fact and shall not be responsible, except as
to money or securities received by it or its authorized agents, for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care. Neither the Agent, nor the Issuing Bank, nor any of their
respective directors, officers, employees or agents shall be liable or
responsible for any action taken or omitted to be taken by it or them hereunder
or under any other Facility Document or in connection herewith or therewith,
except for its or their own gross negligence or willful misconduct.
Section 11.02. Reliance by Agent and Issuing Bank. Each of the
Agent and the Issuing Bank shall be entitled to rely upon any certification,
notice or other communication (including any thereof by telephone, telex,
telegram, telecopier or cable) believed by it to be genuine and correct and to
have been signed or sent by or on behalf of the proper Person or Persons, and
upon advice and statements of legal counsel, independent accountants and other
experts selected by the Agent or the Issuing Bank, as the case may be. Each of
the Agent and the Issuing Bank may deem and treat each Bank as the holder of the
Loans made by it for all purposes hereof unless and until a notice of the
assignment or transfer thereof reasonably satisfactory to the Agent and the
<PAGE>
Issuing Bank signed by such Bank shall have been furnished to the Agent and the
Issuing Bank but neither the Agent nor the Issuing Bank shall be required to
deal with any Person who has acquired a participation in any Loan from a Bank.
As to any matters not expressly provided for by this Agreement or any other
Facility Document, the Agent and the Issuing Bank shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
instructions signed by the Required Banks, and such instructions of the Required
Banks and any action taken, or failure to act, pursuant thereto shall be binding
on all of the Banks and any other holder of all or any portion of any Loan.
Section 11.03. Defaults. Neither the Agent nor the Issuing
Bank shall be deemed to have knowledge of the occurrence of a Default or Event
of Default (other than, in the case of the Agent, the non-payment of principal
of or interest on the Loans to the extent the same is required to be paid to the
Agent for the account of the Banks and other than, in the case of the Issuing
Bank, the non-payment of any reimbursement obligation under a Letter of Credit)
unless the Agent or the Issuing Bank, as the case may be, has actual knowledge
of such Default or Event of Default or has received notice from a Bank or the
Borrower specifying such Default or Event of Default and stating that such
notice is a "Notice of Default." In the event that the Agent or the Issuing
Bank, as the case may be, has actual knowledge of an Event of Default or
receives such a notice of the occurrence of a Default or Event of Default, the
Agent or the Issuing Bank shall give prompt notice thereof to the Banks (and
shall give each Bank prompt notice of each such non-payment). The Agent shall
(subject to Section 12.08) take such action with respect to such Default or
Event of Default which is continuing as shall be directed by the Required Banks;
provided that, unless and until the Agent shall have received such directions,
the Agent may take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interest of the Banks and the Issuing Bank; and provided further that the Agent
shall not be required to take any such action which it determines to be contrary
to law.
Section 11.04. Rights of Agent and Issuing Bank. With
respect to its Commitment and the Loans made by it, the Agent and the Issuing
Bank in its capacity as a Bank hereunder shall have the same rights and powers
hereunder as any other Bank and may exercise the same as though it were not
acting as the Agent or the Issuing Bank, and the term "Bank" or "Banks" shall,
unless the context otherwise indicates, include the Agent and the Issuing Bank
in its capacity as a Bank. The Agent, the Issuing Bank or any Bank and their
respective Affiliates may (without having to account therefor to any other Bank)
accept deposits from, lend money to (on a secured or unsecured basis), and
generally engage in any kind of banking, trust or other business
<PAGE>
with, the Borrower or any Subsidiaries of the Borrower (and any of their
respective Affiliates). In the case of the Agent or the Issuing Bank, it may do
so as if it were not acting as the Agent or the Issuing Bank, respectively, and
the Agent and the Issuing Bank may accept fees and other consideration from the
Borrower or any Subsidiaries of the Borrower for services in connection with
this Agreement or otherwise without having to account for the same to the Banks.
Although the Agent, the Issuing Bank or a Bank or any of their respective
Affiliates may in the course of such relationships and relationships with other
Persons acquire information about the Borrower or any Subsidiaries of the
Borrower, their respective Affiliates and such other Persons, neither the Agent,
the Issuing Bank nor such Bank shall have any duty to disclose such information
to the other Banks except as required under this Agreement or the Facility
Documents.
Section 11.05. Indemnification of Agent. The Banks (including
the Agent and the Issuing Bank in its capacity as a Bank) agree to indemnify the
Agent and the Issuing Bank (to the extent not reimbursed under Section 12.03 or
under the applicable provisions of any other Facility Document, but without
limiting the obligations of the Borrower under Section 12.03 or such
provisions), ratably in accordance with the aggregate unpaid principal amount of
the Loans made by the Banks (without giving effect to any participation, in all
or any portion of such Loans, sold by them to any other Person) (or, if no Loans
are at the time outstanding, ratably in accordance with their respective
Commitments), for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature whatsoever which may be imposed on, incurred by or asserted
against the Agent or the Issuing Bank relating to or arising out of this
Agreement, any other Facility Document or any other documents contemplated by or
referred to herein or the transactions contemplated hereby or thereby
(including, without limitation, the costs and expenses which the Borrower is
obligated to pay under Section 12.03 or under the applicable provisions of any
other Facility Document but excluding, unless a Default or Event of Default has
occurred, normal administrative costs and expenses incidental to the
performance of its agency duties hereunder) or the enforcement of any of the
terms hereof or thereof or of any such other documents or instruments; provided
that no Bank shall be liable for any of the foregoing to the extent they arise
from the gross negligence or willful misconduct of the party to be indemnified.
Section 11.06. Documents. The Agent will forward to the
Issuing Bank and each Bank, promptly after the Agent's receipt thereof, a copy
of each report, notice or other document required by this Agreement or any other
Facility Document to be delivered to the Agent for such Bank, to the extent not
otherwise delivered to the Issuing Bank or such Bank pursuant to this Agreement
or any other Facility Document.
<PAGE>
Section 11.07. Non-Reliance on Agent, Issuing Bank and Other
Banks. Each Bank agrees that it has, independently and without reliance on the
Agent, the Issuing Bank or any other Bank, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Borrower, its Subsidiaries and their respective Affiliates and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent, the Issuing Bank or any other Bank, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
analysis and decisions in taking or not taking action under this Agreement or
any other Facility Document. Neither the Agent nor the Issuing Bank shall be
required to keep itself informed as to the performance or observance by the
Borrower or any of its Subsidiaries of this Agreement or any other Facility
Document or any other document referred to or provided for herein or therein or
to inspect the properties or books of the Borrower or any Affiliate. Except for
notices, reports and other documents and information expressly required to be
furnished to the Banks by the Agent or the Issuing Bank hereunder, neither the
Agent nor the Issuing Bank shall have any duty or responsibility to provide any
Bank with any credit or other information concerning the affairs, financial
condition or business of the Borrower or any of its Subsidiaries (or any of
their respective Affiliates) which may come into the possession of the Agent,
the Issuing Bank or any of their respective Affiliates. Neither the Agent nor
the Issuing Bank shall be required to file this Agreement, any other Facility
Document or any document or instrument referred to herein or therein, for record
or give notice of this Agreement, any other Facility Document or any document or
instrument referred to herein or therein, to anyone except as specifically
provided in this Agreement.
Section 11.08. Failure of Agent or the Issuing Bank to Act.
Except for action expressly required of the Agent or the Issuing Bank
hereunder, the Agent and the Issuing Bank shall in all cases be fully justified
in failing or refusing to act hereunder unless it shall have received further
assurances (which may include cash collateral) of the indemnification
obligations of the Banks under Section 11.05 in respect of any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action.
Section 11.09. Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent may
resign at any time by giving written notice thereof to the Issuing Bank, the
Banks and the Borrower, and the Agent may be removed at any time with or without
cause by Banks having at least 60% of the aggregate amount of the Commitments
(the "Special Purpose Required Banks"); provided that the Borrower, the Issuing
Bank and the other Banks
<PAGE>
shall be promptly notified thereof. Upon any such resignation or removal, the
Special Purpose Required Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Special Purpose
Required Banks and shall have accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or the Special Purpose Required
Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of
the Banks, appoint a successor Agent, which shall be a commercial bank which has
an office in New York, New York having a minimum capital and surplus of
$500,000,000. The Special Purpose Required Banks or the retiring Agent, as the
case may be, shall upon the appointment of a successor Agent promptly so notify
the Borrower, the Issuing Bank and the other Banks. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from and after the date of such succession from its duties and obligations
hereunder. After any retiring Agent's resignation or removal hereunder as Agent,
the provisions of this Article 11 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Agent. The retiring Agent shall pay to the successor Agent its pro-rated
portion of any agency fee that had been paid for such year.
Section 11.10. Amendments Concerning Agency and Issuing Bank
Function. Neither the Agent nor the Issuing Bank shall be bound by any waiver,
amendment, supplement or modification of this Agreement or any other Facility
Document which affects its respective rights or obligations hereunder or
thereunder unless it shall have given its prior consent thereto.
Section 11.11. Liability of Agent, Issuing Bank and Banks.
Neither the Agent, the Issuing Bank nor any Bank shall have any liabilities or
responsibilities to the Borrower, any Subsidiary of the Borrower or any other
Person on account of the failure of any other Bank to perform its obligations
hereunder or to any other Bank on account of the failure of the Borrower or any
of the Borrower's Subsidiaries to perform their obligations hereunder or under
any other Facility Document.
Section 11.12. Transfer of Agency Function. Without the
consent of the Borrower, any Subsidiary of the Borrower, the Issuing Bank, or
any Bank, the Agent may at any time or from time to time transfer its functions
as Agent hereunder to any of its United States offices wherever located,
provided that the Agent shall promptly notify the Borrower and the Banks
thereof.
<PAGE>
Section 11.13. Non-Receipt of Funds by the Agent. Unless the
Agent shall have been notified by (i) a Bank or (ii) the Borrower (the "Payor")
prior to the date on which such Bank is to make payment hereunder to the Agent
of the proceeds of a Loan or the Borrower is to make any payment hereunder to
the Agent, as the case may be (either such payment being a "Required Payment"),
which notice shall be effective upon receipt, that the Payor does not intend to
make the Required Payment to the Agent, the Agent may assume that the Required
Payment has been made and may, in reliance upon such assumption (but shall not
be required to), make the amount thereof available to the intended recipient on
such date and, if the Payor has not in fact made the Required Payment to the
Agent, the recipient of such payment (and, if such recipient is the Borrower and
the Payor Bank fails to pay the amount thereof to the Agent forthwith upon
demand, the Borrower) shall, on demand, repay to the Agent the amount made
available to it together with interest thereon for the period from the date such
amount was so made available by the Agent until the date the Agent recovers such
amount at a rate per annum equal to the average daily Federal Funds Rate for
such period.
Section 11.14. Withholding Taxes. Each Bank represents that it
is entitled to receive any payments to be made to it hereunder without the
withholding of any tax and will furnish to the Agent such forms, certifications,
statements and other documents as the Agent may request from time to time to
evidence such Bank's exemption from the withholding of any tax imposed by any
jurisdiction or to enable the Agent to comply with any applicable laws or
regulations relating thereto. Without limiting the effect of the foregoing, if
any Bank is not created or organized under the laws of the United States of
America or any state thereof, in the event that the payment of interest by the
Borrower is treated for U.S. income tax purposes as derived in whole or in part
from sources from within the U.S., such Bank will furnish to the Agent Form 4224
or Form 1001 of the Internal Revenue Service, or such other forms,
certifications, statements or documents, duly executed and completed by such
Bank as evidence of such Bank's exemption from the withholding of U.S. tax with
respect thereto. The Agent shall not be obligated to make any payments hereunder
to such Bank in respect of any Loan or such Bank's Commitment until such Bank
shall have furnished to the Agent the requested form, certification, statement
or document.
Section 11.15. Several Obligations and Rights of Banks. The
failure of any Bank to make any Loan to be made by it on the date specified
therefor or to perform any of its other obligations hereunder (including,
without limitation, its obligations to participate in any reimbursement
obligations under a Letter of Credit) shall not relieve any other Bank of its
obligation to make its Loan on such date or to perform its other obligations
hereunder (including, without limitation, its
<PAGE>
obligation to participate in any reimbursement obligations under a Letter of
Credit), but no Bank shall be responsible for the failure of any other Bank to
make a Loan to be made by such other Bank or to perform any of such other
obligations. If any Bank shall default in its obligations hereunder or under the
Facility Documents, (i) such Bank shall not be entitled to (x) receive any
payments to which it would otherwise be entitled hereunder, or (y) give any
consent, instruction, approval or waiver hereunder (including, without
limitation, pursuant to Section 10.02 and Section 12.01 hereof) or under any
other Facility Document, and the Commitment Proportion of such Bank shall not be
given any effect with respect to any such consent, instruction, approval or
waiver and (ii) the Borrower and the non-defaulting Banks will endeavor in good
faith to arrange for another lender or lenders to replace the defaulting Bank,
which replacement lender or lenders must agree to participate in the Commitment
to the extent of the defaulting Bank's obligations hereunder on the same terms
and conditions applicable to such defaulting Bank at the time of such default
and to purchase all of such defaulting Bank's Loans hereunder; provided,
however, that none of such non-defaulting Banks will be deemed to have incurred
or assumed any liabilities or obligations pursuant to this sentence if any
replacement lender does not elect to participate as referenced above for any
reason whatsoever. The amounts payable at any time hereunder to each Bank shall
be a separate and independent debt and upon the written consent of the Required
Banks, the Banks shall be entitled to protect and enforce their rights arising
out of this Agreement, absent a waiver of any such rights in accordance with
Section 12.01 hereof, in any proceeding in which all Banks are joined for any
such purpose; provided, however, that the Agent shall be entitled to protect and
enforce the rights of the Banks arising out of this Agreement, in accordance
with this Agreement, and it shall not be necessary for any other Bank to be
joined as an additional party in any proceeding for such purpose (though nothing
shall preclude such joinder).
Section 11.16. Pro Rata/Non Pro Rata Treatment of Loans.
(a) Subject to the provisions of Article 3 and Article
4, each payment or prepayment of principal of any Borrowing consisting of Pro
Rata Loans, each payment of interest on any Borrowing consisting of Pro Rata
Loans, each payment of the Facility Fee, each reimbursement obligation under a
Letter of Credit, each reduction of the Commitments and each refinancing or
conversion of any Borrowing with a Borrowing consisting of Pro Rata Loans of any
type, shall be allocated pro rata among Banks in accordance with their
respective Commitments (or, if such Commitments shall have expired or been
terminated, in accordance with the respective principal amounts of their
outstanding Pro Rata Loans). Each payment of principal of any Borrowing
consisting of Bid Loans shall be allocated pro rata among the
<PAGE>
Banks participating in such Borrowing in accordance with the respective
principal amounts of their outstanding Bid Loans comprising such Borrowing. Each
payment of interest on any Borrowing consisting of Bid Loans shall be allocated
pro rata among the Banks participating in such Borrowing in accordance with the
respective amounts of accrued and unpaid interest on their outstanding Bid Loans
comprising such Borrowing. For purposes of determining the available Commitments
of the Banks at any time, each outstanding Borrowing consisting of Bid Loans
shall be deemed to have utilized the Commitments of the Banks (including those
Banks which shall not have made Loans as part of such Borrowing consisting of
Bid Loans) pro rata in accordance with such respective Commitments. Each Bank
agrees that in computing such Bank's portion of any Borrowing to be made
hereunder, the Agent may, in its discretion, round each Bank's percentage of
such Borrowing to the next higher or lower whole dollar amount.
(b) Each reduction or termination of the amount of the
Commitments under Section 2.07 hereof shall be applied to the Commitments of the
Banks pro rata in accordance with their respective Commitment Proportions.
Section 11.17. Sharing of Payments Among Banks. If a Bank
shall obtain payment of any principal of or interest on any Pro Rata Loan made
or extended by it through the exercise of any right of setoff, banker's lien,
counterclaim, or by any other means, it shall promptly purchase from the other
Banks participations in (or, if and to the extent specified by such Bank, direct
interests in) the Pro Rata Loans made by the other Banks in such amounts, and
make such other adjustments from time to time as shall be equitable to the end
that all the Banks shall share the benefit of such payment (net of any expenses
which may be incurred by such Bank in obtaining or preserving such benefit) pro
rata in accordance with the unpaid principal and interest on the Pro Rata Loans
held by each of them. To such end the Banks shall make appropriate adjustments
among themselves (by the sale of participations or otherwise) if such payment is
rescinded or must otherwise be restored. The Borrower agrees that any Bank so
purchasing a participation (or direct interest) in the Pro Rata Loans made by
other Banks may exercise all rights of setoff, banker's lien, counterclaim or
similar rights with respect to such participation (or direct interest). Nothing
contained herein shall require any Bank to exercise any such right or shall
affect the right of any Bank to exercise, and retain the benefits of exercising,
any such right with respect to any other indebtedness of the Borrower. In the
event that a Bank has both Bid Loans and Pro Rata Loans outstanding, such Bank
shall deem and treat all payments obtained by it as payments of principal of or
interest on such Pro Rata Loans and the excess of such payments, if any, as
payments of principal of or interest on such Bid Loans.
<PAGE>
ARTICLE 12. MISCELLANEOUS
Section 12.01. Amendments and Waivers. Except as otherwise
expressly provided in this Agreement, any provision of this Agreement may be
amended or modified only by an instrument in writing signed by the Borrower and
the Required Banks (and, if the rights, obligations or duties of the Agent or
the Issuing Bank are affected thereby, by the Agent or the Issuing Bank, as the
case may be), and any provision of this Agreement may be waived by the Borrower
(if such provision requires performance by the Agent, the Issuing Bank or the
Banks, or any of them) or by an instrument signed by the Required Banks (if such
provision requires performance by the Borrower), including, but not limited to,
any Event of Default; provided that no amendment, modification or waiver of any
provision of Section 8.01 or Section 8.02 shall, unless by an instrument signed
by Banks having at least 75% of the aggregate amount of the Commitments at such
time and, if the Commitments have been terminated, Banks having at least 75% of
the Loans outstanding at such time and participation interests in Aggregate
Letter of Credit Outstandings at such time, affect any provision of Section 8.01
or Section 8.02 hereof; and provided further that no amendment, modification or
waiver shall, unless by an instrument signed by all of the Banks: (a) increase
or extend the term, or extend the time or waive any requirement for the
reduction or termination of the Commitments, (b) extend the date fixed for the
payment of principal of or interest on any Loan, (c) reduce the amount of any
payment of principal thereof or the rate at which interest is payable thereon or
any fee payable hereunder, (d) alter the terms of this Section 12.01 or of
Section 12.06 hereof, (e) amend the definition of the term "Required Banks", (f)
change the Commitment of any Bank or the fees payable to any Bank except as
otherwise provided herein, (g) permit the Borrower to transfer or assign any of
its obligations hereunder or under the Facility Documents, (h) amend the
provisions of Article 11 hereof, (i) amend the provisions of Section 3.07(f)
hereof or any guarantee delivered pursuant to the terms hereof or the provisions
of any Subordinated Debt agreement relating to subordination, or (j) release any
guarantee delivered pursuant to the terms hereof. No failure on the part of the
Agent, the Issuing Bank or any Bank to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof or preclude any other or
further exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 12.02. Usury. Anything herein to the contrary
notwithstanding, the obligations of the Borrower under this Agreement and the
Notes shall be subject to the limitation that payments of interest shall not be
required to the extent that
<PAGE>
receipt thereof would be contrary to provisions of law applicable to a Bank
limiting rates of interest which may be charged or collected by such Bank.
Section 12.03. Expenses. The Borrower shall reimburse the
Agent and the Issuing Bank on demand for all reasonable costs, expenses, and
charges (including, without limitation, reasonable fees and charges of external
legal counsel for the Agent and the Issuing Bank) incurred by the Agent or the
Issuing Bank or by the Agent on behalf of the Banks in connection with the
preparation, execution and delivery of this Agreement and the Facility
Documents. In addition, the Borrower shall reimburse the Agent, the Issuing Bank
and each Bank for all of its reasonable costs and expenses (including, without
limitation, reasonable fees and charges of external legal counsel for each such
Person) in connection with the enforcement or preservation of any rights under
this Agreement, the Notes or the other Facility Documents. The Borrower agrees
to indemnify the Agent, the Issuing Bank and each Bank and their respective
directors, officers, employees and agents from, and hold each of them harmless
against, any and all losses, liabilities, claims, damages or expenses incurred
by any of them arising out of or by reason of any investigation or litigation or
other proceedings (including any threatened investigation or litigation or other
proceedings) relating to any actual or proposed use by the Borrower or any of
its Affiliates of the Letters of Credit or the proceeds of the Loans, or to the
failure of the Borrower or any of its Subsidiaries to perform or observe any of
the terms, covenants or conditions on its part to be performed or observed under
this Agreement or any of the Facility Documents including, without limitation,
the reasonable fees and disbursements of counsel incurred in connection with any
such investigation or litigation or other proceedings (but excluding any such
losses, liabilities, claims, damages or expenses incurred by reason of the gross
negligence, willful misconduct or bad faith of the Person to be indemnified).
Section 12.04. Survival. The obligations of the Borrower
under Section 2A.08, Section 3.06, Article 4 and Section 12.03 shall survive the
repayment of the Loans and the termination of the Commitments for a period
corresponding to the maximum applicable statute of limitations in effect in the
State of New York from time to time.
Section 12.05. Assignment; Participation. This Agreement shall
be binding upon, and shall inure to the benefit of, the Borrower, the Agent, the
Issuing Bank, the Banks and their respective successors and assigns, except that
the Borrower may not assign or transfer its rights or obligations hereunder.
Each Bank may, (x) with the prior written consent of the Agent and the Borrower
(which consents shall not be unreasonably withheld) and the Issuing Bank (which
consent may be given or
<PAGE>
withheld in the sole and absolute discretion of the Issuing Bank) (except that
with respect to assignments made by a Bank to an Affiliate thereof, no such
consent of either the Agent or the Issuing Bank shall be required) assign or (y)
sell participations in, all or any part of its Loans and its Commitment to
another bank or other entity, in which event (a) in the case of an assignment,
upon notice thereof by the Bank to the Borrower with a copy of the assignment
agreement to the Agent, the assignee shall have, to the extent of such
assignment (unless otherwise provided in the applicable assignment agreement),
the same rights, benefits and obligations as it would have if it were a Bank
hereunder; and (b) in the case of a participation, the participant shall have no
rights under the Facility Documents, and all amounts payable by the Borrower
under Article 3 shall be determined as if such Bank had not sold such
participation. Such Bank may furnish any information concerning the Borrower and
its Subsidiaries in the possession of such Bank from time to time to assignees
and participants (including prospective assignees and participants); provided
that such Bank shall require any such prospective assignee or such participant
(prospective or otherwise) to agree in writing to maintain the confidentiality
of such information on substantially the terms set forth in Section 12.15
hereof. The right of a Bank to assign or participate all or part of its
Commitment to a third party shall be subject to the following limitations: (i)
each assignment or participation shall be made pro rata between the Commitment
and the Bid Loans, (ii) each assignee shall be a commercial bank having minimum
capital and surplus of $500,000,000, (iii) each Bank (other than the Agent, in
its capacity as a Bank) shall be permitted to make only one assignment and the
Agent, in its capacity as a Bank, shall be permitted to make two assignments
during the term of the Revolving Credit Facility provided that any such assignee
shall also be an assignee under Section 11.05 of the Second Amended and Restated
Credit Agreement concurrently with such assignment and such assignment shall be
in the same ratable proportion as the assignment of the interests under Section
11.05 of the MSC Credit Agreement and provided further that the Agent by reason
of any assignment shall not cease to be a Bank or Agent hereunder, and (iv) the
holder of any participation shall not be entitled to any voting rights under
this Agreement. There shall be no limit on the number of participations that
may be granted by any Bank. Any permitted assignees or participants shall be
bound by, and shall be subject to, the provisions of Section 12.01 hereof.
Notwithstanding the foregoing, each Bank shall be permitted to assign all or
part of its Commitment hereunder to any Federal Reserve Bank in connection with
any collateral assignment thereto in the ordinary course of any such Bank's
business.
Section 12.06. Special Provisions with Respect to
Permitted Acquisitions.
(a) By Affiliates of the Borrower. Subject to the
<PAGE>
limitations set forth below, affiliated companies (the "Acquisition
Affiliates") may be established by the Borrower and the Borrower may make loans
to such affiliates to permit them to acquire equity interests in Persons and
other assets provided that such Acquisition Affiliates and any Subsidiaries
acquired by such Acquisition Affiliates shall have guaranteed the obligations of
the Borrower to the Banks under the Facility Documents, in form and substance
(with respect to such guarantee) reasonably satisfactory to the Agent and the
Required Banks.
(b) Limitations. No acquisition shall be permitted at any time
pursuant to clause (a) unless (i) the aggregate purchase price and assumed
liabilities for all such acquisitions is not greater than twenty-five percent
(25%) of Effective Net Worth as reflected in the Borrower's most recent audited
consolidated and consolidating financial statements available at such time and
provided to the Banks, (ii) no Default or Event of Default shall have occurred
and be continuing or would result from such acquisition, (iii) each acquired
entity (or the assets being acquired, as the case may be) shall be engaged in
(or, in the case of acquired assets, shall be used in) a business comparable to
the business in which Sid Tool is engaged as of the Effective Date, (iv) the
acquisition shall not be hostile and (v) the acquisition shall have been duly
authorized by the acquired entity or the entity selling such assets, as the case
may be. In the event that any acquisition is consummated, the Borrower shall be
required to provide consolidated and consolidating financial statements
reasonably acceptable to the Banks. Under no circumstances shall the Borrower or
any Acquisition Affiliate of the Borrower be permitted to make any acquisition
pursuant to this Section 12.06 if such acquisition includes an acquisition of
real property unless, to the best knowledge of the Borrower and/or such
Acquisition Affiliate, after reasonable investigation, such real property has
not been used for conducting any manufacturing, industrial, commercial or retail
business which involved in any way the introduction, manufacture, generation,
processing or storage of any Hazardous Substance which is the subject of any
Environmental Law.
Section 12.07. Notices. Unless the party to be notified
otherwise notifies the other party in writing as provided in this Section, and
except as otherwise provided in this Agreement, notices shall be given to the
Agent or the Issuing Bank by telephonic communication directly with Christopher
J. Mendelsohn or any other person designated for such purpose by notice from the
Agent or the Issuing Bank to the Borrower, confirmed by telecopy or other
writing (with a copy of any such notice to be sent simultaneously by telecopy to
Alan M. Christenfeld, Esq. at (212) 878-8375, and to the Banks and to the
Borrower by certified or registered mail or by recognized overnight delivery
services to such party at its address on the signature page of this Agreement;
provided, however, that
<PAGE>
notwithstanding the foregoing to the contrary, notices to the Borrower shall be
effective if delivered at the following address: 151 Sunnyside Boulevard,
Plainview, New York 11803, Attention: President. Notices shall be effective: (a)
if given by registered or certified mail, 72 hours after deposit in the mails
with postage prepaid, addressed as aforesaid; or (b) if given by recognized
overnight delivery service, on the business day following deposit with such
service addressed as aforesaid; or (c) if given by telecopy, when the telecopy
is transmitted to the telecopy number as aforesaid and confirmed with a
confirmation receipt (with a copy of any such notice to be sent simultaneously
to Joseph L. Getraer, Esq., at Rosenman & Colin, 575 Madison Avenue, New York,
New York 10022, Telecopy No. (212) 940-8776; provided, however, that
notwithstanding the foregoing to the contrary, all notices to the Agent, the
Issuing Bank, the Banks, or any of them, shall only be effective upon receipt by
all of the Agent, the Issuing Bank and the Banks pursuant to the other
provisions of this Section, except that notice to any Bank other than a Bank
which is a signatory hereto shall be effective upon receipt by the Agent of
notice pursuant to the other provisions of this section; and further provided,
however, that notwithstanding the foregoing to the contrary, notices to the
Borrower pursuant to Section 10.01(a) hereof shall be effective upon delivery,
by hand, of any such notice to the Borrower at the following address: 151
Sunnyside Boulevard, Plainview, New York 11803, Attention: Mitchell Jacobson,
Thomas Eccleston and Shelley Boxer. In addition, any such notices shall also be
given simultaneously by telephonic communication directly with either Mitchell
Jacobson, Thomas Eccleston or Shelley Boxer at (516) 349-7100, provided,
however, that delivery of any notice to the Borrower pursuant to Section
10.01(a) hereof shall be effective upon hand-delivery of any such notice as
aforesaid, whether or not such telephonic communication is completed with any of
the foregoing individuals. Furthermore, a copy of any such notice shall also be
sent simultaneously by telecopy to Joseph L. Getraer, Esq. at (212) 940-8563,
provided, however, that delivery of any notice to the Borrower pursuant to
Section 10.01(a) hereof shall be effective upon hand-delivery of any such notice
as aforesaid.
Section 12.08. Setoff. The Borrower agrees that, in
addition to (and without limitation of) any right of setoff, banker's lien or
counterclaim a Bank or the Issuing Bank may otherwise have, each Bank and the
Issuing Bank shall be entitled, at its option without any prior notice to the
Borrower (any such notice being expressly waived by the Borrower to the extent
permitted by applicable law), to offset balances (general or special, time or
demand, provisional or final) held by it for the account of the Borrower at any
of such Bank's or the Issuing Bank's, as the case may be, offices, in Dollars or
in any other currency, against any amount payable by the Borrower to such Bank
or the Issuing Bank, as the case may be, under this Agreement or
<PAGE>
such Bank's Note which is not paid when due (regardless of whether such balances
are then due to the Borrower), in which case it shall promptly notify the
Borrower and the Agent thereof; provided that such Bank's or the Issuing Bank's,
as the case may be, failure to give such notice shall not affect the validity
thereof. Payments by the Borrower hereunder shall be made without setoff or
counterclaim.
Section 12.09. JURISDICTION; WAIVER OF JURY TRIAL;
IMMUNITIES.
(a) THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW
YORK COUNTY OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT, THE NOTES OR THE OTHER FACILITY DOCUMENTS, AND THE BORROWER HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR FEDERAL COURT. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR
PROCEEDING BY THE MAILING (BY CERTIFIED OR REGISTERED MAIL) OF COPIES OF SUCH
PROCESS TO THE BORROWER AT THE ADDRESS SPECIFIED IN SECTION 12.07. THE BORROWER
AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR
IN ANY OTHER MANNER PROVIDED BY LAW. THE BORROWER FURTHER WAIVES ANY OBJECTION
TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH
STATE ON THE BASIS OF FORUM NON CONVENIENS. THE BORROWER FURTHER AGREES THAT ANY
ACTION OR PROCEEDING BROUGHT AGAINST THE AGENT OR THE ISSUING BANK SHALL BE
BROUGHT ONLY IN NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW
YORK COUNTY.
(b) THE AGENT, THE ISSUING BANK, EACH OF THE BANKS AND THE
BORROWER WAIVE ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH RESPECT TO THIS
AGREEMENT AND THE OTHER FACILITY DOCUMENTS.
(c) NOTHING IN THIS SECTION 12.09 SHALL AFFECT THE RIGHT OF
THE AGENT, THE ISSUING BANK OR ANY BANK TO SERVE LEGAL PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE AGENT, THE ISSUING BANK OR
ANY BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY
IN THE COURTS OF ANY OTHER JURISDICTIONS.
(d) TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY
ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS
(WHETHER FROM SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID
OF EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, IT
HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS
AGREEMENT AND THE NOTES.
Section 12.10. Table of Contents; Headings. Any table
<PAGE>
of contents and the headings and captions hereunder are for convenience only and
shall not affect the interpretation or construction of this Agreement.
Section 12.11. Severability. The provisions of this Agreement
are intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
Section 12.12. Counterparts. This Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument, and any party hereto may execute this Agreement by signing
any such counterpart.
Section 12.13. Integration. The Facility Documents set forth
the entire agreement among the parties hereto relating to the transactions
contemplated thereby and supersede any prior oral or written statements or
agreements with respect to such transactions.
SECTION 12.14. GOVERNING LAW. THIS AGREEMENT SHALL BE
GOVERNED BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH,
THE LAW OF THE STATE OF NEW YORK.
Section 12.15. Treatment of Certain Information. The
Borrower (a) acknowledges that services may be offered or provided to it (in
connection with this Agreement or otherwise) by each Bank or the Issuing Bank or
by one or more of their respective Subsidiaries or Affiliates and (b)
acknowledges that information delivered to each Bank or the Issuing Bank by such
entity may be provided to each such Affiliate. Notwithstanding the foregoing,
the Banks and the Issuing Bank agree to maintain and to endeavor to cause its
Subsidiaries and Affiliates to maintain all non-public information which is
furnished to them hereunder or under or in connection with any Facility Document
in confidence and not to disclose any such information to third parties (except
as provided in the preceding sentence); provided, however that neither Bank nor
the Issuing Bank will be liable to the Borrower or to any of its Subsidiaries or
Affiliates for the failure to cause such Bank's or the Issuing Bank's, as the
case may be, Subsidiaries and Affiliates to maintain in confidence and not
disclose any such information, in the absence of gross negligence or willful
misconduct on the part of any such Bank or the Issuing Bank, as the case may be;
and further provided, however, that the Banks, the Issuing Bank and their
Affiliates referred to above may disclose such information (i) to their
<PAGE>
legal counsel, auditors, appraisers or consultants in connection with the
transactions contemplated hereby (provided that such persons are advised of the
confidential nature of such information and of the Banks' and the Issuing Bank's
confidentiality obligations hereunder), (ii) to any regulatory authority having
jurisdiction over them, (iii) to prospective participants or assignees of the
Commitments (provided that such prospective participants or assignees execute a
confidentiality agreement on substantially the terms hereof), (iv) as required
by law or (v) in response to credit inquiries, provided that with respect to
Section 12.15 (v) only, the Borrower has consented in writing to such
disclosure.
Section 12.16. Further Rights of the Agent.
(a) The Borrower appoints such person or persons as Agent may
designate as their attorney-in-fact to, upon and during the continuance of an
Event of Default, to do all things necessary to carry out this Agreement and the
Facility Documents. The powers granted herein, being coupled with an interest,
are irrevocable, and the Borrower approves and ratifies all acts of the
attorney-in-fact. Neither the Agent nor the attorney-in-fact shall be liable for
any act or omission, error in judgment or mistake of law so long as the same is
not willful misconduct or grossly negligent.
(b) In the event that the Borrower or any of its Subsidiaries
shall fail to purchase or maintain insurance (where applicable), or to pay any
tax, assessment, government charge or levy, except as the same may be otherwise
permitted hereunder, or in the event that any Lien prohibited hereby shall not
be paid in full or discharged, or in the event that the Borrower or any of its
Subsidiaries shall fail to perform or comply with any other covenant, promise or
obligation to the Banks hereunder or under any Facility Document, the Agent may,
but shall not be required to, perform, pay, satisfy, discharge or bond the same
for the account of the Borrower and all monies so paid by the Agent, including
reasonable attorneys' fees, shall be treated as an advance to the Borrower.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
BORROWER:
MSC INDUSTRIAL DIRECT CO., INC.
By: ____________________________
Name:
Title:
Address for Notices:
MSC Industrial Direct Co., Inc.
c/o Sid Tool Co., Inc.
151 Sunnyside Blvd.
Plainview, New York 11803
Attn: Mitchell Jacobson
President
Telephone No.: (516) 349-0500,
Ext. 1223
Telecopier No.: (516) 349-7096
<PAGE>
AGENT and ISSUING BANK:
FLEET BANK, NATIONAL ASSOCIATION
By: ____________________________
Name:
Title:
Lending Office and
Address for Notices:
Fleet Bank, National Association
300 Broadhollow Road
Melville, New York 11747
Attention: Christopher J.
Mendelsohn
Vice President
Telephone No.: (516) 547-7777
Telecopier No.: (516) 547-7815
BANKS:
FLEET BANK, NATIONAL ASSOCIATION
By: ____________________________
Name:
Title:
Lending Office and
Address for Notices:
Fleet Bank, National Association
300 Broadhollow Road
Melville, New York 11747
Attention: Christopher J.
Mendelsohn
Vice President
Telephone No.: (516) 547-7777
Telecopier No.: (516) 547-7815
Commitment:
$40,000,000
<PAGE>
THE CHASE MANHATTAN BANK
By: ____________________________
Name:
Title:
Lending Office and
Address for Notices:
The Chase Manhattan Bank
Corporate Banking Group
395 North Service Road
Melville, New York 11747
Attention: Emelia Teige
Vice President
Telephone No.: (516) 755-5046
Telecopier No.: (516) 755-5104
Commitment:
$30,000,000
MELLON BANK
By: ____________________________
Name:
Title:
Lending Office and
Address for Notices:
Mellon Bank
165 EAB Plaza
West Tower - 6th Floor
Uniondale, New York 11556-0165
Attention: Jeffrey B. Carstens
Vice President
Telephone No.: (516) 522-2689
Telecopier No.: (516) 522-2896
Commitment:
$10,000,000
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this registration statement of our report dated November 6, 1996, and to the
incorporation by reference in this registration statement of our reports dated
November 6, 1996 included in the Form 10-K of MSC Industrial Direct Co., Inc.
for the year ended August 31, 1996 and to all references to our Firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Melville, New York
July 29, 1997
