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As filed with the Securities and Exchange Commission on August 15, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
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WHITE CAP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 84-1380403 5082
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
</TABLE>
3120 Airway Avenue
P.O. Box 1770
Costa Mesa, California 92626
Telephone: 714-850-0900
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Mr. Greg Grosch
Chairman, President and Chief Executive Officer
3120 Airway Avenue
P.O. Box 1770
Costa Mesa, California 92626
Telephone: 714-850-0900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Lance C. Balk, Esq. Philip E. Coviello, Jr., Esq.
Kirkland & Ellis Latham & Watkins
153 East 53rd Street 885 Third Avenue, Suite 1000
New York, New York 10022 New York, New York 10022
Telephone: 212-446-4800 Telephone: 212-906-1200
Telecopy: 212-446-4900 Telecopy: 212-751-4864
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.|_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1)(2) Registration Fee
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Common Stock, par value $0.01 per share $86,250,000 $26,137
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(1) Includes shares that the Underwriters have the option to purchase from
the Company and certain stockholders of the Company to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
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.
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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 AUGUST 15, 1997
PROSPECTUS
, 1997
_____________ Shares
WHITE CAP INDUSTRIES, INC.
Common Stock
-------------------------
All of the shares of Common Stock, par value $0.01 per share ("Common
Stock"), of White Cap Industries, Inc. ("White Cap" or the "Company") offered
hereby are being offered (the "Offering") by the Company.
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $___ and $___ per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering
price.
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market ("Nasdaq") under the trading symbol "WHCP."
See "Risk Factors" beginning on page 8 for a discussion of certain
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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===================================================================================================================
Underwriting
Price to the Discounts and Proceeds to the
Public Commissions(1) Company(2)
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Per Share..................................... $ $ $
Total (3)..................................... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities
Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses payable by the Company of
$_______________.
(3) The Company and certain stockholders of the Company have granted the
Underwriters a 30-day option to purchase up to ____________ additional
shares of Common Stock, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company and the
proceeds to the such stockholders will be $____________,
$_______________, $_______________ and $______________, respectively.
See "Principal Stockholders" and "Underwriting."
-------------------------
The shares of Common Stock are being offered by the several
Underwriters subject to prior sale, when, as and if issued to and accepted by
them, subject to certain prior conditions, including the right of the
Underwriters to reject any order in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1997.
Donaldson, Lufkin & Jenrette Robertson Stephens
Securities Corporation & Company
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[PHOTOS OF COMPANY'S PRODUCTS AND/OR FACILITIES]
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[PHOTOS OF COMPANY'S PRODUCTS AND/OR FACILITIES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
STATEMENTS IN THIS PROSPECTUS AS WELL AS ORAL STATEMENTS THAT MAY BE MADE BY THE
COMPANY, OR BY OFFICERS, DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON BEHALF
OF THE COMPANY, THAT ARE NOT HISTORICAL FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF 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"). ANY STATEMENTS CONTAINED HEREIN WHICH
ARE NOT HISTORICAL FACTS OR WHICH CONTAIN THE WORDS EXPECT, BELIEVE OR
ANTICIPATE, SHALL BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT NOT
LIMITED TO, RISKS ASSOCIATED WITH CURRENTLY UNFORESEEN COMPETITIVE PRESSURES AND
RISKS AFFECTING THE COMPANY'S INDUSTRY SUCH AS DECREASED CUSTOMER SPENDING AND
THE EFFECTS OF GENERAL ECONOMIC CONDITIONS. IN ADDITION, THE COMPANY'S BUSINESS,
OPERATIONS AND FINANCIAL CONDITION ARE SUBJECT TO THE RISKS WHICH ARE DESCRIBED
UNDER "RISK FACTORS" AS WELL AS IN THE COMPANY'S REPORTS AND STATEMENTS THAT MAY
BE FILED FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Prospectus.
Certain capitalized terms used in this summary are defined elsewhere in this
Prospectus. References in this Prospectus to the Company shall, as the context
requires, refer to White Cap Industries, Inc. (formerly known as White Cap
Holdings, Inc.), together with its wholly-owned subsidiary, White Cap
Industries, Corp. (formerly known as White Cap Industries, Inc.) ("WCI"), and
their respective predecessors, and references to "pro forma" or "pro forma
basis" mean the application of the pro forma adjustments described under
"Unaudited Pro Forma Combined Financial Data." Except where otherwise indicated,
the information in this Prospectus assumes that the over-allotment option
granted to the Underwriters is not exercised. All references to years, unless
otherwise noted, refer to the Company's fiscal year, which, prior to January 1,
1996 ended on December 31 of each year and since such date ends on March 31 of
the following year.
The Company
White Cap is one of the leading business to business retailers to
professional contractors in the Western United States. The Company offers over
20,000 stock keeping units ("SKUs") of specialty tools and materials. The
Company markets its products through 20 branch locations, its highly experienced
outside sales force and through the strategic distribution of its in-stock
catalogs. The Company has achieved substantial growth by acquiring leading
contractor suppliers in new and existing markets, expanding product offerings
and opening new branch locations. Since 1987, White Cap's net sales have
increased at a compounded annual growth rate of 23%, resulting from (i)
acquisitions, (ii) same store sales growth, which averaged 17% over the past
four years, and (iii) new branch openings. The Company's active customer base
(customers that have purchased at least one item on open credit during the past
12 months) has grown from approximately 7,000 in 1994 to over 16,000 at June 30,
1997. For the fiscal year ended March 31, 1997, the Company had pro forma net
sales of approximately $165 million.
The Company operates in a highly fragmented, multi-billion dollar
industry. Management believes that small, regional contractor suppliers, with
sales of less than $50 million, supply over two-thirds of the professional
contractor market. With pro forma fiscal 1996 net sales of approximately $165
million, the Company believes it is one of the largest suppliers to its market
niche nationwide. The Company targets medium- and large-sized professional
contractors, including professional concrete, framing, waterproofing,
landscaping, grading, electrical, mechanical and general contractors.
The Company sells a wide variety of products, including construction
materials, hand tools, fasteners, structural connectors, power tools, light
construction equipment, steel reinforcing bar (rebar), bulk and collated gun
nails and specialty cementatious products. In addition, at certain branches the
Company provides rental services on selected items such as brackets and braces
used in the construction of concrete "tilt-up" buildings, power tools and
miscellaneous light construction equipment. The Company's products are used by
professional contractors in both new construction and maintenance and repair
projects.
The Company believes that it has developed a business model that
differs substantially from that of traditional contractor suppliers. The model
is based on offering the Company's customers superior customer service and
convenient "one-stop" shopping at its branch locations. Unlike traditional
contractor suppliers, who typically fill orders from warehouses not accessible
to customers, the Company encourages customers to shop at its branches where
they can browse through the warehouse aisles and adjacent outdoor yards. The
Company's prototypical store format consists of approximately 15,000 to 20,000
square feet of indoor floor space with an adjacent outdoor yard of approximately
the same square footage. As a result of the Company's focus on merchandising,
which exposes customers to the wide breadth of White Cap's product offerings and
promotes significant add-on sales, approximately 60% of the Company's net sales
are generated from "walk-in" and "will call" business. Customers can also select
items from the Company's in-stock catalogs, distributed to approximately 40,000
professional contractors, listing over 11,000 of the best selling SKUs
maintained in stock. Customers can order products by phone, fax, at a sales
branch or through the outside sales force. The Company's highly experienced
sales force maintains frequent customer contact, providing service on and off
the job-site. Through its high in-stock position and sophisticated inventory
management systems, the Company is able to fulfill approximately 95% of the
items included in each customer order and provide same-day or next-day delivery.
Growth Strategy
In order to capitalize on its unique business model and the fragmented
professional contractor supply industry, the Company has initiated an aggressive
growth strategy consisting of: (i) pursuing acquisitions of leading contractor
suppliers in new and existing markets; (ii) increasing market share within
existing markets; (iii) expanding product offerings; and (iv) opening new branch
locations. The key elements of the Company's growth strategy are as follows:
Strategic Acquisitions. The Company seeks to acquire leading contractor
suppliers in existing and new markets that will provide geographic
diversification, product line expansion, an established customer base and a
direct sales force. The Company seeks
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to consolidate the operations of acquired companies and eliminate duplicative
overhead expense. White Cap has established a successful track record for
identifying and integrating acquisitions. Since February 1997, the Company has
completed three acquisitions, A-Y Supply, Inc. ("A-Y Supply"), Stop Supply, Inc.
("Stop Supply") and Viking Distributing Company, Inc. ("Viking Distributing"),
thereby strengthening its position as a market leader in the Western United
States and adding approximately $63 million to pro forma fiscal 1996 net sales.
The Company believes that there are numerous attractive acquisition
opportunities and that the Company's established reputation as an industry
leader, access to capital, sophisticated management information systems and
operating expertise provide it with competitive advantages in making
acquisitions.
Increased Market Share. The Company believes that its position as one
of the largest suppliers in its market niche, combined with its reputation for
providing superior customer service and a wide range of specialty product
offerings, will enable the Company to increase its market share. White Cap's
direct sales force utilizes industry databases to continuously prospect for new
customers and new projects. This effort focuses on targeting medium- and
large-sized professional contractors engaged in construction projects throughout
the Western United States. The Company believes its increased geographical
presence will allow its customers to consolidate their purchases with White Cap.
The Company also works closely with its suppliers and with licensed architects
and engineers to ensure that the specialty product lines it carries are
specified on projects.
Expanded Product Offerings. The Company believes there are significant
opportunities to expand its product offerings by distributing profitable
specialty product lines sold by acquired companies but not previously offered at
White Cap locations. As a result of its three most recent acquisitions, the
Company anticipates that it will introduce at its Southern California locations
approximately 3,500 new SKUs. As an example, the Company expects to expand A-Y
Supply's rental business of brackets and braces used in the construction of
concrete "tilt-up" buildings, as well as the sale of related products and
accessories at certain of the Company's other branches. The Company also intends
to expand the product offerings at its newly acquired branches by introducing
approximately 2,500 new SKUs which have proven successful at White Cap. The
Company has introduced the Simpson Strong-Tie line of structural connectors and
fasteners to the A-Y Supply branches and has expanded the offering of the
Simpson Strong-Tie products carried at the Viking Distributing branches. The
Company anticipates regularly adding new products to expand its existing
offerings and creating new product categories.
New Branch Openings. The Company continues to evaluate opportunities to
open new branch locations where it can service new customers and provide better
service to its existing customer base. Pursuant to this strategy, the Company
has opened three branch locations since 1994. These strategic branch openings in
Las Vegas, Phoenix and Denver targeted high growth markets where management
believed the Company could capture sufficient market share to allow it to meet
or exceed budgeted sales goals.
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The Offering
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Offering ...................................... [ ] shares
Common Stock to be outstanding after the
Offering....................................... [ ] shares (a)
Use of Proceeds................................ To repay outstanding indebtedness, redeem Senior Redeemable
Preferred Stock, pay accrued dividends on such stock and on the
Company's Convertible Preferred Stock and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq Trading Symbol................. WHCP
</TABLE>
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(a) Excludes (i) 369,798 shares issuable upon the exercise of options currently
held by certain employees of the Company and 52,606 shares of restricted stock
awarded to management which are not yet vested; (ii) 60,000 shares of Series B
Preferred Stock held by the former owners of Viking Distributing which will
automatically convert into shares of Common Stock on a share-for-share basis
upon consummation of the Offering but which will remain subject to a repurchase
right by the Company if certain performance targets are not achieved for the
Northern California operation of the Company; (iii) a number of shares issuable
to the former shareholders of A-Y Supply upon optional conversion of a
subordinated convertible promissory note, which number is determined by dividing
$500,000 by 75% of the initial public offering price per share specified herein;
and (iv) a number of shares issuable to the former owners of Stop Supply upon
exercise of a warrant, which number is determined by dividing $250,000 by 75% of
the initial public offering price per share specified herein. Includes currently
exercisable warrants to acquire 675,969 shares of Common Stock held by certain
stockholders. See "Management--1997 Incentive and Stock Option Plan" and
"Principal Stockholders."
The Company was incorporated in Delaware in November 1996 and acquired
all of the outstanding stock of WCI on February 28, 1997. The Company's
principal executive offices are located at 3120 Airway Avenue, Costa Mesa,
California, 92626, telephone (714) 850-0900.
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SUMMARY FINANCIAL INFORMATION, OPERATING DATA AND UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The summary consolidated results of operations data set forth below for
the years ended December 31, 1994 and 1995 and March 31, 1997 and the summary
consolidated balance sheet data set forth below as of March 31, 1997 are derived
from the Company's consolidated financial statements included elsewhere in this
Prospectus; the summary consolidated results of operations data for the year
ended December 31, 1993 is derived from audited financial statements not
included herein; the summary consolidated results of operations data for the
three months ended March 31, 1996 are derived from the Company's interim
consolidated financial statements included elsewhere in the Prospectus. The
summary unaudited pro forma data as of March 31, 1997 and for the year then
ended, are derived from the Unaudited Pro Forma Combined Financial Data included
elsewhere in this Prospectus. The Unaudited Pro Forma Combined Financial Data do
not purport to represent what the Company's results of operations actually would
have been if the transactions referred therein had been consummated on the date
or for the periods indicated, or what such results will be for any future date
or for any future period. The Company's business is seasonal and interim results
are not necessarily indicative of the results obtainable by the Company for a
full fiscal year or any other interim period. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical Financial and Operating Data,"
"Unaudited Pro Forma Combined Financial Data" and the financial statements of
the Company, of Viking Distributing and of A-Y Supply and related notes thereto
(collectively, the "Financial Statements") included elsewhere in this
Prospectus.
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Three
Months Fiscal Year Ended
Year Ended December 31, Ended March 31, 1997
------------------------------ March 31, --------------------
1993 1994 1995 1996 Actual Pro Forma
-------- -------- -------- ------- -------- ---------
(dollars in thousands, except per share data)
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Statement of Operations Data (a):
Net sales........................... $ 49,438 $ 69,508 $ 77,840 $ 19,511 $101,770 $164,873
Gross profit........................ 15,065 20,088 23,879 5,884 32,030 52,121
Income from operations.............. 723 2,170 3,362 214 4,655 9,294
Income tax provision (benefit)(b)... 10 30 40 -- (414) 3,669
Net income (loss)................... 226 1,318 1,937 (228) 2,796 5,279
Net income per share................ $[ ]
=========
Weighted average shares outstanding. $[ ]
=========
Selected Operating Data (at end of period):
Branch locations.................... 9 10 12 12 17 20
Percentage change in comparable store
sales........................... 9.8% 35.6% 6.1% 9.9% 15.3%
Number of SKUs...................... N/A 10,787 11,223 12,483 15,765
Active customers.................... N/A 7,023 8,735 9,225
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At March 31, 1997
-------------------
Actual Pro Forma
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Balance Sheet Data:
Working capital.............................. $17,410 $30,578
Total assets................................. 62,292 92,107
Long-term debt............................... 38,888 3,623
Total stockholders' equity (deficit)......... (3,030) 61,632
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(a) The Company changed its fiscal year end to March 31, effective April 1,
1996.
(b) Reflects S Corporation status until February 28, 1997, when the Company
converted to C Corporation status. However, the March 31, 1997 pro
forma income tax expense provision is presented as if the Company was a
C Corporation for the entire fiscal year.
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the Common Stock offered hereby.
RISKS RELATED TO COMPANY'S ACQUISITION STRATEGY
In furtherance of the Company's growth strategy, the Company acquired
A-Y Supply in February 1997, Stop Supply in May 1997 and Viking Distributing in
June 1997. White Cap is still in the process of completing the integration of
these acquisitions into the Company. The Company's historical operating results
prior to the acquisitions and pro forma results after giving affect to the
acquisitions are not necessarily indicative of the Company's future prospects.
There can be no assurance that these three acquisitions or any future
acquisitions will be successfully integrated into the Company and will achieve
the operating results that management expects.
There can be no assurance that the Company's management and financial
controls, personnel, computer systems and other corporate support systems will
be adequate to manage the increase in the size and scope of the Company's
operations as a result of the Company's recent acquisitions. An important part
of the Company's plans is to integrate these acquisitions into the Company's
operations and business model. There can be no assurance that the Company will
be able to integrate these acquisitions or successfully convert them to the
Company's business model in a timely manner and without substantial costs,
delays or other problems. Once integrated and converted, these acquisitions may
not achieve sales, profitability and asset productivity commensurate with the
Company's original stores. In addition, acquisitions involve a number of special
risks, including adverse short-term effects on the Company's reported operating
results, the diversion of management's attention, the dependence on retention,
hiring and training of key personnel, risks associated with unanticipated
problems or legal liabilities and the amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
Company's operations and financial performance.
The Company currently finances acquisitions, and intends to finance
future acquisitions, by using cash from operations, through borrowings under its
credit facilities and, in certain cases, through the issuance of additional
equity. The Company will need additional debt or equity financing to continue
its acquisition strategy. There can be no assurance that the Company will be
able to obtain such financing if and when it is needed or that, if available,
such financing will be available on terms the Company deems acceptable. If the
Company does not have sufficient cash resources or availability under the Credit
Agreement (as defined) or if the Common Stock does not maintain sufficient value
or potential acquisition candidates are unwilling to accept equity as part of
the consideration for the sale of their businesses, the Company will be unable
to continue its acquisition strategy. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Continued growth by the Company in the future could place strains on
the Company's management, operational and financial resources. In the future,
the Company will need to continue to develop the management skills of its
managers and supervisors and to recruit, train, motivate and manage its
employees. The Company's failure to manage growth effectively could have a
material adverse effect on the Company's results. See "Business" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
DEPENDENCE ON SYSTEMS
The Company believes that its computer software programs are an
integral part of its business and growth strategies. The Company 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 the Company's business
and results of operation. The Company is exploring whether and to what extent
the Company's computer operating systems will be disrupted upon the turn of the
century as a result of the widely known dating system flaw inherent in most
operating systems (the "Year 2000 Problem"). There can be no assurance that the
Company's systems will not be disrupted by the Year 2000 Problem. Any such
disruption could have a material adverse effect on the Company's business and
results of operations.
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COMPETITION
The industry in which the Company conducts its business is highly
competitive. The Company faces competition in all customer categories of the
contractor supply industry. In the small- and medium-sized professional
contractor categories, the Company competes with traditional contractor
suppliers, mail order marketers, small hardware stores and large home center
chains. Historically, the large professional contractor has been served by
traditional specialty construction supply dealers and distributors. Recently,
however, some of the large home center chains have explored competing in this
category through in-house sales efforts. Certain existing competitors of the
Company have, and future competitors of the Company could have, substantially
greater resources, including financial resources, than the Company. There can be
no assurance that the Company will continue to compete effectively against
existing competitors or new competitors that may enter the markets in which it
conducts its business. See "Business -- Industry Overview" and "-- Competition."
GEOGRAPHIC DEPENDENCE; IMPACT OF REGIONAL WEATHER CONDITIONS
All of the Company's operations are located in the Western United
States and all but three branches are located in California and, as a result,
are affected by local economic conditions, which are beyond the Company's
control. Any recession or period of slow growth in California or the Western
United States could have a material adverse effect on the Company.
In addition, the Company's operations are affected by regional wet or
dry weather conditions which are beyond the Company's control. A prolonged or
wet winter season can and usually does adversely affect the Company's sales and
earnings due to construction delays or inactivity. Unusually dry winters can
result in regional water supply shortages resulting in government restrictions
on the number and or type of building permits issued which could also adversely
affect the Company's sales and earnings. While lower sales in any given quarter
resulting from the impact of weather conditions may be recaptured to a certain
extent in future periods, no assurances can be given that weather related
factors will not adversely affect the Company's sales and earnings in any given
fiscal year or reporting period.
FLUCTUATING OPERATING RESULTS
The Company has experienced in the past and will experience in the
future quarterly variations in net sales and net income as a result of many
factors, including product cycles of suppliers that are not controlled or
influenced by the Company, product availability, supplier relationships,
customers relationships, catalog response rates, product mix, past and potential
acquisitions, the level of selling, general and administrative expenses, the
condition of the construction industry in general and shifts in demand for
contractor supplies. The construction industry which the Company supplies is
highly sensitive to economic cycles. The Company's planned operating
expenditures are based on sales forecasts. If net sales are below expectations
in any given quarter, operating results could be materially adversely affected.
In the contractor supply industry, seasonality generally affects
quarterly sales performance. Historically, the Company's quarterly sales in the
fourth fiscal quarter (January through March) are lowest and quarterly sales in
the second fiscal quarter (July through September) are highest. See "Business --
Industry Overview" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations;
Seasonality."
EFFECTIVE VOTING CONTROL BY PRINCIPAL STOCKHOLDERS
Upon the completion of the Offering, Greg Grosch, the Company's
Chairman, CEO and President, KRG Capital Partners, LLC ("KRG Capital"), Apex
Investment Fund, III, L.P., Bayview Investors, Ltd., Argentum Capital Partners,
L.P. and their respective affiliates and certain of the Company's directors and
members of management will beneficially own, if taken together, ____% of the
combined voting power of the Company's outstanding voting Common Stock or _____%
assuming exercise of the over-allotment option (not including options held by
certain employees). If the foregoing stockholders were to vote all of their
shares of Common Stock in a similar manner, they would effectively have
sufficient voting power to elect the entire Board of Directors of the Company
and, in general, to determine (without the consent of the Company's other
stockholders) the outcome of any corporate transaction or other matter submitted
to the stockholders for approval, including mergers, consolidations and the sale
of all or substantially all of the Company's assets, and to prevent or cause a
change in control of the Company. Greg Grosch, KRG Capital and certain of its
affiliates are parties to a stockholders agreement relating to the voting of the
Company's Common Stock, which agreement will take effect upon the closing of the
Offering. See "Certain Relationships and Related Transaction -- Stockholders
Agreement".
9
<PAGE> 12
DEPENDENCE OF KEY PERSONNEL AND SKILLED EMPLOYEES
The Company's continued success depends to a large extent upon the
efforts and ability of key managerial and sales employees, including Greg
Grosch, its Chairman, President and Chief Executive Officer. The loss of
services of certain of these key personnel could have a material adverse effect
on the Company's results of operations. The Company maintains a key-man life
insurance policy on Mr. Grosch, of which $10 million is currently assigned to
the Company's existing lenders. The Company's business also depends upon its
ability to continue to attract and retain senior managers, an outside sales
force and skilled employees, and failure to do so could adversely affect the
Company's results of operations. See "Management."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Offering will result in immediate and substantial dilution of
$__________ per share of Common Stock to investors purchasing shares of Common
Stock. See "Dilution."
ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law (the "DGCL") contain certain provisions that may have
the effect of inhibiting a non-negotiated merger or other business combination.
In addition, the Board of Directors will have the authority, without further
action by the stockholders, to fix the rights and preferences and issue shares
of preferred stock. These provisions, and other provisions of the Company's
Certification of Incorporation, may have the effect of deterring hostile
takeovers or delaying or preventing changes of control or management of the
Company, including transactions in which stockholders might otherwise receive a
premium for their shares over the then-current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. See "Description of Capital Stock."
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK
In the past, the Company has not declared or paid any regular cash or
other dividends on the Common Stock and does not expect to pay dividends for the
foreseeable future. The Company is a holding company with limited assets and no
operations of its own. Consequently, the Company is dependent upon dividends and
other advances from WCI as its predominant source of cash flow. The Credit
Agreement is expected to contain restrictive covenants that restrain the ability
of the Company to pay dividends. If these restrictions are subsequently lifted,
any future cash dividends will depend upon the Company's results of operations,
financial conditions, cash requirements and other factors. See "Dividend Policy"
and "Description of Certain Indebtedness."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Company has applied to have the Common Stock quoted on
Nasdaq, there can be no assurance that an active trading market for the Common
Stock will develop or be sustained. The initial public offering price of the
Common Stock offered hereby will be determined by negotiations among the Company
and the representatives of the Underwriters and may not be indicative of the
market price for the Common Stock after the Offering. See "Underwriting." After
the Offering, the market price for shares of the Common Stock may be volatile
and may fluctuate based upon a number of factors, including many which are
beyond the control of the Company, such as business performance, general
industry trends, news announcements by competitors of the Company or changes in
the regulatory environment or in general political, market and economic
conditions. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of Common
Stock outstanding. The shares of Common Stock sold in the Offering will be
freely tradeable without restriction or further registration under the
Securities Act unless held by an "affiliate" of the Company, as that term is
defined under Rule 144 of the Securities Act, which shares will be subject to
the resale limitations of Rule 144. In addition, certain existing stockholders,
including holders of restricted Common Stock, have registration rights with
respect to Common Stock held by them. In connection with the Offering, all
existing stockholders holding in the aggregate shares (or % of total outstanding
shares) have agreed not to dispose of any shares for a period of 180 days from
the date of this Prospectus, and the Company has agreed not to dispose of any
shares (other than shares sold by the Company
10
<PAGE> 13
in the Offering or issuances by the Company of certain employee stock options
and shares covered thereby) for a period of 180 days from the date of this
Prospectus, without the prior written consent of representatives of the
Underwriters. Upon expiration of such 180-day period, shares of Common
Stock will be eligible for sale subject to certain volume and other limitations
of Rule 144 under the Securities Act applicable to "affiliates" of the Company.
No prediction can be made as to the effect, if any, that market sales of shares
of Common Stock or the availability of shares of Common Stock for sale will have
on the market price of the Common Stock from time to time. The sale of a
substantial number of shares held by the existing stockholders, whether pursuant
to a subsequent public offering or otherwise, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could materially impair the Company's future ability to raise capital through an
offering of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
11
<PAGE> 14
RECENT TRANSACTIONS
THE RECAPITALIZATION
In February 1997, KRG Capital formed the Company, which acquired all of
the outstanding stock of WCI from Greg Grosch, the then sole stockholder,
Chairman, President and Chief Executive Officer of WCI, through a leveraged
recapitalization (the "Recapitalization"). The Company acquired the stock of WCI
for: (i) $10 million in cash; (ii) a $1.5 million subordinated note; (iii)
warrants to acquire shares of convertible preferred stock, which shares will
automatically convert into 68,364 shares of Common Stock upon consummation of
the Offering; (iv) 50,000 shares of Common Stock; and (v) Convertible Preferred
Stock which will automatically convert into 1,538,182 shares of Common Stock
upon consummation of the Offering. In connection with the Recapitalization,
shares of redeemable preferred stock and warrants to purchase Common Stock were
purchased by three investment funds. Such shares of redeemable preferred stock
will be redeemed upon consummation of the Offering. See "Use of Proceeds,"
"Principal Stockholders" and "Certain Relationships and Related Transactions."
RECENT ACQUISITIONS
The Company has recently acquired three contractor suppliers for an
aggregate purchase price of approximately $37 million. In February 1997,
simultaneously with the Recapitalization, the Company acquired 100% of the stock
of A-Y Supply, which has stores located in Sacramento, Stockton, San Leandro,
Santa Rosa and Fresno, California. A-Y Supply generated net sales of
approximately $25.7 million for its fiscal year ended December 31, 1996. The
acquisition of A-Y Supply was effective as of January 1, 1997. Effective May 1,
1997, the Company acquired 100% of the stock of Stop Supply, located in Fresno,
California. Stop Supply generated net sales of approximately $6.2 million for
its fiscal year ended January 31, 1997. In June 1997, the Company acquired 100%
of the stock of Viking Distributing, which has stores located in San Francisco,
Dublin and San Jose, California. Viking Distributing generated approximately
$35.2 million in net sales for its fiscal year ended March 31, 1997.
The Company continues to evaluate potential acquisitions and negotiates
with potential acquisition candidates from time to time. The Company is
currently in discussions with several acquisition candidates, but has not
entered into binding commitments or understandings with any of such candidates.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to be received from the sale of the [ ] shares of
Common Stock by the Company in the Offering (after deducting the underwriting
discounts and estimated expenses of the Offering payable by the Company) are
estimated to be approximately $68.5 million ($80 million if the Underwriters'
over-allotment option is exercised in full), based on an assumed initial public
offering price of $[ ] per share (the midpoint of the price range set forth on
the cover page of this Prospectus). The Company intends to use approximately
$58.5 million (assuming convertible seller notes described below are converted
into Common Stock) of such proceeds to repay outstanding indebtedness,
consisting of (i) revolving loans of approximately $28.9 million outstanding
under WCI's existing credit agreement, bearing interest at 0.25% over the bank's
prime rate and providing for a LIBOR option of 2.5% over the LIBOR rate (the
effective interest rates ranged from 8.22% to 8.75% at June 30, 1997) and
maturing on February 1, 2002; (ii) term loans of approximately $10.6 million
outstanding under WCI's existing credit agreement, bearing interest at 0.75%
over the bank's prime rate and providing for a LIBOR option of 3.0% over the
LIBOR rate (the effective interest rates ranged from 8.72% to 9.25% at June 30,
1997) and maturing on February 1, 2002; (iii) senior subordinated notes in an
aggregate principal amount of $15.0 million held by an institutional investor
and maturing on February 28, 2005, consisting of an aggregate principal amount
of $13.0 million accruing interest at a rate of 13.0% plus an additional
deferred rate of 6.25% and an aggregate principal amount of $2.0 million
accruing interest at a rate of 11.5%; (iv) a subordinated note in an aggregate
principal amount of $1.5 million issued to the Company's Chairman, Chief
Executive Officer and President in connection with the Recapitalization,
accruing interest at a current rate of 13.0% and maturing on February 28, 2005;
(v) subordinated notes in an aggregate principal amount of $3.0 million ($0.5
million of which are convertible into Common Stock at 75% of the initial public
offering price per share) held by the former owners of A-Y Supply, accruing
interest at a rate of 10.0% and maturing on February 25, 2000; and (vi) a $0.25
million subordinated note held by the former owners of Stop Supply, which note
is convertible into Common Stock at 75% of the initial public price per share.
In addition, the Company expects to use approximately $6.3 million of such net
proceeds to pay deferred interest and prepayment penalties incurred in
connection with the repayment of the indebtedness described above. Approximately
$3.0 million of such net proceeds will be used to redeem the Company's
Redeemable Preferred Stock and pay accrued dividends on such stock and on the
Company's Convertible Preferred Stock outstanding prior to the completion of the
Offering. See "Certain Relationships and Related Transactions."
The remainder of the net proceeds to the Company (estimated to be
approximately $1.7 million) will be used for general corporate purposes. Pending
such uses, the Company intends to invest the net proceeds of the Offering in
short-term, interest-bearing investment-grade securities.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and has no
current plans to pay cash dividends in the foreseeable future. The payment of
future dividends will be determined by the Board of Directors of the Company in
light of conditions then existing, including the Company's financial condition
and requirements, future prospects, restrictions in financing agreements,
business conditions and other factors deemed relevant by the Board of Directors.
There can be no assurance that the Company will determine to pay any cash
dividends in the future. The proposed terms of the Credit Agreement will
restrict the payment of dividends on the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
13
<PAGE> 16
DILUTION
The net tangible book value (deficit) of the Company as of June 30,
1997 was $________, or $________ per share. "Net tangible book value (deficit)
per share" is determined by dividing the number of shares of Common Stock
outstanding into the net tangible book value of the Company (tangible assets
less liabilities). After giving effect to the Offering and use of proceeds
described herein, the pro forma net tangible book value (deficit) of the Company
at March 31, 1997 would have been approximately $________, or $________ per
share based on an initial public offering price of $_____ per share (the
midpoint of the price range set forth on the cover page of this Prospectus).
This represents an immediate increase in the net tangible book value per share
of $________ to present stockholders and an immediate dilution of $________ per
share to new investors purchasing shares of Common Stock at the assumed public
offering price.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................................... $[ ]
Net tangible book value (deficit) per share before the Offering......... $[ ]
Increase resulting from the offering.................................... $[ ]
------
Pro forma net tangible book value (deficit) per share after the Offering.... $[ ]
------
Dilution per share to new investors......................................... $[ ]
======
</TABLE>
The following table summarizes the difference between existing
stockholders and new investors with respect to the number of shares of Common
Stock purchased from the Company, the total cash consideration paid, and the
average price paid per share (before deducting underwriting discounts and
offering expenses):
<TABLE>
<CAPTION>
Percent Average
Shares of Total Total Cash Percent of Total Price
Purchased Shares Consideration Consideration Per Share
--------- ------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... (a) (b)
New investors...............
Total
</TABLE>
- --------------------
(a) Does not include: (i) options to purchase an aggregate of 369,798
shares of Common Stock issued to employees pursuant to the Existing
Plan (as defined); (ii) 52,606 shares of restricted stock held by
certain members of management pursuant to the Existing Plan and (iii)
and warrants to acquire 675,969 shares of Common Stock held by certain
stockholders. See "Management--1997 Incentive and Stock Option Plan."
(b) If the Underwriters' over-allotment option is exercised in full, the
percentage of shares retained by the existing stockholders would be
reduced to ________% of the total shares of Common Stock outstanding
after the Offering.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 and as adjusted to give effect to the Offering and
the application of the net proceeds thereof. See "Use of Proceeds." This table
should be read in conjunction with "Selected Historical Financial and Operating
Data," "Unaudited Pro Forma Combined Financial Data" and the Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
-------------
Actual As Adjusted
-------------------------
(dollars in thousands)
<S> <C> <C>
Short-term debt............................................... $ 3,245 $ 845
======= =======
Long-term debt:
Senior revolving debt.................................... $28,868 $ --
Senior term debt......................................... 9,000 --
Subordinated debt........................................ 15,282 --
Other long-term liability................................ 200 200
------- -------
Total long-term debt................................. 61,252 200
------- -------
Redeemable preferred stock.................................... 2,650 --
------- -------
Stockholders' equity:
Common stock............................................. 11 16
Convertible preferred stock.............................. 2,250 --
Additional paid-in capital............................... -- 71,745
Accumulated deficit...................................... TBD TBD
------- -------
Total stockholders' equity (deficit) (a).............
------- -------
Total capitalization..................................... $ $
======= =======
</TABLE>
- ------------------------
(a) Following the consummation of the Offering, the authorized capitalization
of the Company will consist of (i) shares of Common Stock, of
which shares will be outstanding and (ii) shares of Preferred Stock,
par value $1.00 per share, of which no shares will be outstanding. Options
to purchase 369,798 shares of Common Stock will be outstanding immediately
following consummation of the Offering.
15
<PAGE> 18
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data as of March
31, 1997 and for the year then ended (the "Unaudited Pro Forma Combined
Financial Data") give effect to (i) the 1997 acquisitions of A-Y Supply, Stop
Supply and Viking Distributing and (ii) the Offering and the use of proceeds
described herein to repay certain indebtedness and redeem outstanding Senior
Redeemable Preferred Stock. The Unaudited Pro Forma Combined Financial Data are
based on the historical financial statements of the Company, A-Y Supply, Stop
Supply and Viking Distributing and the assumptions and adjustments described in
the accompanying notes to the Unaudited Pro Forma Combined Financial Data. The
pro forma balance sheet was prepared as if the transactions described in (i) and
(ii) above occurred on March 31, 1997. The pro forma combined statement of
operations was prepared as if such transactions had occurred on April 1, 1996.
The Unaudited Pro Forma Combined Financial Data are not necessarily indicative
of the results which actually would have occurred if such transactions had
occurred on the dates indicated or which may occur in the future. The Unaudited
Pro Forma Combined Financial Data should be read in conjunction with the
Financial Statements contained elsewhere in this Prospectus.
16
<PAGE> 19
White Cap Industries, Inc.
Pro Forma Combined Income Statement (Unaudited)
Fiscal Year Ended March 31, 1997
<TABLE>
<CAPTION>
White A-Y Stop Viking Pro Forma Pro Forma Offering Pro Forma
Cap(a) Supply(a) Supply(b) Distributing Adjustments Combined Adjustments As Adjusted
-------- --------- --------- ------------ ----------- -------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $101,770 $21,689 $6,222 $35,192 $ -- $164,873 $ -- $164,873
Cost of goods sold...... 69,740 14,952 3,532 24,528 -- 112,752 -- 112,752
-------- ------- ------ ------- ------- -------- ------- --------
Gross profit ...... 32,030 6,737 2,690 10,664 -- 52,121 -- 52,121
-------- ------- ------ ------- ------- -------- ------- --------
Selling, general and
administrative
expenses.............. 27,375 4,416 2,294 9,446 (704)(c) 42,827 -- 42,827
-------- ------- ------ ------- ------- -------- ------- --------
Income from
operations........ 4,655 2,321 396 1,218 704 9,294 -- 9,294
Interest expense........ 2,273 -- 182 280 -- 2,735 (2,389)(e) 346
Income before
provision (benefit)
for income taxes...... 2,382 2,321 214 938 704 6,559 2,389 8,948
Provision (benefit) for
income taxes.......... (414) 51 2 402 2,648 (d) 2,689 979 (f) 3,669
-------- ------- ------ ------- ------- -------- ------- --------
Net income.............. $ 2,796 $ 2,270 $ 212 $ 536 $(1,944) $ 3,870 $ 1,410 $ 5,279
======== ======= ====== ======= ======= ======== ======= ========
Weighted average
shares outstanding..
Net income per share.... $
========
</TABLE>
17
<PAGE> 20
White Cap Industries, Inc.
Pro Forma Combined Balance Sheet (Unaudited)
As of March 31, 1997
<TABLE>
<CAPTION>
White Viking Pro Forma Offering Pro Forma
Cap Distributing Stop Adjustments Combined Adjustments As Adjusted
------- ------------ ------ ----------- -------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash..................... $ 214 $ 145 $ -- $ -- $ 359 $ 2,269 (f) $ 2,628
Receivables.............. 19,175 3,940 802 -- 23,917 -- 23,917
Inventory................ 20,426 3,917 1,547 -- 25,890 -- 25,890
Other.................... 1,179 505 8 -- 1,692 3,071 (g) 4,763
------- ------ ------ -------- ------- -------- --------
Current assets....... 40,994 8,507 2,357 -- 51,858 5,340 57,198
------- ------ ------ -------- ------- -------- --------
Fixed assets, net........ 7,461 943 417 -- 8,821 -- 8,821
Intangibles.............. 13,205 -- 13,496 (a) 26,701 (1,274)(h) 25,427
Other non-current
long-term assets......... 632 29 -- -- 661 -- 661
------- ------ ------ -------- ------- -------- --------
Non-current long-
term assets.......... 21,298 972 417 13,496 36,183 (1,274) 34,909
------- ------ ------ -------- ------- -------- --------
Total assets............. $62,292 $9,479 $2,774 $ 13,496 $88,041 $ 4,066 $ 92,107
======= ====== ====== ======== ======= ======== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Liabilities:
Accounts payables........ $17,162 $2,282 $ 555 $ -- $19,999 $ -- $ 19,999
Accruals................. 3,266 1,760 89 750 (a) 5,865 -- 5,865
Line of credit........... -- -- 1,412 (1,412)(b) -- -- --
Term debt - current
portion................. 3,156 247 18 (265)(b) 3,156 (2,400)(h) 756
Other current liabilities -- -- -- -- -- -- --
------- ------ ------ -------- ------- -------- --------
Total current
liabilities........ 23,584 4,289 2,074 (927) 29,020 (2,400) 26,620
Line of credit........... 14,133 -- -- 12,097 (c) 26,230 (26,230)(i) --
Term debt-long term...... 13,223 593 973 (1,566)(b) 13,223 (9,600)(h) 3,623
Subordinated debt........ 11,532 -- -- 8,250 (d) 19,782 (19,782)(j) --
Other long-term
liabilities............ 200 32 -- -- 232 -- 232
------- ------ ------ -------- ------- -------- --------
Total liabilities........ 62,672 4,914 3,047 17,854 88,487 (58,012) 30,475
------- ------ ------ -------- ------- -------- --------
Redeemable preferred
stock.................. 2,650 -- -- -- 2,650 (2,650)(l) --
------- ------ ------ -------- ------- -------- --------
Stockholders' Equity
(Deficit):
Common stock............. 6 51 15 (66)(e) 6 5 (k) 11
Convertible preferred
stock.................. 2,250 -- -- -- 2,250 (2,250)(k) --
Additional paid-in
capital................ -- -- -- -- -- 71,745 (k) 71,745
Retained earnings
(deficit).............. (5,286) 4,514 (288) (4,292)(e) (5,352) (4,772)(m) (10,124)
------- ------ ------ -------- ------- -------- --------
Total stockholders'
equity (deficit)....... (3,030) 4,565 (273) (4,358) (3,096) 64,728 61,632
------- ------ ------ -------- ------- -------- --------
Total liabilities and
stockholders' equity
(deficit).............. $62,292 $9,479 $2,774 $ 13,496 $88,041 $ 4,066 $ 92,107
======= ====== ====== ======== ======= ======== ========
</TABLE>
18
<PAGE> 21
WHITE CAP INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. UNAUDITED PRO FORMA COMBINED INCOME STATEMENT ADJUSTMENTS
(a) A-Y Supply's results of operations are included in White Cap's
income statement from January 1, 1997 (acquisition date)
forward. The A-Y Supply column only includes the results of
operations for the period April 1, 1996 through December 31,
1996.
(b) Stop Supply's fiscal year ended January 31, 1997.
(c) Adjustment to reflect the reduction of acquired companies'
prior owners compensation to a normalized ongoing amount,
which is offset, in part, by the amortization of goodwill and
covenants not to compete associated with the recent
acquisitions.
<TABLE>
<S> <C>
Reduction in compensation:
A-Y Supply $ 300
Stop Supply 170
Viking Distributing 1,024
------
1,494
Goodwill amortization:
A-Y Supply (278)
Stop Supply (34)
Viking Distributing (278)
------
(590)
Covenant not to compete amortization:
A-Y Supply (200)
------
Net expense reduction $ 704
======
</TABLE>
(d) Adjustment to record a tax provision at a combined federal and
state rate of 41% for the entire period presented. A-Y Supply
and Stop Supply were S Corporations prior to being acquired by
White Cap. White Cap converted from S Corporation to C
Corporation status in February 1997.
(e) Adjustment to reflect the elimination of interest expense upon
retiring all outstanding bank and subordinated debt.
(f) Adjustment to reflect the elimination of the tax benefit
associated with the reduction of interest expense due to debt
retirement.
2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Adjustment to reflect the additional acquisition costs,
goodwill and other intangible assets associated with the
acquisitions of Viking Distributing and Stop Supply.
(b) Adjustments to reflect the retirement of Viking Distributing
and Stop Supply's line of credit and term debt.
(c) Adjustment to reflect line of credit borrowings to purchase
Viking Distributing and Stop Supply.
(d) Adjustment to reflect subordinated debt borrowings to purchase
Viking Distributing and Stop Supply.
(e) Removal of Viking Distributing and Stop Supply common stock
and retained earnings.
19
<PAGE> 22
(f) Adjustment to reflect the net increase in cash upon completion
of the Offering after repayment of all bank debt, subordinated
debt, payment of preferred stock dividends, redemption of all
redeemable preferred stock and payment of all debt prepayment
penalties.
(g) Adjustment to reflect the tax benefit associated with the debt
prepayment penalties and charge-off of deferred loan fees (see
note m below).
(h) Adjustment to reflect the payoff of the Company's bank long
term debt, subordinated debt and charge-off of associated
deferred loan fees.
(i) Adjustment to reflect the payoff of the Company's line of
credit.
(j) Adjustment to reflect the retirement of subordinated debt:
<TABLE>
<S> <C>
Payment from offering proceeds $19,032
Conversion of debt to common stock 750
-------
$19,782
=======
</TABLE>
(k) Adjustment to reflect the net increase in common stock and
additional paid-in capital as follows:
<TABLE>
<S> <C>
Gross offering $75,000
Offering costs 6,500
-------
Net proceeds 68,500
Conversion of convertible preferred stock
to common stock 2,250
Conversion of seller notes to
common stock 1,000
-------
Net increase in equity 71,750
Portion of equity increase allocated
to common 5
-------
Increase in paid-in capital $71,745
=======
</TABLE>
(l) Adjustment to reflect repayment of all redeemable preferred
stock.
(m) Adjustment to reflect the net increase in accumulated deficit
as follows:
<TABLE>
<S> <C>
Debt prepayment penalties $ 5,966
Interest charges on debt conversion 250
Charge-off of deferred loan fees 1,274
-------
7,490
Tax benefit 3,071
-------
Increase in accumulated deficit before
the preferred stock dividend 4,419
Preferred stock dividends 353
-------
Net increase in accumulated deficit $ 4,772
=======
</TABLE>
20
<PAGE> 23
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The selected consolidated results of operations set forth below for
the years ended December 31, 1994 and 1995 and March 31, 1997 and the summary
balance sheet data set forth below as of December 31, 1995 and March 31, 1996
and 1997 are derived from the Company's consolidated financial statements
included elsewhere in this Prospectus; such data as of December 31, 1992 and
1993 and for the years then ended and the year ended December 31, 1994 are
derived from audited financial statements not included herein; such data as of
March 31, 1996 and for the three months then ended are derived from the
Company's interim consolidated financial statements included elsewhere in this
Prospectus; such data for the three months ended March 31, 1995 are derived from
unaudited consolidated financial statements not included herein. The Company's
business is seasonal and interim results are not necessarily indicative of the
results obtainable by the Company for a full fiscal year or any other interim
period. The data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year
Year Ended December 31, March 31, Ended
------------------------------------- ----------------- March 31,
1992 1993 1994 1995 1995 1996 1997
------- ------- ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (A):
Net sales...................................... $45,124 $49,438 $69,508 $77,840 $15,841 $19,511 $101,770
Cost of sales.................................. 31,118 34,373 49,420 53,961 11,246 13,627 69,740
------- ------- ------- ------- ------- ------- --------
Gross profit................................... 14,006 15,065 20,088 23,879 4,595 5,884 32,030
Selling, general and administrative expenses... 13,530 14,342 17,918 20,517 4,259 5,670 27,375
------- ------- ------- ------- ------- ------- --------
Income from operations(b)...................... 476 723 2,170 3,362 336 214 4,655
Interest expense, net.......................... 486 487 822 1,385 274 442 2,273
------- ------- ------- ------- ------- ------- --------
Income (loss) before income tax................ (10) 236 1,348 1,977 62 (228) 2,382
Income tax provision (benefit)(b).............. 2 10 30 40 6 -- (414)
------- ------- ------- ------- ------- ------- --------
Net income (loss).............................. $ (12) $ 226 $ 1,318 $ 1,937 $ 56 $ (228) $ 2,796
======= ======= ======= ======= ======= ======= ========
Net income per share(c)........................ $ $ $ $ $ $ $
Weighted average shares outstanding............
SELECTED OPERATING DATA (AT END OF PERIOD):
Branch locations............................... 9 9 10 12 11 12 17
Percentage change in comparable store sales.... 0.7% 9.8% 35.6% 6.1% 4.0% 9.9% 15.3%
Number of SKUs................................. N/A N/A 10,787 11,223 11,954 12,483 15,765
Active customers............................... N/A N/A 7,023 8,735 7,317 9,225 [ ]
</TABLE>
<TABLE>
<CAPTION>
At December 31, At March 31,
------------------------------------- ----------------------------
1992 1993 1994 1995 1995 1996 1997
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 8,201 $ 8,104 $10,840 $12,712 $10,875 $14,566 $ 17,410
Total assets................................... 18,200 18,087 26,750 36,192 26,211 35,287 62,292
Long-term debt................................. 7,620 7,550 10,472 15,815 9,860 18,095 38,888
Total stockholders' equity (deficit)........... 2,763 2,905 3,639 4,528 4,007 3,945 (3,030)
</TABLE>
- ---------------------------
(a) The Company changed its fiscal year end to March 31, effective April 1,
1996.
(b) Reflects S Corporation status until February 28, 1997, when the Company
converted to C Corporation status.
(c) The number of shares used in the computation of earnings per share data
gives effect to the conversion of all outstanding shares of the
Company's Series A-1, Series A-2 and Series B Preferred Stock to Common
Stock and a ____-for-1 stock split which will be effected immediately
prior to the consummation of Offering. Per share data has been computed
as if ________ shares of Common Stock were outstanding for all
historical periods presented.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
GENERAL
The Company's revenues are generated by providing a wide variety of
specialty tools and construction materials to professional contractors. The
Company is executing an aggressive acquisition strategy, acquiring companies in
related lines of businesses. These acquisitions may change the Company's
products, product mix and operating margins. While the Company's management
strategy, operating efficiencies and economies of scale may present
opportunities to reduce costs, such benefits may initially be partially or
completely offset by the cost of integration such as transitional, management
and administrative costs. These various costs and possible cost savings may make
historical operating results not indicative of future performance. In connection
with the Company's rapid expansion, the Company expects to focus significant
attention and resources on technological investments that will increase
productivity.
The Company expects to incur significant one-time charges in the
fiscal quarter in which the Offering is consummated. These one time charges will
include approximately $6.0 million related to prepayment penalties on the
retirement of existing debt, the charge-off of approximately $1.3 million
associated with capitalized debt issuance costs and imputed interest charges of
approximately $250,000 associated with the issuance of Common Stock at a
discount to the initial public offering price per share in order to retire a
note and warrant held by the sellers of certain acquired entities.
RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of net
sales or pro forma net sales, as applicable, for the actual fiscal years ended
December 31, 1994 and 1995, the actual and pro forma fiscal years ended March
31, 1997 and the actual three months ended March 31, 1995 and 1996. The pro
forma data were prepared as if the acquisitions of A-Y Supply, Stop Supply and
Viking Distributing had occurred on April 1, 1996.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Fiscal Yar Ended
December 31, March 31, March 31, 1997
--------------- --------------- ------------------
1994 1995 1995 1996 Actual Pro Forma
----- ----- ----- ----- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 71.1 69.3 71.0 69.8 68.5 68.4
----- ----- ----- ----- ----- -----
Gross Profit 28.9 30.7 29.0 30.2 31.5 31.6
Selling, general and
administrative expenses 25.8 26.4 26.9 29.1 26.9 26.0
----- ----- ----- ----- ----- -----
Income from operations 3.1 4.3 2.1 1.1 4.6 5.6
Interest expense (income) net 1.2 1.8 1.7 2.3 2.2 (.2)
----- ----- ----- ----- ----- -----
Income (loss) before
income tax 1.9 2.5 0.4 (1.2) 2.4 5.4
Income tax provision (benefit) -- -- -- -- (.4) 2.2
----- ----- ----- ----- ----- -----
Net income (loss) 1.9% 2.5% 0.4% (1.2%) 2.8% 3.2%
===== ===== ===== ===== ===== =====
</TABLE>
22
<PAGE> 25
The pro forma results of operations for the fiscal year ended March 31,
1997, as compared to the actual results for such fiscal year, reflect an
increase in gross margin from 31.5% to 31.6% due to the increased margins
associated with the rental businesses of A-Y Supply and Stop Supply. Pro forma
operating expenses as a percentage of net sales for the fiscal year ended March
31, 1997, as compared to the actual results for such fiscal year, were 26.0%
versus 26.9%. The lower selling, general and administrative expenses reflect
reduced annual compensation for the Company's Chief Executive Officer and
reduced or eliminated compensation to the selling shareholders of the acquired
entities. The change in net interest expense (income) reflects the impact of
paying off the Company's outstanding bank and subordinated debt. The increase in
the tax provision reflects the elimination of the benefit of reinstating
deferred income taxes for the Company due to the conversion from S Corporation
status to C Corporation status in February 1997 and the recording of a 41% tax
provision.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased $24.0 million, or 30.8%, to $101.8 million in
the fiscal year ended March 31, 1997 from $77.8 million in the year ended
December 31, 1995. The growth in net sales for 1997 was the result of the
acquisition of A-Y Supply in January 1997, a 28.0% increase in same store sales
during the fourth quarter ended March 31, 1997, expansion of product lines and
sales growth at the new branch stores opened in 1995.
Gross Profit. Gross profit increased $8.1 million, or 33.9%, to $32.0
million in the fiscal year ended March 31, 1997 from $23.9 million in the year
ended December 31, 1995. The increase in gross profit was a result of the net
sales increase combined with an increase in gross profit margin as a percentage
of net sales. The gross profit margin as a percentage of net sales for the
fiscal year ended March 31, 1997 was 31.5%, compared to 30.7% in the year ended
December 31, 1995. The increase in gross profit margin as a percentage of net
sales was a result of White Cap's improved purchasing of products throughout the
fiscal year ended March 31, 1997. This improvement was offset by lower margins
at A-Y Supply during the fourth quarter due to the aggressive promotion of
certain products in order to initiate relationships with new customers in
Northern California.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.9 million, or 33.7%, to $27.4 million in
the fiscal year ended March 31, 1997 from $20.5 million in the year ended
December 31, 1995. Selling expenses increased $4.3 million, or 31.9%, to $17.8
million in the fiscal year ended March 31, 1997 from $13.5 million in the year
ended December 31, 1995. The increase in selling expenses was due to increased
advertising, increased commissions to the outside sales force due to the sales
growth and increased costs of customer service, principally the addition of
branch personnel. Selling expenses as a percentage of net sales for the fiscal
year ended March 31, 1997 increased to 17.5%, as compared to 17.3% in the year
ended December 31, 1995, as a result of the greater percentage growth in net
sales.
General and administrative expenses include corporate administrative costs
and the costs of operating the Company's central distribution center in Costa
Mesa, California. General and administrative expenses increased $2.6 million, or
37.1%, to $9.6 million in the fiscal year ended March 31, 1997 from $7.0 million
in the year ended December 31, 1995. General and administrative expenses as a
percentage of net sales for the year ended March 31, 1997 increased to 9.4%, as
compared to 9.0% in the year ended December 31, 1995. The increase in corporate
and distribution expense was primarily due to increased distribution costs to
process the increased sales volume and a planned increase in corporate functions
to position the Company for future growth.
Income from Operations. Income from operations increased $1.3 million, or
38.2%, to $4.7 million in the fiscal year ended March 31, 1997 from $3.4 million
in the year ended December 31, 1995. Income from operations as a percentage of
net sales was 4.6%, as compared to 4.3% for the year ended December 31, 1995.
This increase reflects the cumulative effects of the increase in gross profit,
partially offset by the increase in selling, general and administrative
expenses.
Interest Expense, Net. Interest expense, net of interest income, increased
$0.9 million, or 64.3%, to $2.3 million in the fiscal year ended March 31, 1997
from $1.4 million in the year ended December 31, 1995. Interest expense as a
percentage of net sales increased to 2.2% from 1.8% in the year ended December
31, 1995. This increase was due to increased levels of debt to support the
Company's growth and the new debt associated with the acquisition of A-Y Supply,
combined with the higher interest rate associated with the debt utilized to
acquire A-Y Supply.
Net Income. Net income increased $0.9 million, or 47.4%, to $2.8 million in
the fiscal year ended March 31, 1997 from $1.9 million in the year ended
December 31, 1995. Net income as a percentage of net sales was 2.8%, as compared
to 2.5% for the year ended December 31, 1995. This increase reflects the
cumulative effects of the increase in gross profit and the increase in the
benefit for income taxes, offset by the increase in operating expenses and the
increase in net interest expense.
23
<PAGE> 26
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1995
Net Sales. Net sales increased $3.7 million, or 23.4%, to $19.5 million for
the three month period ended March 31, 1996 from $15.8 million for the three
month period ended March 31, 1995. The growth in net sales for the 1996 period
was the result of a 9.9% increase in same store sales during the quarter ended
March 31, 1996, the expansion of product lines and sales growth at the new
branch stores opened in 1994 and 1995.
Gross Profit. Gross profit increased $1.3 million, or 28.3%, to $5.9 million
for the three month period ended March 31, 1996 from $4.6 million for the three
month period ended March 31, 1995. The increase in gross profit was a result of
the increased net sales combined with an increase in gross profit margin. The
gross profit margin for the three months ended March 31, 1996 was 30.2%,
compared to 29.0% in the three months ended March 31, 1995. The increase in
gross profit margin was a result of White Cap's improved purchasing of products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 32.6%, to $5.7 million in the
quarter ended March 31, 1996 from $4.3 million in the quarter ended March 31,
1995. Selling expenses increased $0.7 million, or 24.1%, to $3.6 million for the
three month period ended March 31, 1996 from $2.9 million for the three month
period ended March 31, 1995. The increase in selling expenses was due to
increased advertising, increased commissions to the outside sales force due to
the sales growth and increased costs of customer service, principally the
addition of branch personnel. Selling expenses as a percent of net sales for the
three month period ended March 31, 1996 was 18.5%, as compared to 18.4% for the
three month period ended March 31, 1995.
General and administrative expenses increased $0.7 million, or 50.0%, to
$2.1 million for the three month period ended March 31, 1996 from $1.4 million
for the three month period ended March 31, 1995. General and administrative
expenses as a percentage of net sales for the three months ended March 31, 1996
increased to 10.6%, as compared to 8.9% for the three months ended March 31,
1995. The increase in corporate and distribution expense was primarily due to
increased distribution costs to process the increased sales volume and a planned
increase in corporate functions to position the Company for future growth.
Income from Operations. Income from operations was nominal for the three
month periods ended March 31, 1996 and March 31, 1995. Income from operations as
a percentage of net sales was 1.1%, as compared to 2.1% for the three months
ended March 31, 1995. This decrease reflects the cumulative effects of the
increase in gross profit offset by the increase in selling, general and
administrative expenses.
Interest Expense, Net. Interest expense, net of interest income, increased
$0.1 million, or 33.3%, to $0.4 million for the three month period ended March
31, 1996 from $0.3 million for the three month period ended March 31, 1995.
Interest expense as a percentage of net sales increased to 2.3% from 1.7% in the
three month period ended March 31, 1995. This increase was due to increased
levels of debt to support the Company's growth.
Net Loss. Net loss increased to $0.2 million, as compared to net income of
$0.1 million for the three month period ended March 31, 1995. The decrease in
net income was primarily related to increased general and administrative
expenses and increased interest expense.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales increased $8.3 million, or 11.9%, to $77.8 million in
the year ended December 31, 1995 from $69.5 million in the year ended December
31, 1994. The growth in net sales for 1995 was the result of a 6.1% increase in
same store sales during 1995, expansion of product lines and the opening of new
branch stores in 1994 and 1995.
Gross Profit. Gross profit increased $3.8 million, or 18.9%, to $23.9
million in the fiscal year ended December 31, 1995 from $20.1 million in the
fiscal year ended December 31, 1994. The increase in gross profit was a result
of the increase in net sales combined with an increase in gross profit margins
as a percentage of net sales. The gross profit margin as a percentage of net
sales in the year ended December 31, 1995 was 30.7%, as compared to 28.9% in the
year ended December 31, 1994. The increase in gross profit margin as a
percentage of net sales was a result of White Cap's improved purchasing of
products throughout the year.
24
<PAGE> 27
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.6 million, or 14.5%, to $20.5 million in
the year ended December 31, 1995 from $17.9 million in the year ended December
31, 1994. Selling expenses increased $1.5 million, or 12.5%, to $13.5 million in
the year ended December 31, 1995 from $12.0 million in the year ended December
31, 1994. The increase in selling expenses was due to increased advertising,
increased commissions to the outside sales force due to the sales growth and
increased costs of customer service, primarily the addition of branch personnel.
Selling expenses as a percentage of net sales for the years ended December 31,
1995 and 1994 was constant at 17.3%.
General and administrative expenses increased $1.1 million, or 18.6%, to
$7.0 million in the year ended December 31, 1995 from $5.9 million in the year
ended December 31, 1994. General and administrative expenses as a percentage of
net sales for the year ended December 31, 1995 was 9.0%, as compared to 8.4% in
the year ended December 31, 1994. The increase in general and administrative
expense was primarily due to increased distribution costs to process the
increased sales volume, a planned increase in corporate functions to position
the Company for future growth and the costs associated with opening three new
branches during 1994 and 1995.
Income from Operations. Income from operations increased $1.2 million, or
54.5%, to $3.4 million in the year ended December 31, 1995 from $2.2 million in
the year ended December 31, 1994. Income from operations as a percentage of net
sales was 4.3%, as compared to the 3.1% for the year ended December 31, 1995.
This increase reflects the effect of the increase in gross profit margins offset
by the increase in selling, general and administrative expenses.
Interest Expense, Net. Interest expense, net of interest income, increased
$0.6 million, or 75.0%, to $1.4 million in the year ended December 31, 1995 from
$0.8 million in the year ended December 31, 1994. Interest expense as a
percentage of net sales increased to 1.8% from 1.2% in the year ended December
31, 1994. This was due to increased levels of debt to support the Company's
growth.
Net Income. Net income increased $0.6 million, or 46.2%, to $1.9 million in
the year ended December 31, 1995 from $1.3 million in the year ended December
31, 1994. Net income as a percentage of net sales was 2.5%, as compared to 1.9%
for the year ended December 31, 1994. This increase reflects the effect of the
increase in gross profit margins, offset by the increases in operating expenses
and interest expense.
QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth certain unaudited quarterly consolidated
financial data for each of the eight consecutive quarters beginning April 1,
1995. This information was derived from unaudited consolidated financial
statements that include, in the opinion of the Company, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
when read in conjunction with the consolidated financial statements of the
Company and notes thereto included elsewhere in this Prospectus. In the
contractor supply industry, seasonality generally affects quarterly sales
performance. Historically, the Company's quarterly sales in the fourth fiscal
quarter (January through March) are lowest and quarterly sales in the second
fiscal quarter (July through September) are highest. This variance is primarily
due to uncontrollable weather conditions and a somewhat predictable annual
construction cycle. White Cap manages the impact of seasonality trends by
focusing on such critical issues as staffing requirements and trends in
inventory turns.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------------
Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31
1995 1995 1995 1996 1996 1996 1996 1997(a)
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... $ 20,081 $ 21,564 $ 20,354 $ 19,511 $ 23,509 $ 24,999 $ 22,383 $ 30,880
Gross profit........ 6,240 6,560 6,484 5,884 7,517 8,044 6,987 9,482
Income (loss) from
operations........ 1,160 942 924 214 1,282 1,592 498 1,283
Net income (loss)... 816 582 483 (228) 849 1,206 215 525
</TABLE>
- --------------------
(a) Includes the results of operations for A-Y Supply, which was acquired
effective January 1, 1997.
25
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have historically been to fund (i) the
working capital requirements necessitated by its sales growth, (ii) acquiring
and operating acquired companies and (iii) distributions to the prior sole
shareholder, primarily to satisfy tax liabilities resulting from the prior S
Corporation status. The Company's primary sources of financing have been senior
and subordinated debt, cash from operations and the sale of preferred equity.
After completion of the Offering, the Company anticipates that its cash flows
from operations and available lines of credit will be adequate to support its
operations and strategic acquisition plan for the immediate future and for at
least the next 24 months.
The Company's existing credit facility will be retired upon closing of the
Offering. A new credit facility will be entered into upon closing of the
Offering. The terms of the existing and new credit facilities are described
below.
Existing Credit Facilities
Under the terms of the existing credit facility, the Company has available
secured revolving borrowings of up to $35 million (seasonal sublimit of $38
million) and has an outstanding secured term loan of $10.6 million. Revolving
loans under the existing credit facility bear interest at 0.25% over the agent
bank's prime rate and provides a LIBOR option of 2.5% over the LIBOR rate. Term
loans under the existing credit facility bear interest at 0.75% over the agent
bank's prime rate and provide for a LIBOR option of 3.0% over the LIBOR rate.
The interest rate ranged from 8.1% to 8.75% on revolving loans and 8.6% to 9.3%
on term loans at March 31, 1997. The existing credit facility also contains
certain financial covenants which require the Company to maintain a minimum net
worth, ratio of current assets to current liabilities, ratio of liabilities to
effective net worth, minimum interest coverage ratio and positive net income, to
refrain from capital expenditures in excess of certain amounts and to limit the
payment of dividends. The Company expects to be in compliance with these
covenants upon completion of the Offering and will repay and terminate the above
described credit facility.
Post Offering Credit Facilities
Under the terms of the Credit Agreement (as defined), which the Company
expects will take effect upon the consummation of the Offering , the Company
will have available borrowings of up to $100 million. Interest on amounts
borrowed may be paid at the option of the Company at a rate per annum equal to
the lead bank's prime or reference rate, or alternatively at bankers' acceptance
rate or LIBOR rate plus margins. The Credit Agreement is expected to contain
certain restrictive covenants limiting mergers, use of proceeds, indebtedness,
liens, investments, sale of assets and acquisitions. The Credit Agreement is
also expected to contain certain financial covenants which will require the
Company to maintain a minimum net worth, ratio of current assets to current
liabilities, ratio of liabilities to effective net worth, minimum interest
coverage ratio and positive net income, to refrain from capital expenditures in
excess of certain amounts and to limit the payment of dividends. The Company
expects to be in compliance with these covenants upon completion of the
Offering.
The Company provided net cash from operating activities of $3.6 million for
the fiscal year ending March 31, 1997 compared to net cash provided by operating
activities of $1.4 million and net cash used in operating activities of $0.8
million for the years ended December 31, 1995 and December 31, 1994,
respectively. The increase in cash provided from operating activities was
primarily due to increased net income.
Cash used in investing activities was $18.0 million, $4.9 million and $1.3
million in the fiscal year ended March 31, 1997, and the years ended December
31, 1995 and December 31, 1994, respectively. The cash used in investing
activities was primarily for capital expenditures and, in the fiscal year ended
March 31, 1997, the purchase of A-Y Supply.
Cash provided by financing activities was $14.4 million, $3.6 million and
$2.1 million in the fiscal years ending March 31, 1997, December 31, 1995 and
December 31, 1994, respectively, primarily from increased borrowings.
Capital expenditures (other than acquisitions) were $2.1 million, $4.5
million and $1.3 million in the fiscal years ended March 31, 1997, December 31,
1995 and December 31, 1994, respectively. The Company expects to spend
approximately $2.8 million on capital expenditures for its existing operations
in the fiscal year ending March 31, 1998, primarily for office and computer
equipment, and branch remodeling and related equipment.
26
<PAGE> 29
BUSINESS
GENERAL
White Cap is one of the leading business to business retailers to
professional contractors in the Western United States. The Company offers over
20,000 stock keeping units ("SKUs") of specialty tools and materials. The
Company markets its products through 20 branch locations, its highly experienced
outside sales force and through the strategic distribution of its in-stock
catalogs. The Company has achieved substantial growth by acquiring leading
contractor suppliers in new and existing markets, expanding product offerings
and opening new branch locations. Since 1987, White Cap's net sales have
increased at a compounded annual growth rate of 23%, resulting from (i)
acquisitions, (ii) same store sales growth, which averaged 17% over the past
four years, and (iii) new branch openings. The Company's active customer base
(customers that have purchased at least one item on open credit during the past
12 months) has grown from approximately 7,000 in 1994 to over 16,000 at June 30,
1997. For the fiscal year ended March 31, 1997, the Company had pro forma net
sales of approximately $165 million.
The Company operates in a highly fragmented, multi-billion dollar
industry. Management estimates that the total U.S. market for products sold by
the Company is several billion annually and that small, regional contractor
suppliers, with sales of less than $50 million, supply over two-thirds of the
professional contractor market. With pro forma fiscal 1996 net sales of
approximately $165 million, the Company believes it is one of the largest
suppliers to its market niche nationwide. The Company targets medium- and
large-sized professional contractors, including professional concrete, framing,
waterproofing, landscaping, grading, electrical, mechanical and general
contractors.
The Company sells a wide variety of products, including construction
materials, hand tools, fasteners, structural connectors, power tools, light
construction equipment, rebar, bulk and collated gun nails and specialty
cementatious products. In addition, at certain branches the Company provides
rental services on selected items such as brackets and braces used in the
construction of concrete "tilt-up" buildings, power tools and miscellaneous
light construction equipment. The Company's products are used by professional
contractors in both new construction and maintenance and repair projects.
The Company believes that it has developed a business model that
differs substantially from that of traditional contractor suppliers. The model
is based on offering the Company's customers superior customer service and
convenient "one-stop" shopping at its branch locations. Unlike traditional
contractor suppliers, who typically fill orders from warehouses not accessible
to customers, the Company encourages customers to shop at its branches where
they can browse through the warehouse aisles and adjacent outdoor yards. The
Company's prototypical store format consists of approximately 15,000 to 20,000
square feet of indoor floor space with an adjacent outdoor yard of approximately
the same square footage. As a result of the Company's focus on merchandising,
which exposes customers to the wide breadth of White Cap's product offerings and
promotes significant add-on sales, approximately 60% of the Company's net sales
are generated from "walk-in" and "will call" business. Customers can also select
items from the Company's in-stock catalogs, distributed to approximately 40,000
professional contractors, listing over 11,000 of the best selling SKUs
maintained in stock. Customers can order products by phone, fax, at a sales
branch or through the outside sales force. The Company's highly experienced
sales force maintains frequent customer contact, providing service on and off
the job-site. Through its high in-stock position and sophisticated inventory
management systems, the Company is able to fulfill approximately 95% of the
items included in each customer order and provide same-day or next-day delivery.
GROWTH STRATEGY
In order to capitalize on its unique business model and the fragmented
professional contractor supply industry, the Company has initiated an aggressive
growth strategy consisting of: (i) pursuing acquisitions of leading contractor
suppliers in new and existing markets; (ii) increasing market share within
existing markets; (iii) expanding product offerings; and (iv) opening new branch
locations. The key elements of the Company's growth strategy are as follows:
Strategic Acquisitions. The Company seeks to acquire leading contractor
suppliers in existing and new markets that will provide geographic
diversification, product line expansion, an established customer base and a
direct sales force. The Company seeks to consolidate the operations of such
acquired companies and eliminate duplicative overhead expense. White Cap has
established a successful track record for identifying and integrating
acquisitions.
27
<PAGE> 30
Since February 1997, the Company has completed three acquisitions, A-Y
Supply, Stop Supply and Viking Distributing, thereby strengthening its position
as a market leader in the Western United States and adding approximately $63
million to pro forma fiscal 1996 net sales. The Company believes that there are
numerous attractive acquisition opportunities and that the Company's established
reputation as an industry leader, access to capital, sophisticated management
information systems and operating expertise provide it with competitive
advantages in making acquisitions. The initial focus of the Company's
acquisition strategy will be on acquiring specialty contractor suppliers in the
Western United States.
In 1991, prior to its recent acquisitions, White Cap acquired seven
branch locations of Abco Hardware ("Abco"), its then largest competitor in
Southern California. Following this acquisition, White Cap consolidated four
Abco branches with existing White Cap branches and converted the remaining three
Abco branches into the White Cap business model.
Increased Market Share. The Company believes that its position as one
of the largest suppliers in its market niche to professional contractors in the
Western United States, combined with its established reputation for providing
superior customer service and a wide range of specialty product offerings, will
enable the Company to increase its market share. White Cap's direct sales force
utilizes industry databases to continuously prospect for new customers and new
projects. This effort focuses on targeting medium- and large-sized professional
contractors engaged in construction projects throughout the Western United
States. The Company believes its increased geographical presence will also allow
its customers to consolidate their purchases with White Cap. The Company also
works closely with its suppliers and with licensed architects and engineers to
ensure that the specialty product lines it carries are specified on projects.
Expanded Product Offerings. The Company believes there are significant
opportunities to further expand its product offerings by distributing profitable
specialty product lines sold by acquired companies but not previously offered at
White Cap locations. As a result of its three most recent acquisitions, the
Company anticipates that it will introduce at its other Southern California
locations approximately 3,500 new SKUs. As an example, the Company expects to
expand A-Y Supply's rental business of brackets and braces used in the
construction of concrete "tilt-up" buildings, as well as the sale of related
products and accessories to certain of the Company's other branches. The Company
also intends to expand the product offerings at its newly acquired branches by
introducing approximately 2,500 new SKUs which have proven successful at White
Cap. The Company has introduced the Simpson Strong-Tie line of structural
connectors and fasteners to the A-Y Supply branches and has expanded the
offering of the Simpson Strong-Tie products carried at the Viking Distributing
branches. The Company anticipates regularly adding new products to its existing
offerings and creating new product categories.
New Branch Openings. The Company continues to evaluate opportunities to
open new branch locations where it can service new customers and provide better
service to its existing customer base. Pursuant to this strategy, the Company
has opened three branch locations since 1994. In 1994, the Company expanded
operations by opening a new branch location to service the rapidly growing Las
Vegas market. In 1995, to capitalize on the growing economy in the Western
United States, the Company further expanded by opening new branch locations in
Denver and Phoenix. These strategic branch openings targeted high growth markets
where management believed the Company could capture sufficient market share to
allow it to meet or exceed budgeted sales goals.
INDUSTRY OVERVIEW
The Company operates in a highly fragmented, multi-billion dollar
industry. The Company believes that traditional suppliers, i.e. small regional
contractor suppliers, substantially all which have sales less than $50 million,
supply over two-thirds of the professional contractor market.
The Company believes that the customer base it serves can be classified
by customer type into the following three categories:
Small Professional Contractors. This customer category
consists mostly of home-office based contractors with approximately
five or fewer employees. Small professional contractors typically
conduct home improvement projects, such as room additions, patios,
masonry walls and landscaping. Most purchases are made directly by the
owner/contractor and approximately 90% of their work is completed
without hiring sub-contractors. Purchases by contractors in this
category consist of smaller quantities of many of the SKUs stocked by
the Company. This "multi-trade" category of customer is made up mostly
of professionals doing concrete, masonry, and wood framing projects.
Most projects are located within one hour driving distance from the
contractor's base of operations. Small professional contractors
historically have
28
<PAGE> 31
purchased construction supplies from traditional specialty contractor
suppliers, mail order catalogs, retail dealers and home centers. A
relatively small percentage of White Cap's current net sales are from
this customer category.
Medium-Sized Professional Contractors. This customer category
is comprised of contractors with approximately 6 to 50 employees who
typically operate within a relatively small geographical area.
Medium-sized professional contractors may act as general contractors,
but usually act as sub-contractors. The scope of their projects
typically includes municipal projects, retail strip centers, concrete
"tilt-up" buildings and residential construction. This category of
customer depends heavily on customer service, high same-day or next-day
order fill rates and job-site delivery. White Cap's outside sales
force, with its product knowledge and mobility, is perceived by these
customers to add value. Medium-sized professional contractors
historically have been primarily served by traditional specialty
contractor suppliers and, to a much lesser extent, by mail order
marketers, retail dealers and home centers.
Large Professional Contractors. This customer category is
comprised mostly of companies with over 50 employees that purchase
large quantities of specialty construction products. The large
professional contractor bids on multiple multi-million dollar projects
simultaneously. This customer category completes the major portions of
a project acting as a general or major subcontractor. Large contractors
can be bonded for hundreds of millions of dollars which qualifies them
for projects such as highway bridges, sewage treatment plants, oil
refineries, high rise building, hotels, rapid transit projects and
other major construction projects. The large professional contractor is
generally located in multiple states and may have ten or more projects
under way at any given time. Large professional contractors often
negotiate contract pricing on many of the products they routinely
purchase and demand a high level of service. These services include
same-day or next-day job-site delivery, a professional outside sales
force and special credit terms. These customers have historically been
served by traditional contractor suppliers.
The Company's focus on one-stop shopping and "business-to-business"
retailing to medium- and large-sized professional contractors distinguishes it
from many of the traditional specialty contractor suppliers with whom it
competes, as well as from large home centers, whose primary emphasis is on the
"do-it-yourself" ("DIY") consumer market and small maintenance and home
improvement contractors. Management believes that home centers can achieve only
limited market penetration among medium- and large-sized professional
contractors. The Company believes that home centers do not provide the necessary
full range of services required by these customers and lack the sales force to
establish the critical relationships necessary to service this category. The
Company believes it has a competitive advantage over home centers because it is
able to provide the professional contractor a wider range of specialty product
lines; high same-day or next-day order fill rates; "next-day" job-site delivery;
a highly experienced technical sales force to provide service on and off the job
site; and in-house credit facilities tailored for the professional contractor.
See "--Competition."
There are numerous traditional contractor suppliers (most with
significantly lower revenues than the Company) in the United States that, to
varying degrees, serve small-, medium- and large-sized professional contractors
in the Company's product offering niche. Most of those contractor suppliers
operate in only one or two metropolitan areas or states. The Company believes
there are only a limited number of suppliers to medium- and large-sized
professional contractors nationwide which have annual sales in excess of $100
million and these suppliers tend to offer a more specialized and a significantly
narrower focused product line than the Company.
White Cap's management believes that a period of rapid consolidation is
about to commence among traditional contractor suppliers. The Company believes
it is well positioned to capitalize on this consolidation trend and has several
competitive advantages relative to smaller competitors, including access to
capital, the ability to offer a broad range of products and customer services,
superior purchasing power, sophisticated management information systems and an
experienced management team. The Company continues to evaluate potential
acquisitions and negotiates with potential acquisition candidates from time to
time. The Company is currently in discussions with several acquisition
candidates, but has not entered into binding commitments or understandings with
any of such candidates.
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<PAGE> 32
THE WHITE CAP BUSINESS MODEL
The Company believes that it has developed a business model that
differs substantially from that of traditional contractor suppliers in the
United States. The key elements of the Company's business model include the
following:
Breadth and Depth of Products. The Company has distinguished itself
from the traditional contractor suppliers in the United States by providing the
professional contractor with a "one-stop shopping" alternative. Historically,
professional contractors have made purchases from multiple suppliers for their
specialty tools and materials. The Company believes that its success has
resulted from the superior range of the specialty merchandise it offers to the
professional contractor. To better serve its customers' needs, the Company
maintains over 20,000 SKUs in selected specialty product lines, which the
Company believes is substantially more than its competitors. In addition, the
Company maintains sufficient inventories of products necessary to satisfy the
professional contractor's large project requirements. Through its high in-stock
position and inventory management systems, the Company is able to fulfill
approximately 95% of the items included in each customer order and provide
same-day or next-day delivery.
Innovative Retail Merchandising Techniques. Management believes that
White Cap's continued growth has been the result of the implementation of
innovative retail merchandising techniques not previously utilized in marketing
to medium- and large-sized professional contractors. The Company believes its
ratio of "walk-in" and "will call" business, which is approximately 60% of net
sales, is among the highest in the industry. Traditional contractor suppliers
have historically operated on the basis of filling orders from a "closed
warehouse" with a limited display or showroom area accessible to the customer.
White Cap was among the first in its industry to utilize "business-to-business"
retail marketing techniques and the "open warehouse" merchandising concept in
the Company's sales branches, providing the customer complete access to the
products in stock both inside its branches and in the adjacent outdoor storage
yards. The typical White Cap branch utilizes such merchandising techniques as
strategic placement of product groups, innovative product displays and video
monitors showing product demonstration tapes. Frequent in-store promotional
events, such as power tool demo days, product seminars and pancake breakfasts,
are examples of a few of the retail marketing techniques employed by the
Company. Through its merchandising orientation and its innovative and aggressive
marketing, including catalogs, monthly mailings, radio advertising and trade
show attendance, the Company attracts customers to its sales branches to expose
the customer to the breadth of White Cap's specialty product offerings and to
promote in-store impulse purchases.
Sales Force / Customer Service. The Company's sales force consists of
approximately 178 salespersons committed to providing the highest level of
customer service. The highly skilled and knowledgeable sales force is of crucial
importance to the Company's success as the salespersons' personal relationships
with their customers and their emphasis on customer service are the factors
which result in repeat business and customer loyalty. The Company's operating
model includes one inside salesperson for approximately every two outside
salespeople. Inside salespeople are responsible for processing orders and
conducting telemarketing. White Cap's outside sales force generates sales by
making office sales calls and/or making direct sales calls to actual job sites.
In addition, the outside sales force utilizes sales leads generated from
industry databases, trade shows, vendors/suppliers, the inside counter sales
force and telemarketing. The Company's highly experienced outside sales force is
integral to the Company's efforts to add new customers and generate additional
revenue from existing customers. The individuals comprising White Cap's outside
sales force have an average of 15 years industry experience and an average
tenure of over six years with the Company and sell the Company's products on an
exclusive basis. The Company's salespersons regularly receive product training
both from internal and external sources to ensure they are current on all
product developments. As a result the sales force is able to provide product
recommendations as well as job-site assistance and instruction. Approximately
80% of the Company's outside sales force is paid on a 100% commission basis. The
Company believes that its increased geographic presence will more effectively
allow its sales force to serve medium- and large-sized professional contractors
with projects in multiple regions throughout California and in other targeted
states.
In-Stock Catalogs and Publications. The Company provides its customers
with in-stock catalogs displaying and listing over 11,000 of the best-selling
SKUs maintained in stock. The in-stock catalogs are distributed in the branches
and by the outside sales force to approximately 40,000 professional contractors.
In addition, the Company publishes monthly the Contractor Trader which features
selected items which are on sale, as well as technical information and articles
of interest to the industry. The Contractor Trader is distributed via direct
mail to over 75,000 contractors and other industry professionals. As a result of
its consistent focus on this type of marketing, a high percentage of White Cap's
customers shop at its well stocked branches or order desired products from the
Company's in-stock catalogs. Orders are also placed directly with the outside
sales force, by telephone or facsimile. The Company is also implementing
electronic data interchange ("EDI") to better serve the ordering and invoicing
needs of its customers.
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<PAGE> 33
Job Site Delivery. The Company's customers ordinarily receive next
business day delivery via the Company's fleet of trucks. The Company believes
this is of crucial importance to professional contractors who rely on the
Company's reputation for on-time delivery in order to meet their critical
"just-in-time" ordering requirements and strict job production schedules.
Credit Facilities Designed for the Professional Contractor. The Company
offers its customers credit options including in-house credit lines, job-based
credit lines, revolving private label third party charge accounts and third
party equipment leasing lines. Approximately 80% of White Cap's sales are on
open account with the credit managed by White Cap's in-house credit department.
Historically, White Cap has experienced a net accounts receivable write-off rate
averaging 0.3% of net sales of the period from January 1992 to March 31, 1997.
Strong Supplier Relationships. The Company purchases from more than
1,200 suppliers, 98% of which are manufacturers. This focus on making purchases
directly from manufacturers provides it a substantial cost advantage over
traditional contractor suppliers who historically relied more heavily on higher
cost purchases from wholesalers. Management believes that the Company's
increasing volume purchasing power as a leading contractor supplier in the
Western United States will allow it to obtain even lower prices, better credit
terms, increased co-op advertising support and increased freight allowances.
White Cap has excellent relationships with all of its key suppliers. The Company
is one of the largest customers in its channel with many of its suppliers, and
in some of the markets that it serves, it has exclusive or semi-exclusive
product distribution agreements.
Commitment to Systems Innovation. The Company has made substantial
investments in computer hardware and the development of computer software
applications which it believes allow it to achieve cost savings, deliver
superior customer service and centrally manage its operations. White Cap's
software applications are continually being enhanced and new applications are
continually being developed. The Company has recently installed a customized
integrated software package that provides order entry, purchasing, inventory
control, accounts receivable, accounts payable and financial statement
reporting. Among other applications, White Cap's new software is specifically
designed to track on a real-time basis the inventory level of each SKU by
branch, forecast demand by SKU and calculate appropriate reorder quantities and
lead times to maximize fill rates while minimizing inventory carrying costs. As
part of the integration of the White Cap business model at acquired companies,
branches are linked to White Cap's central computer system and are converted
over to the Company's management information systems..
OPERATIONS
Products
White Cap offers its customers over 20,000 SKUs through its 20 branch
locations. The Company sells a wide selection of specialty products for
professional contractors, including: building materials, hand tools, fasteners,
structural connectors, power tools, light construction equipment, rebar, bulk
and collated gun nails and specialty cementatious products. In addition, in
certain branches the Company provides rental services on selected items such as
brackets and braces used in the construction of concrete "tilt-up" buildings,
power tools and light construction equipment. The Company's products are used by
professional contractors in both new construction and maintenance and repair
projects.
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<PAGE> 34
The following table sets forth the Company's major product groups and
the key products offered in each category.
<TABLE>
<CAPTION>
Product Category Types of Products Sold
- --------------------------------------------------------------------------------
<C> <S>
Construction Materials rebar, specialty cementatious products,
concrete adhesives, concrete curing
compounds, sealers, coatings,
polyethylene sheeting, expansion joints
Hand Tools trowels, hammers, shovels, levels,
screwdrivers, rakes, wrenches, tape
measures, ratchets and sockets
Fasteners machine bolts, allthread, bulk and gun
nails, anchor bolts, nuts, bolts,
screws, mechanical anchoring systems,
staples used for roofing and packaging
Structural Connectors embedded truss anchors, beam seats,
holddowns, purlin anchors, foundation
anchors, post bases, column caps, joist
hangers, strap ties, framing anchors,
seismic and hurricane ties
Power Tools hammer drills, rotary hammers,
grinders, breaker hammers, demolition
hammers, saws, routers, cordless drills
and saws
Waterproofing Materials negative side water proofing products,
coatings and sealers, hydraulic cement,
membrane protection systems, bentonite
waterproof systems
Light Construction Equipment brick and block saws, power trowels,
concrete saws and coring equipment,
compactors, concrete mixers,
generators, pumps, compressors,
concrete screeds and material spreaders
Cutting Tools diamond concrete cutting blades,
diamond brick/block cutting blades,
diamond coring bits, saw blades for
cutting wood, plastics and metal,
abrasive blades for cutting masonry,
concrete and metal
Rental Tools, Equipment and Braces tilt-up braces, compressors,
generators, man-lifts, concrete
finishing machines and saws, pressure
washers, sprayers
Drainage Materials surface drainage systems, plastic
drainage pipe, ground stabilization
fabric, subsurface drainage systems,
filter fabric
Landscape Lighting wire and cable, transformers, outdoor
fixtures, pathway lights, step and deck
lights, underwater lights, bulbs and
connectors
</TABLE>
Store Design
All of the Company's branches are well-stocked and staffed by highly
trained sales personnel. The Company's prototypical store format consists of
approximately 15,000 to 20,000 square feet of floor space, plus an adjacent
outdoor yard of approximately the same square footage. The majority of the
Company's original branches are designed as open warehouses providing the
customer complete access to the products in stock both inside the store and in
the adjacent outdoor storage yards. The Company believes that the open warehouse
design of its branches, where its customers can browse through the aisles, gives
the Company a competitive advantage over most traditional contractor suppliers
whose branches have small showrooms and sales counters.
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<PAGE> 35
The Company expects to convert the eight branches acquired since
February 1997 to open warehouses over the next year. This conversion process is
being implemented gradually to avoid the disruption of day-to-day operations
during its two busiest quarters.
Customers
White Cap sells to a variety of professional general and specialty
building trade contractors in all three of the customer categories described
above. The Company's primary customers include general, concrete, framing,
waterproofing, landscape, grading, electrical and mechanical contractors. The
Company believes that the professional relationships maintained through its
outside sales force with its customers are of critical importance. The Company's
revenues are divided approximately equally between contractors engaged in
residential construction and contractors engaged in commercial or infrastructure
construction and maintenance projects.
As of June 30, 1997, White Cap had over 16,000 customers that have
purchased at least one item on open account during the past 12 months, in
addition to customers that do not have established credit accounts and pay upon
purchase. No one customer generates more than 1% of pro forma net sales. For the
fiscal year ended March 31, 1997, the Company's top ten customers generated less
than 6% of sales.
Marketing
The Company has implemented innovative retail merchandising techniques
not previously utilized in marketing to medium- and large-sized professional
contractors. White Cap was among the first in its industry to utilize
"business-to-business" retail marketing techniques and the "open warehouse"
merchandising concept in the Company's sales branches. Because of its
merchandising and marketing orientation, including innovative catalogs and,
monthly mailings, creative radio advertising spots and trade show booths, the
Company believes it attracts three to four times as many customers to its sales
branches than most of its competitors. The typical branch implements such
merchandising techniques as the strategic placement of product groups,
innovative product displays and video monitors showing product demonstration
tapes. Frequent in-store promotional events, such as power tool demo days,
product seminars and pancake breakfasts, are examples of a few of the marketing
techniques employed by the Company.
White Cap and its recently acquired companies, Viking Distributing, A-Y
Supply and Stop Supply, publish in-stock catalogs, the most recent editions of
which list over 11,000 of the best selling SKUs maintained in stock. The 1998
edition of the White Cap in-stock catalog will include SKUs not previously
carried by White Cap, many of which were previously carried by the recently
acquired companies. The Company's professionally prepared catalog has over 400
pages creatively displaying the broad array of products carried by the Company.
The combined catalogs are distributed in the branches and by the outside sales
force to approximately 40,000 professional contractors. In addition, the Company
publishes monthly the Contractor Trader which includes sales specials as well as
tips and articles of interest to the industry. The Contractor Trader is
distributed to over 75,000 professional contractors and other industry
participants. The Company has expanded its distribution of the Contractor Trader
to cover all customers of A-Y Supply, Stop Supply and Viking Distributing since
their acquisition.
Suppliers
White Cap enjoys well established relationships with all of its key
suppliers and has maintained many of these relationships for over 10 years. The
Company is one of the primary distributors for many industry brand names. In
some of the markets that the Company serves, it has exclusive or semi-exclusive
product distribution agreements, which gives it a competitive advantage on
specific product lines. Management believes that outstanding supplier
relationships and White Cap's position in the marketplace allow the Company to
have one of the lowest inventory costs in the industry. Many of the products
carried by the Company are not carried by its competitors, because they cannot
provide technical assistance in the field. In addition, many of White Cap's
products are specified by architects for particular projects because of the
efforts of the Company's professional outside sales force working in conjunction
with the manufacturer's architectural sales representatives. Many of its top
suppliers differentiate the Company as an "industrial distributor" as opposed to
a "DIY retailer." In some instances this gives the Company access to a "full
product line," lower prices and more favorable credit terms.
The Company purchases from more than 1,200 suppliers, 98% of which are
manufacturers. The fact that no one supplier accounts for more than 10% of its
purchases minimizes the effects of supplier-related product shortages. The
Company carries major brands such as those identified in the following table.
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<PAGE> 36
<TABLE>
<S> <C> <C>
Air Nail Company Knaack Manufacturing Company Sika Corporation
American Honda Motor Company, Inc. L.M. Scofield Company Simpson Strong-Tie Company, Inc.
Black and Decker (U.S.), Inc. Makita U.S.A. Inc. S-B Power Tool Company
Davis Wire Corporation Master Builders Technologies Soff-Cut International
Diamond Products Milwaukee Electric Tool Corporation Stanley-Proto Industrial Tools
Electricord/A Leviton Company Multiquip, Inc. 3M
Hitachi Power Tools U.S.A., Ltd. Nicolon/Mirafi Group W.R. Meadows, Inc.
Itochu Building Products Company, Inc. Pacific Polymers, Inc. Werner Ladder Company
ITW Ramset/Red Head Pacific Stihl, Inc. Weyerhaeuser Company
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
The Company has made substantial investments in computer hardware and
the development of computer software applications which it believes allow the
Company to achieve cost savings, deliver superior customer service and centrally
manage its operations. As part of the integration of the White Cap business
model at acquired companies, branches are linked to the Company's central
computer system and are converted to the Company's software applications,
including point-of-sale, order processing, order fulfillment, delivery and
purchasing. White Cap's software applications are continually being developed
and enhanced. The Company has recently installed a customized software package
that provides order entry, purchasing, inventory control, accounts receivable,
accounts payable and financial statement reporting. The software also provides a
fully integrated distribution/warehouse management system. The Company's new
software is specifically designed to track on a real-time basis the inventory
level of each SKU by branch, forecast demand by SKU and calculate optimum
reorder quantities and lead times to maximize fill rates while minimizing
inventory carrying costs.
The Company's inventory management software is designed to minimize the
Company's cost of goods sold by forecasting and analyzing sales history for
every SKU in its inventory. The system can then calculate order quantities and
lead times and determine the lowest cost source of supply. Each and every order
is tracked from data entry to will call or delivery. Utilizing its customer
support software, the Company's customer service representatives are able to
inform customers on a real-time basis of the Company's in-stock position and
recommend an array of substitute products for discontinued or out-of-stock
items. In addition, the Company's system has the ability to accept and
cross-reference orders using the codes of suppliers and manufacturers, Universal
Product Codes (UPCs) and its own proprietary product codes. The Company is
implementing EDI in order to streamline purchasing, accounts receivable and
accounts payable.
CUSTOMER CREDIT
Approximately 80% of White Cap's sales are on open account, managed by
White Cap's in-house credit department. The Company offers its customers several
credit options including: 2% tenth prox credit terms, job-based credit lines,
revolving private label third party charge accounts and third party equipment
leasing lines. Unlike the large home centers, which do not create a "direct"
receivable from their customers, the Company utilizes its own credit facility to
allow its customers to charge their purchases. Each in-house account is opened
and credit terms are set according to the customer's creditworthiness and
background after review by White Cap's credit department. Each account is put on
a real-time monitoring status and assigned an in-house credit manager to
communicate directly with the customer to facilitate any issues arising on the
account. Most state lien laws allow the Company to file a preliminary lien
notice with the owner of the real property, the lender and the general
contractor that the Company has extended credit for materials used in the
improvement of the real property. A properly filed preliminary notice gives the
Company certain legal remedies which allow it to look beyond its customer for
the recovery of a past due job-based receivable.
Historically, White Cap has experienced a net accounts receivable
write-off rate averaging 0.3% of net sales over the period from January 1992 to
March 1997. The Company believes its collection performance can be attributed to
(i) a credit department with extensive experience in construction credit; (ii) a
real-time computerized accounts receivable system; (iii) thorough screening of
all new accounts; and (iv) the monitoring and reevaluation of existing accounts.
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<PAGE> 37
COMPETITION
White Cap competes against a broad range of building material dealers,
specialty contractor suppliers, home centers, retail hardware outlets and mail
order marketers within its geographic market territories. The majority of
traditional contractor suppliers in the Company's market have only one or two
locations. White Cap competes with several multiple branch operators, all of
whom management believes to have lower annual revenues than White Cap. Several
specialty contractor suppliers with revenues greater than the Company also
compete in the Company's markets, including Carlson Corporation, which
specializes in fasteners; Hilti Fastening Systems - USA, which specializes in
fastener systems and power tools; and Fasteners, Inc., which specializes in
tools and fasteners. The Company believes that it provides a much greater range
of products to service more of the professional contractor's needs than these
specialty contractor suppliers.
The Company believes its primary focus on medium- and large-sized
professional contractors, distinguishes it from home center chains, whose
primary emphasis is on the DIY consumer market and small maintenance and home
improvement contractors. The Company believes that the services it offers the
professional contractor and the relationship of its sales force with the
professional contractor would be difficult for home centers to replicate under
their current structure which is oriented more towards the DIY consumer market.
However, the Company believes that home centers are attempting to gain market
share among medium-size professional contractors, by providing limited delivery
services and limited commercial credit facilities. In addition, the Company
believes that the largest of such chains have explored, and continue to explore,
competing in the large professional contractor category through in-house
contractor sales efforts.
PROPERTIES
The Company's corporate headquarters and main distribution facility are
located in approximately 35,000 square feet of leased space (plus an adjacent
yard area of approximately 70,000 square feet) at 3120 Airway Avenue, Costa
Mesa, California. This facility is strategically located close to key major
freeways and is situated adjacent to Orange County's John Wayne Airport. White
Cap's credit and inventory control departments are operated from a separate
leased office facility in Santa Ana, California.
Approximately 50% of the goods stocked by the Company in its sales
branches are received and warehoused at its distribution facility. The Company
is implementing a program to increase drop-shipments by its suppliers directly
to branches and as a result expects the percentage of goods received in the
distribution facilities to continue to decline. The Company's fleet of transfer
trucks make scheduled deliveries from its distribution facilities to its 17
California branches. In addition, common carriers are used to resupply the
Company's out-of-state branches.
The Company maintains 20 branch locations in California, Nevada,
Arizona, and Colorado, all of which are leased. The leases for these 20 branches
expire at various periods between 1998 and 2007. The aggregate annual lease
payments on these properties, as of July 1997 was approximately $2,215,000. The
Company also owns a 7,500 square foot warehouse facility adjacent to its Las
Vegas branch. The Company believes that its facilities are adequate for its
current needs and that suitable additional space will be available as needed to
facilitate the Company's growth strategy. The following sets forth information
concerning the Company's operating facilities.
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<PAGE> 38
<TABLE>
<CAPTION>
Building Square Yard Square
Branch Location Footage Footage Total
- ----------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Chatsworth, CA........................... 20,020 41,230 61,250
San Diego, CA............................ 16,261 41,951 58,212
Santa Ana, CA............................ 27,504 31,536 59,040
Paramount, CA............................ 22,320 21,710 44,030
Sacramento, CA........................... 23,200 19,680 42,880
Ventura, CA.............................. 13,158 22,370 35,528
Riverside, CA............................ 17,670 17,925 35,595
San Juan, CA............................. 14,970 17,362 32,332
Fresno, CA............................... 21,040 6,390 27,430
Thousand Palms, CA....................... 7,840 15,316 23,156
Temecula, CA............................. 9,430 13,650 23,080
Stockton, CA............................. 10,500 8,925 19,425
San Leandro, CA.......................... 13,452 6,629 20,081
Santa Rosa, CA........................... 11,100 630 11,730
San Francisco, CA........................ 52,000 20,000 72,000
Dublin, CA............................... 10,000 0 10,000
San Jose, CA............................. 9,800 3,000 12,800
Phoenix, AZ.............................. 13,230 24,400 37,630
Denver, CO............................... 9,676 10,076 19,752
Las Vegas, NV............................ 10,505 21,095 31,600
------- ------- -------
Total........................... 333,676 343,875 677,551
======= ======= =======
</TABLE>
EMPLOYEES
As of July 31, 1997, White Cap had approximately 640 employees,
approximately 106 at its Costa Mesa, California headquarters and 534 at branch
locations. White Cap's sales force consists of 178 sales professionals. The
Company considers its relations with its employees to be satisfactory.
LITIGATION
The Company is from time to time a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial condition or results of
operations of the Company.
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<PAGE> 39
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE COMPANY
The directors, executive officers and key employees of the Company and
their respective ages and positions are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Greg Grosch 50 Chairman of the Board of Directors, Chief Executive Officer and
President
Rik Gagnon 44 Senior Vice President and National Sales Manager
Dan Tsujioka 48 Executive Vice President -- Merchandising, Secretary and Director
Chris Lane 36 Chief Financial Officer and Director
Jack Karg 48 Vice President and Chief Operations Officer
Brian Etter 31 Vice President and Treasurer
Gary Zwilling 50 Director of Credit
Charles Gruden 48 Director of Human Resources
Michael Monroe 48 Regional Vice President Sales
Albert Malatesta 57 Regional Vice President Branch Operations
Mark King 37 Director
James Johnson 59 Director
</TABLE>
MR. GROSCH is Chairman, Chief Executive Officer and President of the
Company and has nearly 25 years experience in retailing. In 1976, Mr. Grosch
formed White Cap Industries, Inc. and since then has directed and been directly
involved in all aspects of the business and implementation of the Company's
growth strategy. Prior to joining the Company, Mr. Grosch held sales and
marketing positions with a major regional grocery chain and a national oil
company. Mr. Grosch holds a Bachelor's Degree in marketing from California State
University--Northridge.
MR. TSUJIOKA joined the Company in November 1996 as Executive Vice
President and was elected Director in February 1997. In July 1997, Mr. Tsujioka
was appointed Executive Vice President--Merchandising, with responsibility for
Company-wide merchandizing. Mr. Tsujioka was a member of the original founding
group and the first general manager of Home Depot, Inc., where he started the
first prototype warehouse for Home Improvement Supplies (the predecessor to Home
Depot). Mr. Tsujioka was with Home Depot and its predecessors from 1980 to 1989.
From 1994 to 1995, Mr. Tsujioka served as Vice President of Special Projects for
Home Depot training store managers and district managers in a "back to basics"
training program. From 1995 to 1996, Mr. Tsujioka was Vice President of
Merchandising for Home Depot. From 1989 to 1993, Mr. Tsujioka was retired.
MR. GAGNON joined the Company in 1979. Since 1985, he has been Senior
Vice President and National Sales Manager of the Company overseeing the
Company's sales force. Mr. Gagnon has over twenty years experience in the
contractor supplier industry and also holds a California contractor's license.
37
<PAGE> 40
MR. LANE has been a special consultant to the Company since 1995 and
was appointed Chief Financial Officer of the Company in April 1997. Mr. Lane was
elected as a Director of the Company in February 1997. From 1992 to 1997, Mr.
Lane was a partner with the Orange County, California accounting firm of
Kieckhafer, Lane & Schiffer LLP. From 1986 to 1992, Mr. Lane was with Arthur
Andersen & Company. He was an Audit Manager when he left the firm in 1992. In
June 1997, Mr. Lane also entered into an agreement with KRG Capital agreeing to
act as a Director of KRG Capital.
MR. KARG joined the Company in 1995 as Chief Operations Officer. From
1979 to 1995, Mr. Karg was employed at Audiovox Corporation, where he progressed
from Credit Manager handling thirteen western states to Assistant Vice President
of West Coast Operations to Vice President of Western Operations in 1988. As
Vice President of Western Operations, Mr. Karg was responsible for all aspects
of operations of Audiovox's automotive and cellular businesses.
MR. ETTER joined the Company in July 1997 as Vice President and
Treasurer. From 1992 to 1997, Mr. Etter was employed with Apria Healthcare Group
("Apria"), where he progressed from Finance Manager to Director of Operational
Finance in 1994. As Director of Operational Finance, Mr. Etter was responsible
for the financial management and analysis of over 350 branches and five
divisions. At Apria, Mr. Etter actively participated in the planning and
integration of over 35 acquisitions and in the merger of the two largest
competitors in the home healthcare industry. From 1989 to 1992, Mr. Etter was
with Arthur Andersen & Company. He was an Audit Senior in the Enterprise Group
when he left the firm in 1992.
MR. ZWILLING joined the Company in August of 1985 and serves as
Director of Credit. Previously, he spent three years with Knox Industrial Supply
as credit manager and six years with Orco Construction Supply as credit manager
and controller.
MR. GRUDEN joined the Company in April 1997 and serves as Director of
Human Resources. Previously, Mr. Gruden spent seven and half years at IKEA as an
Area Human Resource Manager and was responsible for over 1,000 employees in
IKEA's Western region.
MR. MONROE joined the Company in June 1997 as Regional Vice President
Sales. From 1982 to June 1997 he was the President and an owner of Viking
Distributing. From 1977 to 1982, Mr. Monroe was an Outside Sales Representative
for Viking Distributing Supply Company.
MR. MALATESTA joined the Company in June 1997 as Regional Vice
President Branch Operations. From 1982 to June 1997, he was the Vice President,
Operations Manager, and an owner of Viking Distributing. Previously, Mr.
Malatesta spent twenty-six years at R&H Wholesale Hardware where he progressed
to General Manager.
MR. KING has been a director of the Company since February 1997. Mr.
King is the founder and Managing Director of KRG Capital. Mr. King has 14 years
experience as a senior executive, an investment banker and the lead principal in
the completion of 15 strategic acquisitions involving middle market companies.
From September 1994 to January 1996, Mr. King served as Vice President of LM
Capital Corporation, a registered investment advisor specializing in private and
public equity investments and strategic acquisitions. From 1988 to 1992, Mr.
King was the Co-Founder, President and Vice Chairman of Industrial Services
Technologies, Inc. ("IST"), a provider of maintenance services to the refinery,
fertilizer and chemicals industries and from 1992 to the present, he has served
as Vice Chairman of IST.
MR. JOHNSON has been a director of the Company since February 1997. Mr.
Johnson is the co-founder of and has been Managing General Partner of Apex
Investment Partners, a Chicago based investment fund, since 1988. Prior to
founding Apex, from 1986 to 1988, Mr. Johnson was the co-founder and general
partner of Knightsbridge Partners, an investment banking firm. From 1974 to
1986, Mr. Johnson served in various positions, including Senior Vice President,
with Beatrice Companies. From 1965 to 1974, Mr. Johnson held various positions,
including Senior Manager, with KPMG Peat Marwick. Mr. Johnson serves as a
director of various private companies and American Waste Systems, Inc., a NYSE
company.
At present all directors are elected and serve until a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal. There are no family relationships between any of the Directors or
executive officers of the Company. Following the consummation of the Offering
each director shall serve until the following annual meeting when a successor is
duly elected and qualified or until his or her earlier death, resignation or
removal.
In addition, following the consummation of the Offering, the Company
intends to appoint at least two outside directors.
38
<PAGE> 41
COMMITTEES OF THE BOARD
The Board of Directors has established an Audit Committee and a
Compensation Committee. The members of the Audit Committee are Messrs. King and
Johnson. The Audit Committee oversees actions taken by the Company's independent
auditors, recommends the engagement of auditors and reviews the Company's
internal accounting policies and practices. The members of the Compensation
Committee are Messrs. King and Johnson. The Compensation Committee approves the
compensation of executives of the Company, makes recommendations to the Board of
Directors with respect to standards for setting compensation levels and
administers the Company's incentive plans. The Company expects that the two
outside directors appointed following the Offering will join the Audit and
Compensation Committees.
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth the cash compensation of the Chief
Executive Officer and the three other most highly compensated executive officers
of the Company for the year ended March 31, 1997. No other person who served as
an executive officer of the Company during the fiscal year ended March 31, 1997
received compensation which exceeded $100,000 for such year.
<TABLE>
<CAPTION>
Cash Compensation(a)
-------------------- All Other
Officers Capacities in Which Served Salary Bonus(b) Compensation(c)
-------- -------------------------- ------ -------- ---------------
<S> <C> <C> <C> <C>
Greg Grosch Chairman, President and Chief $408,763 $ -- $33,419
Executive Officer
Rik Gagnon Senior Vice President and 190,649 121,507 5,218
National Sales Manager
Gary Joslin Treasurer (d) 157,500 2,000 --
Jack Karg Vice President and Chief 97,731 30,000 --
Operations Officer
</TABLE>
(a) Amounts shown include compensation for services rendered in all
capacities to White Cap during the year ended March 31, 1997.
(b) Includes all cash bonuses earned during year ended March 31, 1997 and
paid during the year ended March 31, 1997 or subsequent thereto. Also
includes all cash bonuses paid during year ended March 31, 1997 for
services rendered during the year ended March 31, 1996.
(c) Amounts shown include the Company's contribution to the named
individuals' 401(k) plan, life insurance and additional disability and
unemployment policies.
(d) Mr. Joslin also served as the Company's Chief Financial Officer during
the fiscal year ended March 31, 1997. Mr. Joslin resigned from his
position with the Company in July 1997.
39
<PAGE> 42
STOCK OPTION GRANTS
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following discloses options granted during the year ended March 31,
1997 for the executives named in the compensation table above.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term(d)(e)
--------------------------------------------------------------- ------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise of Expiration 5% Annual 10% Annual
Name Granted (#)(a)(b) Fiscal Year(%) Base Price($) Date(c) Growth Rate($) Growth Rate($)
- ------------------------ ----------------- -------------- ------------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Greg Grosch............. -- -- -- -- -- --
Rik Gagnon.............. -- -- -- -- -- --
Gary Joslin............. -- -- -- -- -- --
Jack Karg............... 14,250 3.9% $4.31 March 31, 2007 $38,693 $97,654
</TABLE>
- ------------------------------------
(a) All of such options were granted under the Existing Plan (as defined).
(b) The options vest in equal installments over a five-year period.
(c) The options granted are subject to earlier termination and repurchase upon
the occurrence of certain events related to termination of employment.
(d) The dollar amounts in these columns represent potential value that might
be realized upon exercise of the options immediately prior to the
expiration of their term, assuming that the market price of the Common
Stock appreciates in value from the date of the grant at the 5% and 10%
annual rates prescribed by regulation, and therefore are not intended to
forecast possible future appreciation, if any, of the price of the Common
Stock.
(e) In calculating the potential realizable value, the Company used an
estimated market price of $4.31 per share as of the grant date.
COMPENSATION OF DIRECTORS
Member of the Company's Board of Directors serve without cash
compensation. Upon completion of the Offering, directors will be eligible for
incentive awards under the Incentive Plan (as defined). See "--Equity Incentive
Plan."
EMPLOYMENT AGREEMENTS
Grosch Employment Agreement. In November 1996, the Company and Mr.
Grosch entered into an employment agreement (the "Grosch Employment Agreement")
providing for Mr. Grosch's employment as Chairman, President and Chief Executive
Officer. The initial employment period expires November 2001 and will
automatically extend for successive one year periods thereafter unless the
Company or Mr. Grosch gives notice of intent not to renew.
The Grosch Employment Agreement provides for an initial base salary of
$300,000 plus (i) an annual incentive bonus of $30,000 for each 1% increase in
annual pro forma EBITDA (as adjusted to give effect to the historical earnings
of acquired companies) above 5% and (ii) specified cost of living increases. In
addition, the Company has taken out a key man life insurance policy on Mr.
Grosch's life payable to the Company but assigned to the Company's lenders.
Upon termination by Mr. Grosch for good reason or termination by the
Company without cause, Mr. Grosch would be entitled to receive his base salary
during the period that is the lesser of (i) three years or (ii) the remainder of
the term, plus a supplemental severance payment. The Grosch Employment Agreement
also provides that the Company may terminate Mr. Grosch for cause, and Mr.
Grosch would be entitled to receive his base salary during the period that is
the lesser of (i) two years or (ii) the remainder of the term, plus a maximum
supplemental severance payment of $375,000. The Grosch Employment Agreement
includes a confidentiality provision and a non-solicitation provision.
40
<PAGE> 43
Gagnon Employment Agreement. In February 1997, the Company and Mr.
Gagnon entered into an employment agreement (the "Gagnon Employment Agreement")
providing for Mr. Gagnon's employment as Senior Vice President and National
Sales Manger of the Company. The initial employment period expires February 2002
and shall automatically extend for successive one year periods thereafter unless
the Company or Mr. Gagnon gives notice of intent not to renew.
The Gagnon Employment Agreement provides for an initial base salary of
$200,000 plus (i) an annual variable incentive bonus of $10,000 for each 1%
point increase in annual pro forma EBITDA (as adjusted to give effect to the
historical earnings of acquired companies) above 5%, (ii) specified cost of
living increases and (iii) an additional incentive bonus.
Upon termination by Mr. Gagnon for good reason or termination by the
Company without cause, Mr. Gagnon would be entitled to receive (i) his base
salary during the period that is the lesser of twelve months or the remainder of
the term, and (ii) a prorated portion of any fixed or variable bonus earned
through the date of termination. The Gagnon Employment Agreement also provides
that if the Company terminates Mr. Gagnon for cause or if Mr. Gagnon employment
terminates as a result of voluntary resignation, he would be entitled to receive
his base salary only through the date of termination.
The Gagnon Employment Agreement also includes a confidentiality
provision, a non-solicitation provision, and a nondisclosure and invention and
copyright assignment agreement.
1997 INCENTIVE AND STOCK OPTION PLAN
In 1997, the Company adopted the 1997 Long Term Incentive and Stock
Option Plan of White Cap Industries, Inc. (the "Existing Plan") designed to
provide incentives to present and future executive, managerial, marketing,
technical, other key employees, and consultants and advisors of the Company and
its subsidiaries as may be selected in the sole discretion of the Company's
Board of Directors. The Existing Plan provided for aggregate option grants of up
to 379,798 shares. As of June 30, 1997, options to purchase an aggregate of
369,798 shares of Common Stock at an exercise price of $4.31 per share were
outstanding under the Existing Plan. No additional grants shall be made under
the Existing Plan after the consummation of the Offering.
EQUITY INCENTIVE PLAN
In connection with the Offering, the Company has adopted the 1997
Long-Term Equity Incentive Plan (the "Incentive Plan") designed to update and
replace the Existing Plan.
The Incentive Plan provides for the granting to directors, employees
and other key individuals who perform services for the Company and its
subsidiaries ("Participants") of the following types of incentive awards: stock
options, stock appreciation right ("SARs"), restricted stock, performance units,
performance grants and other types of awards that the Compensation Committee of
the Board (the "Committee") deems to be consistent with the purposes of the
Incentive Plan. An aggregate of shares of Common Stock have been reserved for
issuance under the Incentive Plan. The Incentive Plan affords the Company
latitude in tailoring incentive compensation for the retention of key personnel,
to support corporate and business objectives, and to anticipate and respond to a
changing business environment and competitive compensation practices.
The Committee will have exclusive discretion to select the Participants
and to determine the type, size and terms of each award, to modify the terms of
awards, to determine when awards will be granted and paid, and to make all other
determinations which it deems necessary or desirable in the interpretation and
administration of the Incentive Plan. The Incentive Plan is scheduled to
terminate ten years from the date that the Incentive Plan was initially approved
and adopted by the stockholders of the Company, unless extended for up to an
additional five years by action of the Board of Directors. With limited
exceptions, including termination of employment as a result of death, disability
or retirement, or except as otherwise determined by the Committee, rights to
these forms of contingent compensation are forfeited if a recipient's employment
or performance of services terminates within a specified period following the
award. Generally, a Participant's rights and interest under the Incentive Plan
will not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order.
Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock at
a price fixed by the Committee. The option price may be less than, equal to or
greater than the fair market value of the underlying shares of Common Stock, but
in no event shall the exercise price of an incentive stock option be less than
the fair market value on the date of grant. Options generally will expire not
later than ten years after the date on which they are granted. Options will
become exercisable at such times and in such installments as the Committee shall
determine. Payment of the
41
<PAGE> 44
option price must be made in full at the time of exercise in such form
(including, but not limited to, cash or Common Stock of the Company) as the
Committee may determine.
An SAR may be granted alone, or in tandem with options, either at the
time of grant of the related option or by amendment thereafter to an outstanding
option. SARs granted in tandem with options shall be exercisable only when, to
the extent and on the conditions that any related option is exercisable. The
exercise of an option shall result in an immediate forfeiture of any related SAR
to the extent the option is exercised, and the exercise of an SAR shall cause an
immediate forfeiture of any related option to the extent the SAR is exercised.
Upon the exercise of an SAR, the Participant shall be entitled to a
distribution in an amount equal to the difference between the fair market value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any option to which
the SAR is related, multiplied by the number of shares of Common Stock as to
which the SAR is exercised. The Committee shall decide whether such distribution
shall be in cash, in shares of Common Stock having a fair market value equal to
such amount, in other securities having a fair market value equal to such amount
or in a combination thereof.
A restricted stock award is an award of a given number of shares of
Common Stock which are subject to a restriction against transfer and to a risk
of forfeiture during a period set by the Committee. During the restriction
period, the Participant generally has the right to vote and receive dividends on
the shares. Dividends received while under restriction are treated as
compensation.
Performance awards are those whose final value, if any, is determined
by the degree to which specified performance objectives have been achieved
during an award period set by the Committee, subject to such adjustments as the
Committee may approve based on relevant factors. Performance objectives are
based on such measures of performance, including, without limitation, measures
of Company, unit or Participant performance, or any combination of the
foregoing, as the Committee may determine. The Committee may make such
adjustments in the computation of any performance measure as it deems
appropriate. The Committee shall determine the portion of each performance award
that is earned by a participant on the basis of the Company's performance over
the performance cycle in relation to the performance goals for such cycle. The
earned portion of a performance award may be paid out in shares of Common Stock,
cash, other securities of the Company, or any combination thereof, as the
Committee may determine.
Upon the liquidation or dissolution of the Company all outstanding
awards under the Incentive Plan shall terminate immediately prior to the
consummation of such liquidation or dissolution, unless otherwise provided by
the Committee. In the event of a reorganization, recapitalization, stock split,
stock dividend, combination of shares, merger, consolidation, distribution of
assets, or any other change in the corporate structure or shares of the Company,
the Committee shall make such adjustment as it deems appropriate in the number
and kind of shares or other property reserved for issuance under the Incentive
Plan, in the number and kind of shares or other property covered by grants
previously made under the Incentive Plan, and in the exercise price of
outstanding options and SARs. In the event of any merger, consolidation or other
reorganization in which the Company is not the surviving or continuing
corporation or in which a change in control is to occur, all of the Company's
obligations regarding options, SARs performance awards, and restricted stock
that were granted hereunder and that are outstanding on the date of such event
shall, on such terms as may be approved by the Committee prior to such event, be
assumed by the surviving or continuing corporation or canceled in exchange for
property (including cash).
Certain Federal Tax Consequences under the Incentive Plan. The
following discussion addresses certain federal income tax consequences under
current law to recipients of awards made under the Incentive Plan. The following
discussion is intended only as a general summary of the federal income tax
consequences arising under the Incentive Plan based upon the Internal Revenue
Code (the "Code") as currently in effect. Because federal income tax
consequences will vary as a result of individual circumstances, each Participant
should consult his tax advisor with respect to the tax consequences of such
participation. Moreover, the following summary relates only to a Participants'
federal income tax treatment, and the state, local and foreign tax consequences
may be substantially different.
A Participant to whom a nonqualified stock option is granted will not
recognize any income at the time of the grant. When a Participant exercises a
nonqualified stock option, he generally will recognize ordinary compensation
income equal to the difference, if any, between the fair market value of the
Common Stock he receives at such time and the option's exercise price. The
Participant's tax basis in such shares will be equal to the exercise price paid
plus the amount includable in his gross income as compensation, and his holding
period for such shares will begin on the day on which he recognizes taxable
income in respect of such shares.
42
<PAGE> 45
A Participant to whom an incentive stock option is granted will not
recognize any ordinary income at the time of grant or at the time of exercise.
However, upon the exercise of an incentive stock option, the Participant
generally will be required to include the excess of fair market value of the
Common Stock over the option's exercise price in his alternative minimum taxable
income and, as a result, he may be subject to an alternative minimum tax
("AMT"). In order to obtain incentive stock option treatment for federal income
tax purposes, a Participant (i) must be an employee of the Company or a
subsidiary continuously from the date of grant until any termination of
employment and (ii) in the event of such a termination, must exercise an
incentive stock option within three months after such termination, except if
disabled, in which case exercise may occur within one year from the date of
termination of employment. If a Participant holds Common Stock received upon the
exercise of an incentive stock option for more than one year after exercise and
more than two years after the option was granted (the "Statutory Holding
Periods"), then upon a sale of such Common Stock he will recognize long-term
capital gain or loss equal to the difference, if any, between the sale price of
such shares and the option's exercise price. If the Participant has not held
such shares for the Statutory Holding Periods, when he sells such shares (a
"disqualifying disposition") he will recognize ordinary compensation income
equal to the lesser of (i) the excess, if any, of the fir market value of such
shares on the date of exercise over the exercise price or (ii) the excess, if
any, of the sale price over the exercise price. Any additional gain or any loss
on such sale will constitute capital gain or loss, short- or long-term depending
upon whether the Participant, for purposes of computing such other gain or loss,
will be equal to the exercise price paid plus the amount includable in his gross
income as compensation, if any.
A participant will not recognize any taxable income as a result of the
inclusion of SARs in a nonqualified stock option or an incentive stock option.
At the time of exercise, a Participant generally will recognize ordinary
compensation income in an amount equal to the cash and the fair market value of
the Common Stock he receives to satisfy his SARs. The Participant's tax basis in
any such shares received pursuant to a SAR will be equal to the amount
includable in his gross income as compensation in respect of such shares, and
the Participant's holding period therefor will begin on the day on which he
recognizes taxable income in respect of such shares.
With respect to restricted stock awards, unless he files a timely
election with the Internal Revenue Service under Section 83(b) of the Code (a
"Section 83(b) election"), a Participant who receives Common Stock pursuant to a
restricted stock award will not recognize any taxable income upon the receipt of
such award, but will recognize taxable compensation income at the time his
interest in such shares is no longer subject to the repurchase option imposed by
the Plan in an amount equal to the fair market value of such shares at such
time. Alternatively, by filing a Section 83(b) election within 30 days after the
shares are granted, the Participant may elect to recognize ordinary income equal
to the fair market value of the shares on the grant date. In either event, the
Participant's tax basis in such shares will be equal to the amount includable in
his gross income as compensation, and his holding period for such shares will
begin on the date his compensation income is determined. If a Participant does
not make a Section 83(b) election, dividends paid on restricted stock awards
will be includable in his income as compensation when received.
A Participant to whom a performance grant award is made will not
recognize taxable income at the time such award is made. Such Participant
generally will recognize taxable income, however, at the time cash, Common Stock
or other Company securities or property are paid to him pursuant to such award
in an amount equal to the amount of such cash and the fair market value at such
time of such shares, securities or property. The tax basis of any such shares,
securities or property received by a Participant pursuant to a performance grant
award will be equal to the amount includable in his gross income as compensation
in respect of such shares, securities or property, and the holding period
therefor will begin on the day on which he recognizes taxable income in respect
of such shares, securities or property. Any income equivalents paid to a
Participant with respect to his performance grant award should generally be
regarded as compensation.
If a Participant who receives Common Stock under the Incentive Plan
(whether pursuant to the exercise of an option, as a restricted stock award, or
as a performance grant award) is subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (such recipient, an
"Insider"), the tax consequences may be different from those described above.
Generally, an Insider will not recognize income (or, in the case of the exercise
of an incentive stock option, alternative minimum taxable income) on receipt of
Common Stock. However, by filing a Section 83(b) election with the Internal
Revenue Service no later than 30 days after the date of transfer of property
(e.g., after exercise of a nonqualified stock option that was granted within six
months of such exercise), an Insider may elect to be taxed based upon the fair
market value of the Common Stock at the time of such transfer.
Subject to certain limitations described in the next paragraph, the
company for which a Participant is performing services generally will be allowed
to deduct amounts that are includable in the Participant's income as ordinary
compensation income at the time such amounts are so includable, provided that
such amounts qualify as reasonable compensation for personal services actually
rendered.
43
<PAGE> 46
With limited exceptions, the Company may not deduct certain
compensation paid to its chief executive officer or any of its four other
highest paid executives to the extent such compensation exceeds $1 million in
any taxable year. Depending on the circumstances, some or all of the
compensation paid to such an executive under the Incentive Plan may be
nondeductible.
44
<PAGE> 47
PRINCIPAL STOCKHOLDERS
The table and footnotes below sets forth certain information regarding
beneficial ownership of the Common Stock as of July 31, 1997, assuming exercise
of options exercisable with 60 days of the date hereof, by (i) each person or
entity who owns of record or beneficially 5% or more of the Common Stock, (ii)
each director of the Company, (iii) the Chief Executive Officer and each other
executive officer quoted in the Summary Compensation Table and (iv) all officers
and directors of the Company as a group. To the knowledge of the Company, each
of such stockholders has sole voting and investment power as to the shares shown
unless otherwise noted.
<TABLE>
<CAPTION>
Percentage of Shares of
Common Stock Percentage of Shares of
Number of Beneficially Owned Common Stock Beneficially
Shares of Prior to the Owned after the
Name Common Stock Offering(e)(f) Offering(e)(f)
- ---- ------------ ----------------------- -------------------------
<S> <C> <C>
Greg Grosch............................ 1,556,546 44.4%
Dan Tsujioka........................... 98,186 2.7
Chris Lane............................. 90,667(a) 2.6
Rik Gagnon............................. 100,000(b) 2.8
Gary Joslin............................ -- --
Jack Karg.............................. -- --
Mark M. King .......................... 1,087,686(c) 31.0
James R. Johnson....................... 484,657(d) 13.8
Apex Investment Fund III, L.P. and
affiliates........................... 484,657(d) 13.8
KRG Capital Partners, LLC.............. 1,087,686(c) 31.0
All Officers and Directors as a Group
(8 Persons).......................... 3,417,742 97.4%
</TABLE>
- ------------------------------
(a) Includes 52,606 shares of restricted stock which vest over a three year
period.
(b) All of the shares held by Mr. Gagnon were purchased from Mr. Grosch
effective February 25, 1997 but 80,000 of such shares remain subject to
repurchase by Mr. Grosch in the event Mr. Gagnon leaves the Company
prior to February 25, 2001. Twenty percent of the 80,000 shares vest
each year commencing February 25, 1998 and vested shares are no longer
subject to the repurchase right of Mr. Grosch.
(c) Includes 1,087,686 shares held by investors in KRG Capital Investments
II, LLC, an investment limited liability company ("KRG II") of which
KRG Capital is the manager. All of such shares are subject to a voting
agreement providing KRG Capital the right to vote all of such shares.
Mr. King is a Managing Director and the founder of KRG Capital and as a
result may be deemed to share beneficial ownership of all such shares
covered by the voting agreement. Mr. King disclaims beneficial
ownership of all shares covered by the voting agreement, other than
195,390 shares held directly by Mr. King, members of his family and
trusts formed for their benefit.
(d) Includes 454,239 shares issuable upon exercise of warrants held by Apex
Investment Fund III, L.P. and 30,418 shares held by Apex Strategic
Partners LLC. Mr. Johnson is the President of Apex Management III, LLC,
which is the sole general partner of Apex Investment III, L.P. and the
Manager of Apex Strategic Partners, LLC. As a result, Mr. Johnson may
be deemed to share beneficial ownership of such shares, although he
disclaims such beneficial ownership.
(e) Total outstanding shares include the following: (i) [ ] shares issuable
to the former shareholders of A-Y Supply upon optional conversion of a
subordinated convertible promissory note (determined by dividing
$500,000 by 75% of the initial public offering price per share); (ii)
[ ] shares issuable to the former owners of Stop Supply upon exercise
of a warrant (determined by dividing $250,000 by 75% of the initial
public offering price per share); (iii) 50,000 shares of Series B
Preferred Stock issued to the former owners of Viking Distributing;
and (iv) 675,969 shares issuable upon exercise of warrants held by Apex
Investment Fund III, L.P. and other institutional investors.
(f) Percentages are calculated without giving effect to the Underwriters'
over-allotment option.
45
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The total amount of authorized capital stock of the Company consists of
_________ shares of Common Stock, par value $0.01 per share, and ______ shares
of preferred stock, par value $1.00 per share (the "Preferred Stock"). Upon
completion of the Offering, ________ shares of Common Stock will be issued and
outstanding, and no shares of Preferred Stock will be outstanding. The
discussion herein describes the Company's capital stock, the Certificate of
Incorporation and Bylaws as anticipated to be in effect upon consummation of the
Offering. The following summary of certain provisions of the Company's capital
stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, the Certificate of
Incorporation and the Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
COMMON STOCK
As of _______, 1997, there were _________ shares of Common Stock
outstanding held by __ holders of record. The issued and outstanding shares of
Common Stock are, and the shares of Common Stock being offered will be upon
payment therefor, validly issued, fully paid and nonassessable. Subject to the
prior rights of the holders of any Preferred Stock and restrictions contained in
the Credit Agreement, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board may from time to time determine. See
"Dividend Policy."
Following consummation of the Offering, the shares of Common Stock will
not be redeemable or convertible, and the holders thereof will have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata, along with the holders of Common
Stock, the assets of the Company which are legally available for distribution,
after payment of all debts and other liabilities and subject to the prior fights
of any holders of Preferred Stock then outstanding.
Application has been made for the approval for quotation of the Common
Stock on Nasdaq under the symbol "WHCP."
PREFERRED STOCK
The Board may, without further action by the Company's stockholders,
from time to time, direct the issuance of additional shares of Preferred Stock
in series and may, at the time of issuance, determine the rights, preferences
and limitations of each series. Satisfaction of any dividend preferences of
outstanding shares of Preferred Stock would reduce the amount of funds available
for the payment of dividends on shares of Common Stock. Holders of shares of
Preferred Stock may be entitled to receive a preference payment in the event of
any liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of shares of Common Stock. Under certain circumstances, the
issuance of shares of Preferred Stock may render more difficult or tend to
discourage a merger, tender offer or proxy contest, the assumption of control by
a holder of a large block of the Company's securities or the removal of
incumbent management. The Board, without stockholder approval, may issue shares
of Preferred Stock with voting and conversion rights which could adversely
affect the holders of shares of Common Stock. Upon consummation of the Offering,
there will be no shares of Preferred Stock outstanding.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate of Incorporation provides that stockholder
action can be taken only at an annual or special meeting of stockholders and
cannot be taken by written consent in lieu of a meeting. The Restated
Certificate of Incorporation and the By-laws provide that, except as otherwise
required by law, special meetings of the stockholders can only be called
pursuant to a resolution adopted by a majority of the Board of Directors or by
the chief executive officer of the Company. Stockholders will not be permitted
to call a special meeting or to require the Board to call a special meeting.
The Restated Certificate of Incorporation contains a "fair price"
provision pursuant to which any Business Combination (as defined therein)
involving an interested stockholder and the Company or any subsidiary would
require approval by the affirmative
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<PAGE> 49
vote of the holders of at least 662/3% of the shares of voting stock of the
Company. The fair price provision of the Restated Certificate of Incorporation
provides that 662/3% stockholder vote is not required if the Business
Combination is approved by 70% of the continuing directors or if certain
procedures and price requirements are satisfied. Instead, the vote, if any,
required by applicable Delaware law or by any other provision of the Restated
Certificate of Incorporation would be necessary.
The By-laws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given to the Company's Secretary timely written notice, in proper form, of
the stockholder's intention to bring that business before the meeting. Although
the By-laws do not give the Board the power to approve or disapprove stockholder
nominations of candidates or proposals regarding other business to be conducted
at a special or annual meeting, the By-laws may have the effect of precluding
the conduct of certain business at a meeting if the proper procedures are not
followed or may discourage or defer a potential acquiror from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company.
The Company's By-Laws provide that the number of Directors of the
Company will be fixed from time to time exclusively by the Board of Directors.
The By-Laws provide that any action required or permitted to be taken at any
annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the actions so taken, is executed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted.
SECTION 203 OF DELAWARE LAW
Pursuant to the Certificate of Incorporation, the Company has elected
not to be subject to the provisions of Section 203 of the DGCL regulating
takeovers. This provision would prohibit certain "business combinations" with
significant stockholders, except in certain circumstances.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation limits the liability of directors to
the fullest extent permitted by the Delaware General Corporation Law. In
addition, the Amended and Restated Certificate of Incorporation provides that
the Company shall indemnify directors and officers of the Company to the fullest
extent permitted by such law.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Company's Common Stock is
American Stock Transfer & Trust Company.
DESCRIPTION OF CERTAIN INDEBTEDNESS
Upon consummation of the Offering, the Company expects to terminate its
existing credit agreement and enter into a Credit Agreement (the "Credit
Agreement") with an agent bank (the "Agent") and other institutions party
thereto (the "Banks"), pursuant to which the Company is expected to have
available borrowings of up to $100 million. Loans under the Credit Agreement
consist of term loans and a revolving credit facility, which will permit the
Company to finance working capital, future acquisitions, letters of credit and
other general corporate needs.
The Credit Agreement is expected to contain certain financial covenants
which will require the Company to maintain an minimum net worth, ratio of
current assets to current liabilities, ratio of liabilities to effective net
worth, minimum interest coverage ratio and positive net income. The Credit
Agreement will also contain covenants which will, among other things, limit the
incurrence of additional indebtedness, dividends, transactions with affiliates,
asset sales, acquisition, mergers and consolidation, prepayments of other
indebtedness, liens and encumbrances, capital expenditures and other matters
customarily restricted in such agreements.
47
<PAGE> 50
The Credit Agreement is expected to contain customary events of
default, including payment defaults, breach of representations and warranties,
covenant defaults, cross-defaults to certain other indebtedness, certain events
of bankruptcy and insolvency, ERISA, judgment defaults, failure of any guaranty
or security agreement supporting the Credit Agreement to be in full force and
effect and change of control of the Company or WCI.
48
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE RECAPITALIZATION
In February 1997, KRG Capital formed the Company, which acquired all of
the outstanding stock of WCI from Greg Grosch, the then sole stockholder,
Chairman, President and Chief Executive Officer of WCI, through the
Recapitalization. The Company acquired the stock of WCI for (i) $10 million in
cash; (ii) a $1.5 million subordinated note; (iii) warrants to acquire share
convertible preferred stock, which shares will automatically convert into 68,364
shares of Common Stock upon consummation of the Offering; (iv) 50,000 shares of
Common Stock; and (v) Convertible Preferred Stock which will automatically
convert into 1,538,182 shares of Common Stock upon consummation of the Offering.
In connection with the Recapitalization, shares of redeemable preferred stock
and warrants to purchase Common Stock were purchased by three investment funds.
Such shares of redeemable preferred stock will be redeemed upon consummation of
the Offering. See "Recent Transactions," "Use of Proceeds" and "Principal
Stockholders."
MANAGEMENT AGREEMENT
The Company and WCI are parties to a five-year management agreement
with KRG Capital, pursuant to which KRG Capital provides financial management
consulting and advisory services. Under the terms of such agreement, (i) the
Company paid KRG Capital a transaction closing fee of $300,000 in connection
with the closing of Stock Purchase Agreement, dated November 26, 1996, by and
between Holdings and Mr. Grosch and (ii) the Company and WCI agreed to pay KRG
Capital a base management fee of $250,000 per year. During the year ended March
31, 1997, the Company and WCI paid KRG Capital fees of $62,500 pursuant to such
agreement. KRG Capital received an aggregate transaction closing fee from WCI in
the amount of $100,000 following the closings of the acquisitions of Stop Supply
and Viking Distributing.
Upon completion of the Offering, KRG Capital, the Company and WCI will
terminate the existing management agreement and enter into a transaction
advisory agreement pursuant to which the Company and WCI will pay to KRG Capital
an annual transaction advisory fee of $200,000 and a formula based transaction
fee payable upon the completion of additional acquisitions by the Company or
WCI. The transaction fee will be (i) $50,000 for any transactions where the
aggregate transaction value is $20 million or less, unless the Board of
Directors determines the transaction presented unusual complexities in which
case the fee may be adjusted upward upon approval of the Board of Directors, and
(ii) an amount to be agreed upon and approved by the Board of Directors, but in
no event less than $50,000, for any transaction where the aggregate transaction
value exceeds $20 million.
STOCKHOLDER AGREEMENT
The Company, KRG Capital, Mr. Grosch and certain affiliates of KRG
Capital are parties to an Amended and Restated Stockholders Agreement (the
"Stockholders Agreement"), which will take effect upon the closing of the
Offering and will have a term of ten years. The Stockholders Agreement provides
that so long as Mr. Grosch or parties related to KRG Capital hold at least 5% of
the issued and outstanding Common Stock, (i) Mr. Grosch and KRG Capital will
each be entitled to designate one director and (ii) the stockholder parties will
vote all of their shares for such designees.
LEASES
The Company leases two properties located in Las Vegas, Nevada and San
Juan Capistrano, California, respectively, from Greg Grosch and his wife. Both
leases were entered into in May 1994 and are six year leases renewable for 4
successive five year terms at the Company's option. Monthly rent under the
leases is $5,565 for the Las Vegas property and $9,135 for the San Juan
Capistrano property. The terms of each lease are to be renegotiated upon each
renewal. Payments under the Las Vegas lease totaled $66,780 in the year ended
March 31, 1997, and payments under the San Juan Capistrano lease totaled
$109,620 in such year.
The Company also leases a property in Riverside, California from Black
Marlin Investment Company and the Nuttal Trust (the "Landlord"). Black Marlin
Investment Company is wholly owned by Mr. and Mrs. Grosch. The Riverside lease
has a term of six years expiring in 2002. Monthly rent under the Riverside lease
is $7,403. Payments under the Riverside Lease to the Landlord
49
<PAGE> 52
totaled $48,119 in the year ended March 31, 1997. In addition, in connection
with the Landlord's acquisition of the Riverside property, the Company
guaranteed a $383,468 loan to the Landlord.
The Company believes that the terms of the leases described above are
no less favorable to the Company than terms that could be obtained with
unaffiliated third parties in arms'-length transactions.
ISSUANCE OF SENIOR REDEEMABLE PREFERRED SHARES AND WARRANTS.
On February 25, 1997, the Company issued 127,541 shares of its
Redeemable Preferred Stock at a purchase price of $3.92 per share and 127,541
warrants to purchase shares of Common Stock at a purchase price of $0.01 per
share to Bayview Investors, Ltd., an affiliate of Robertson Stephens & Company.
The Company expects to redeem the Redeemable Preferred Stock and pay accrued
dividends on such stock with a portion of the net proceeds from the Offering.
See "Use of Proceeds" and "Underwriting."
50
<PAGE> 53
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no public market for the Common
Stock of the Company. Sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Common Stock and make it more
difficult for the Company to sell equity securities in the future at a time and
price which it deems appropriate.
Upon completion of the Offering, the Company will have outstanding
________ shares of Common Stock (not including (i) ________ shares issuable upon
the exercise of options held by certain members of management and (ii)
__________ shares reserved for sale or grant in the future under the Incentive
Plan. The ________ shares sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act unless held by
"affiliates" of the Company. Of the remaining ________ outstanding shares of
Common Stock quoted above, ________ shares issued to members of management are
not registered and are also subject to contractual restrictions on transfer. An
additional ________ shares of the Common Stock quoted as outstanding above are
held by _______(certain of its employees), its affiliates, _______ (certain of
its employees), ________ and others and may not be sold unless they are
registered under the Securities Act or unless an exemption from registration,
such as the exemption provided by Rule 144 under the Securities Act, is
available. Immediately after the date of this Prospectus, ________ restricted
shares of Common Stock owned, in the aggregate, by _________ (certain of its
employees), its affiliates, _________ (certain of its employees), ________ and
others will become eligible for sale pursuant to Rule 144 subject to the volume
limitations described below. In addition, beginning 90 days after the date of
this Prospectus, holders of vested stock options may sell shares of Common Stock
acquired upon due exercise of such options subject to the provisions of Rule 701
under the Securities Act ("Rule 701").
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned "restricted
securities" for at least one but less than two years, and any affiliate of the
Company who has owned shares for at least one year, is entitled to sell within
any three month period a number of shares that does not exceed the greater of 1%
of the outstanding shares of the Company's Common Stock (approximately ________
shares immediately after the Offering) or the average weekly trading volume in
the Company's Common Stock on Nasdaq during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain provisions regarding
the manner of sale, notice requirements and the availability of current public
information about the Company. A stockholder (or stockholders whose shares are
aggregated) who is not an affiliate of the Company for at least 90 days prior to
a proposed transaction and who has beneficially owned "restricted securities"
for at least two years is entitled to sell such shares under Rule 144 without
regard to the limitations described above.
Any employee, officer or director of the Company who purchased his or
her shares prior to the date of this Prospectus or holds vested stock options as
of that date pursuant to a written compensatory plan or contract is entitled to
rely on the resale provisions of Rule 701, which permits non-affiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus.
The Company and all of its current stockholders holding in the
aggregate ________ shares of Common Stock have agreed not to sell publicly
shares of capital stock of the Company for a period of 180 days following the
closing date of the Offering without the prior written consent of the
Representative. Such stockholders have further agreed that they will not
otherwise dispose of any shares of capital stock of the Company unless the
person to whom such disposition is made agrees to substantially the same as the
foregoing. The Company has further agreed that during such 180-day period it
will not sell privately shares of Common Stock unless the price per share
received by the Company for such Common Stock is equal to or greater than the
initial public offering price. Upon issuance of ________ shares of Common Stock
reserved for issuance upon the sale of shares to, and exercise of options in the
future by, members of management under the Company's Long Term Incentive and
Stock Option Plan, such shares will be subject to the same restrictions on
resale imposed on the other shares held by members of management described
above.
As soon as practicable after 90 days following the date of this
Prospectus, the Company will file a Form S-8 registration statement under the
Securities Act to register the shares of Common Stock issuable under the
Company's option plans. This registration statement would become effective
immediately upon filing. Shares issued upon the exercise of stock options after
the effective date of the Form S-8 registration statement would be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates and the lock-up agreements applicable to certain
options as described in the preceding paragraph.
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<PAGE> 54
The Company, Mr. Grosch, KRG Capital and certain other stockholders are
parties to a registration rights agreement dated February 25, 1997 (the
"Registration Rights Agreement"). After the Offering, an aggregate of ________
shares of Common Stock owned, in the aggregate, by ___________________ and
others will be entitled to certain rights to register such shares ("Registrable
Shares") under the Securities Act pursuant to the Registration Rights Agreement.
Subject to certain conditions, the registration rights granted with respect to
the Common Stock may be exercised by holders of a majority of the outstanding
shares of such Registrable Shares. Subject to certain conditions, piggyback
registration rights are available at all times for the Registrable Shares. The
parties to the Registration Rights Agreement have waived their registration
rights for the Offering.
52
<PAGE> 55
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
("DLJ") and Robertson Stephens & Company ("Robertson Stephens") are acting as
representatives (the "Representatives"), have severally agreed to purchase from
the Company the number of shares of Common Stock that each Underwriter has
agreed to purchase as set forth opposite its name below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.....
Robertson Stephens & Company............................
-----------------
Total..........................................
=================
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered are subject to approval of certain legal matters by counsel and certain
other conditions. If any shares of 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 Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters
propose initially to offer the shares of Common Stock to the public 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
in excess of $[ ] per share. The Underwriters may allow, and such dealers may
reallow, discounts not in excess of $[ ] per share to any other Underwriter and
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
Certain selling stockholders have granted an option to the
Underwriters, exercisable for 30 days after the date of this Prospectus, to
purchase up to an aggregate of __________-- additional shares of Common Stock at
the initial public offering price set forth on the cover page of this
Prospectus, net of underwriting discounts and commissions. such option may be
exercised at any time until 30 days after the date of this Prospectus. See
"Principal Stockholders." To the extent that the Representatives exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
At the Company's request, the Underwriters have reserved up to [ ]
shares for sale at the initial public offering price to certain of the Company's
employees, members of their immediate families and other individuals who are
business associates of the Company in each case as such parties have expressed
an interest in purchasing such shares. The number of shares available for sale
to the general public will be reduced to the extent these individuals purchase
such reserved shares. Any reserved shares not purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
The Company, its officers and directors, certain of its shareholders
and certain employees of the Company have agreed, subject to certain exceptions,
not to directly or indirectly sell, offer to sell, grant any option for the sale
of or otherwise dispose of any shares of Common Stock or securities convertible
into or exchangeable or exercisable for Common Stock, without the prior written
consent of DLJ, on behalf of the Underwriters, for a period of 180 days after
the date of this Prospectus. See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price will be determined
through negotiations between the Company and the Representatives. Among the
factors considered in
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<PAGE> 56
determining the initial public offering price, in addition to prevailing market
conditions, are price-earnings ratios of publicly traded companies that the
Representatives believe to be comparable to the Company, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, and assessment of the Company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's development,
and the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to the Company. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.
The Company has applied to have the Common Stock quoted on Nasdaq under
the symbol "WHCP."
The Underwriters do not intend to confirm sales of the Common Stock
offered hereby to any accounts over which they exercise discretionary authority.
Under Rule 2720 of the Conduct Rules of the NASD ("Rule 2720"), the
Company is considered an affiliate of Robertson Stephens. See "Certain
Relationships and Related Transactions." This Offering is being conducted in
accordance with Rule 2720 which provides that, among other things, when an NASD
member participates in the underwriting of an affiliate's equity securities, the
price can be no higher than that recommended by a "qualified independent
underwriter" meeting certain standards ("QIU"). In accordance with this
requirement, DLJ has assumed the responsibilities of acting as QIU and will
recommend a maximum price in compliance with the requirements of Rule 2720. In
connection with the Offering, DLJ is performing due diligence investigations and
reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which this prospectus forms a part. As compensation
for the services of DLJ as QIU, the Company has agreed to pay DLJ $5,000.
LEGAL MATTERS
The legality of the shares of Common Stock will be passed upon for the
Company by Kirkland & Ellis, New York, New York. Lance C. Balk who is a partner
of Kirkland & Ellis, as of the date of this Prospectus, holds 5,610 shares of
the Company's Common Stock. Certain legal matters relating to the Offering will
be passed upon for the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The consolidated balance sheets of White Cap Industries, Inc. as of
March 31, 1997, March 31, 1996 and December 31, 1995; the consolidated
statements of operations, consolidated statements of cash flows and consolidated
statements of stockholders' equity of White Cap Industries, Inc. for the fiscal
year ended March 31, 1997 and the years ended December 31, 1995, December 31,
1994 and for the three months ended March 31, 1996; the financial statements of
A-Y Supply, Inc. as of and for the year ended December 31, 1996; and the
financial statements of Viking Distributing Co. as of and for the fiscal year
ended March 31, 1997 included in this Prospectus and the registration statement
of which it 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 giving
such reports.
The balance sheet of A-Y Supply, Inc. as of December 31, 1995 and the
statements of income, stockholders' equity and cash flows of A-Y Supply, Inc.
for the years ended December 31, 1995 and 1994 included in this Prospectus and
the registration statement of which it is a part, have been so included in
reliance on the reports of Burnett, Umphress & Kilgour, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, (the
"Commission") a Registration Statement on Form S-1 under the Act with respect to
the shares of Common Stock being offered by this Prospectus. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, certain portions of which have been
54
<PAGE> 57
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, copies of which may be obtained upon payment of the fees prescribed by
the Commission or examined without charge at (i) the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and (ii) the Commission's regional offices located at
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661 and 75 Park Plaza,
14th Floor, New York, New York 10007. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete,
and in each instance where such contract or other document is an exhibit to the
Registration Statement, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement being
qualified in all respects by such reference.
55
<PAGE> 58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WHITE CAP INDUSTRIES, INC.
Page
Number
------
WHITE CAP INDUSTRIES, INC.:
Report of Independent Public Accountants.............................. F-2
Consolidated Balance Sheets at December 31, 1995,
March 31, 1996 and March 31, 1997..................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, December 31, 1995, March 31, 1997,
and for the three months ended March 31, 1996......................... F-5
Consolidated Statement of Stockholders' Equity (deficit)
for the years ended December 31, 1994, December 31, 1995,
March 31, 1997 and for the three months ended March 31, 1996.......... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, December 31, 1995, March 31, 1997
and for the three months ended March 31, 1996......................... F-7
Notes to Consolidated Financial Statements............................ F-9
A-Y SUPPLY, INC.
Reports of Independent Public Accountants............................. F-20
Balance Sheets as of December 31, 1995 and 1996....................... F-22
Statements of Income for the years
ended December 31, 1994, 1995 and 1996................................ F-23
Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996.......................... F-24
Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996................................ F-25
Notes to Financial Statements......................................... F-26
VIKING DISTRIBUTING CO.:
Report of Independent Public Accountants.............................. F-30
Balance Sheet as of March 31, 1997.................................... F-31
Statement of Operations for the year
ended March 31, 1997.................................................. F-32
Statement of Changes in Stockholders' Equity
for the year ended March 31, 1997..................................... F-33
Statement of Cash Flows for the year
ended March 31, 1997.................................................. F-34
Notes to Financial Statements......................................... F-35
F-1
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To White Cap Industries, Inc.:
We have audited the accompanying consolidated balance sheets of WHITE CAP
INDUSTRIES, INC. (a Delaware corporation) and subsidiary as of December 31,
1995, March 31, 1996 and March 31, 1997 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1994 and 1995, the three month period ended March 31, 1996 and for
the year ended March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of White Cap
Industries, Inc. and subsidiary as of December 31, 1995, March 31, 1996 and
March 31, 1997 and the results of their operations and their cash flows for the
years ended December 31, 1994 and 1995, the three month period ended March 31,
1996 and for the year ended March 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
August 12, 1997
F-2
<PAGE> 60
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
DECEMBER 31,
1995 1996 1997
--------------- -------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 297,000 $ 205,000 $ 214,000
Accounts receivable, net of allowance for doubtful
accounts of $270,000, $702,000 and $525,000 at
December 31, 1995, March 31, 1996 and March 31,
1997, respectively 11,588,000 11,487,000 19,175,000
Inventories 16,337,000 15,786,000 20,426,000
Prepaid expenses and other 339,000 335,000 441,000
Deferred income taxes -- -- 738,000
--------------- -------------- -------------
28,561,000 27,813,000 40,994,000
--------------- -------------- -------------
RECEIVABLE FROM STOCKHOLDER 586,000 481,000 --
PROPERTY AND EQUIPMENT, net 6,849,000 6,768,000 7,461,000
RENTAL EQUIPMENT, net -- -- 500,000
INTANGIBLE ASSETS, net -- -- 13,205,000
OTHER ASSETS
196,000 225,000 132,000
--------------- -------------- -------------
$36,192,000 $35,287,000 $62,292,000
=============== ============== =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 61
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, ----------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 627,000 $ 689,000 $ 3,156,000
Accounts payable 12,894,000 10,422,000 17,162,000
Accrued liabilities 2,328,000 2,136,000 3,266,000
------------ ------------ ------------
15,849,000 13,247,000 23,584,000
------------ ------------ ------------
LONG-TERM DEBT, net of current portion 15,815,000 18,095,000 38,888,000
------------ ------------ ------------
DEFERRED INCOME TAXES -- -- 200,000
------------ ------------ ------------
SENIOR REDEEMABLE PREFERRED STOCK,
$.01 par value:
Designated -- 680,000 shares
Issued and outstanding -- none at December 31,
1995 and March 31, 1996; 675,969 at
March 31, 1997 -- -- 2,650,000
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 8, 9, and 10)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible Preferred Stock, $.01 par value:
Designated--2,700,000 shares
Issued and outstanding - none at December 31,
1995, and March 31, 1996; 2,180,479 at
March 31, 1997 -- -- 2,250,000
Common Stock, $.01 par value:
Authorized -- 10,000,000 shares
Issued and outstanding - 4,160 shares at
December 31, 1995 and March 31, 1996;
600,000 at March 31, 1997 -- -- 6,000
Additional paid-in capital 4,000 4,000 --
Retained earnings (accumulated deficit) 4,524,000 3,941,000 (5,286,000)
------------ ------------ ------------
4,528,000 3,945,000 (3,030,000)
------------ ------------ ------------
$ 36,192,000 $ 35,287,000 $ 62,292,000
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 62
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS
------------------------------ ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 69,508,000 $ 77,840,000 $ 19,511,000 $ 101,770,000
COST OF GOODS SOLD 49,420,000 53,961,000 13,627,000 69,740,000
------------- ------------- -------------- --------------
Gross Profit 20,088,000 23,879,000 5,884,000 32,030,000
------------- ------------- -------------- --------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 17,918,000 20,517,000 5,670,000 27,375,000
------------- ------------- -------------- --------------
Income from operations 2,170,000 3,362,000 214,000 4,655,000
------------- ------------- -------------- --------------
INTEREST EXPENSE, NET 822,000 1,385,000 442,000 2,273,000
------------- ------------- -------------- --------------
Income (loss) before
provision (benefit)
for income taxes 1,348,000 1,977,000 (228,000) 2,382,000
PROVISION (BENEFIT) FOR
INCOME TAXES 30,000 40,000 - (414,000)
------------- ------------- -------------- --------------
Net income (loss) $ 1,318,000 $ 1,937,000 $ (228,000) $ 2,796,000
============= ============= ============== ==============
PRO FORMA INFORMATION
(unaudited):
Historical income (loss) before
provision (benefit) for income
taxes $ 1,348,000 $ 1,977,000 $ (228,000) $ 2,382,000
Pro Forma income tax
provision (benefit) 553,000 811,000 (93,000) 977,000
------------- ------------- -------------- --------------
Pro Forma net income (loss) $ 795,000 $ 1,166,000 $ (135,000) $ 1,405,000
============= ============= ============== ==============
Pro Forma net income (loss)
per share $ 0.36
==============
Pro Forma weighted average
shares outstanding 3,780,000
==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 63
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK COMMON STOCK
--------------------------- ----------------------
RETAINED
ADDITIONAL EARNINGS
PAID IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
--------- ----------- -------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 - $ - 4,160 $ - $4,000 $ 2,901,000 $ 2,905,000
Stockholder distributions - - - - - (584,000) (584,000)
Net income - - - - - 1,318,000 1,318,000
--------- ----------- -------- ----------- ------- ----------- -----------
BALANCE, December 31, 1994 - - 4,160 - 4,000 3,635,000 3,639,000
Stockholder distributions - - - - - (1,048,000) (1,048,000)
Net income - - - - - 1,937,000 1,937,000
--------- ----------- -------- ----------- ------- ----------- -----------
BALANCE, December 31, 1995 - - 4,160 - 4,000 4,524,000 4,528,000
Stockholder distributions - - - - - (355,000) (355,000)
Net loss - - - - - (228,000) (228,000)
--------- ----------- -------- ----------- ------- ----------- -----------
BALANCE, March 31, 1996 - - 4,160 - 4,000 3,941,000 3,945,000
Recapitalization:
Stockholder distributions - - - - - (6,252,000) (6,252,000)
Purchase and retirement of WCI
common stock - - (4,160) - (4,000) (5,716,000) (5,720,000)
Common stock issued - - 600,000 6,000 - - 6,000
Series A-1 convertible preferred
stock issued 1,496,843 2,250,000 - - - - 2,250,000
Series A-2 convertible
stock issued preferred 683,636 - - - - - -
Preferred dividend accretion - - - - - (55,000) (55,000)
Net income - - - - - 2,796,000 2,796,000
--------- ----------- -------- ----------- ------- ----------- ------------
BALANCE, March 31, 1997 2,180,479 $ 2,250,000 6000,000 $ 6,000 $ - $(5,286,000) $(3,030,000)
========= =========== ======== =========== ======= =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 64
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------- THREE MONTH YEAR ENDED
ENDED MARCH 31,
DECEMBER 31, 1994 DECEMBER 31,1995 MARCH 31, 1996 1997
----------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) $ 1,318,000 $ 1,937,000 $ (228,000) 2,796,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 811,000 1,109,000 347,000 1,524,000
Gain on disposition of property and equipment (3,000) (4,000) (1,000) (28,000)
Changes in assets and liabilities, net of effects
from purchase of A-Y Supply:
(Increase) decrease in accounts receivable (2,421,000) (2,098,000) 100,000 (4,861,000)
(Increase) decrease in inventories (5,396,000) (2,592,000) 551,000 (1,698,000)
(Increase) decrease in prepaid expenses 294,000 (308,000) (25,000) 955,000
Increase in deferred tax asset - - - (738,000)
Increase (decrease) in accounts payable 3,562,000 2,969,000 (2,472,000) 5,079,000
Increase (decrease) in accrued expenses 1,008,000 417,000 (181,000) 405,000
Increase in deferred tax liability - - - 200,000
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (827,000) 1,430,000 (1,909,000) 3,634,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,259,000) (4,525,000) (266,000) (2,120,000)
Proceeds from sale of property and equipment - 15,000 2,000 139,000
Purchase of A-Y Supply, net of $1,323,000 in cash acquired - - - (16,502,000)
(Increase) decrease in receivable from stockholder - (372,000) 105,000 481,000
------------ ------------ ------------ ------------
Net cash used in investing activities (1,259,000) (4,882,000) (159,000) (18,002,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing under line of credit agreement 2,812,000 1,871,000 2,397,000 467,000
Principal payments on notes payable (417,000) (498,000) (176,000) -
Proceeds received from notes payable 477,000 3,712,000 121,000 22,235,000
Principal payments on subordinated note payable to
stockholder (325,000) -- -- --
Stockholder distributions paid (442,000) (1,483,000) (366,000) (6,241,000)
Preferred dividend accretion -- -- -- (55,000)
Preferred stock issued -- -- -- 4,900,000
Common stock issued -- -- -- 6,000
Common stock purchased and retired -- -- -- (5,720,000)
Increase in deferred finance costs -- -- -- (1,215,000)
------------ ------------ ------------ ------------
Net cash provided by financing activities 2,105,000 3,602,000 1,976,000 14,377,000
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 19,000 150,000 (92,000) 9,000
CASH AND CASH EQUIVALENTS, beginning of period 128,000 147,000 297,000 205,000
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 147,000 $ 297,000 $ 205,000 $ 214,000
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for--
Interest $ 902,000 $ 1,455,000 $ 455,000 $ 2,451,000
============ ============ ============ ============
Income taxes $ 16,000 $ 48,000 $ -- $ 10,000
============ ============ ============ ============
</TABLE>
F-7
<PAGE> 65
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired various shop equipment under its equipment lease financing
arrangements totaling approximately $456,000 and $518,000 during the years ended
December 31, 1994 and 1995, respectively.
Effective January 1, 1997, the Company acquired all of the outstanding capital
stock of A-Y Supply, Inc. for approximately $17.8 million. In conjunction with
this acquisition, the following liabilities were assumed:
<TABLE>
<S> <C>
Fair value of assets acquired $ 20,216,000
Cash and notes payable exchanged
for capital stock (16,825,000)
------------
Liabilities assumed $ 3,391,000
============
</TABLE>
In connection with the recapitalization transaction in February 1997, the
Company distributed certain property recorded at $284,000 to its shareholder,
and the Company's shareholder assumed certain debt totaling $242,000.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE> 66
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION
White Cap Industries, Inc. (formerly White Cap Holdings, Inc.) ("WCI"), was
formed in November 1996 as a Delaware corporation and had no prior operating
history. White Cap Industries Corp. (formerly White Cap Industries, Inc. )
("WCIC") was formed in February 1976 as a California corporation.
In February 1997, WCI and WCIC completed a transaction whereby the sole
shareholder of WCIC exchanged all of the outstanding stock of WCIC for preferred
stock of WCI, cash and dividends. This transaction was accounted for as a
recapitalization because there was not unilateral change of control of WCIC.
Through this recapitalization transaction, WCIC became a wholly owned subsidiary
of WCI. The operating results for all periods prior to the recapitalization
transaction consist entirely of the historical results of WCIC. Hereinafter WCI
and WCIC are collectively referred to as the "Company".
The Company is a business-to-business retailer of specialty tools and materials
to professional contractors throughout the Western United States. At March 31,
1997, the Company's operations consisted of a central distribution center
located in Costa Mesa, California and 20 retail stores located in California,
Las Vegas, Phoenix, and Denver.
Effective January 1, 1997, the Company acquired all of the capital stock of A-Y
Supply, Inc. (see Note 3). Subsequent to March 31, 1997, the Company acquired
Stop Supply, Inc. and Viking Distribution Co., Inc. (see Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements and related notes include the
accounts of White Cap Industries, Inc. and its wholly owned subsidiary White Cap
Industries Corp. All intercompany account balances and transactions have been
eliminated in consolidation.
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.
Actual results could differ from those estimates.
Concentration of Credit Risk
The majority of sales are on a credit basis to professional concrete, framing,
waterproofing, landscaping, grading, electrical, mechanical and general
contractors located throughout the Western United States. Many customers are
under-capitalized and generally represent a higher than normal credit risk. In
many cases this risk is somewhat mitigated by filing a preliminary notice on
materials for specific jobs sites. The Company records an estimated allowance
for doubtful accounts and adjusts this estimate periodically based upon
historical experience and specific knowledge of a customer's financial
condition. No single customer represents more than three percent of the accounts
receivable balance shown in the accompanying consolidated balance sheets.
F-9
<PAGE> 67
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories are stated at the lower of cost (weighted average, which
approximates FIFO) or market and consist primarily of purchased products held
for sale.
Property and Equipment
Property and equipment are recorded at cost and depreciated based on the
estimated useful lives of depreciable assets using primarily the straight-line
method for financial reporting purposes and accelerated methods for tax
purposes. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Building 30 years
Transportation equipment 3 to 10 years
Machinery and equipment 2 to 5 years
Office equipment 3 to 5
years Leasehold improvements Lesser of useful life
or term of lease
</TABLE>
Upon retirement of property and equipment, the asset and accumulated
depreciation and amortization accounts are relieved and any gain or loss is
reflected in operations. Maintenance costs and repairs are expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Intangibles Assets
Intangible assets consist of goodwill, covenant not to compete and deferred
financing costs. Goodwill represents the excess of cost over the fair value of
net assets acquired in business combinations accounted for under the purchase
method. Management has evaluated its accounting for goodwill, considering such
factors as historical profitability and future undiscounted operating cash
flows, and believes that the asset is realizable and that the amortization
period is appropriate.
Intangible assets are amortized on a straight-line basis over the following
estimated useful lives:
<TABLE>
<S> <C>
Goodwill 40 years
Covenant not to compete Term of the agreement (5 years)
Deferred financing costs Term of the agreements (5 to 8 years)
</TABLE>
Revenue Recognition
Revenue from product sales is recognized as orders are picked up by customers or
upon delivery to customers. The Company also rents equipment to customers under
short-term agreements and such revenue is recognized over the rental period as
earned. The Company establishes reserves for estimated customer returns,
allowances and discounts at the time of shipment.
F-10
<PAGE> 68
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost of Goods Sold
Cost of goods sold consists primarily of the purchase cost of the product plus
transportation to the Company's facilities. Vendor rebates are recognized on an
accrual basis in the period earned as a reduction to cost of goods sold.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109. The statement
requires an asset and liability approach for financial accounting and reporting
of income taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial and tax basis of assets and
liabilities given the provisions of the enacted tax laws. Prior to the
recapitalization transaction completed in February 1997, WCI was taxed as an S
Corporation (see Note 6).
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximates the fair value. In addition, the carrying value of
all borrowings approximate fair value based on interest rates currently
available to the Company.
Cash Management
The Company has a cash management program that processes cash receipts and
provides for centralized cash disbursements using certain zero-balance accounts.
This cash management program may result in negative book cash balances in
various zero-balance disbursement accounts. At December 31, 1995, March 31,
1996 and March 31, 1997, such negative cash balances total approximately $2.8
million, $577,000 and $2.7 million, respectively, and are included in accounts
payable.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS 123
"Accounting for Stock-Based Compensation". As permitted under SFAS 123, the
Company has elected to continue to account for employee stock-based compensation
under APB Opinion No. 25 and therefore presents the necessary pro forma
disclosures (see Note 8).
Unaudited Pro Forma Net Income
Pro Forma net income represents the results of operations adjusted to reflect a
provision for income tax on historical income before income taxes, which gives
effect to the change in the Company's income tax status to a C Corporation for
all periods presented. The difference between the pro forma income tax rates
utilized and the federal statutory rate of 34% relates primarily to state income
taxes (net of federal benefit) and certain permanent differences.
Unaudited Pro Forma Net Income Per Share
Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average number of shares outstanding. In
accordance with a regulation of the Securities and Exchange Commission, such
computation includes all common equivalent shares (using the treasury stock
method and anticipated initial public offering price) issued twelve months prior
to the filing of the initial public offering as if they were outstanding for the
entire period presented. Furthermore, common equivalent shares from convertible
stock are included in the calculation as if converted.
Historical net income per share have not been presented because it is not
indicative of the ongoing entity.
F-11
<PAGE> 69
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement is effective for both interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed in the
same way as fully diluted EPS, except that the calculation now uses the average
share price for the reporting period to compute dilution from options under the
treasury stock method. Management does not believe that adoption of this
standard will have a significant impact on earnings per share.
In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB #130 and #131 are effective for fiscal years beginning after
December 15, 1997, with earlier adoption permitted. The Company does not believe
that adoption of these standards will have a material effect on the Company.
3. ACQUISITION OF A-Y SUPPLY, INC.
Effective January 1, 1997, the Company acquired 100 percent of the outstanding
capital stock of A-Y Supply, Inc. ("A-Y") for approximately $16.8 million in
cash and notes. The total assets related to this acquisition are $20.2 million,
including goodwill of $10.1 million and a covenant not to compete of $1 million.
Total liabilities of $3.4 million were assumed. This acquisition was accounted
for as a purchase. Accordingly, the results of operations of A-Y are included in
the consolidated financial position of the Company beginning on the effective
date of the acquisition. In February 1997 A-Y was merged into the Company.
The following summary, prepared on a pro forma basis, combines the results of
operations as if A-Y had been acquired as of the beginning of the fiscal year
ended March 31, 1997, after including the impact of adjustments for amortization
of intangibles, income taxes and interest expense on the acquisition debt.
<TABLE>
<S> <C>
Net sales $123,459,000
Net income $ 4,780,000
Earnings per share $ 1.25
Pro forma weighted average
shares outstanding 3,780,000
</TABLE>
The pro forma data is presented for informational purposes only and is not
necessarily indicative of the operating results that would have occurred had the
acquisition been consummated as of the above date, nor are they indicative of
future operating results.
F-12
<PAGE> 70
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Land and building $ 379,000 $ 379,000 $ 471,000
Transportation equipment 4,708,000 4,813,000 5,233,000
Machinery and equipment 2,143,000 2,164,000 2,474,000
Office equipment 2,283,000 2,339,000 3,163,000
Leasehold improvements 1,474,000 1,521,000 1,697,000
=========== =========== ===========
10,987,000 11,216,000 13,038,000
Less - accumulated depreciation (4,138,000) (4,448,000) (5,577,000)
----------- ----------- -----------
$ 6,849,000 $ 6,768,000 $ 7,461,000
=========== =========== ===========
</TABLE>
Rental Equipment
Rental equipment consists primarily of construction equipment acquired in
connection with the A-Y acquisition and is net of accumulated depreciation of
approximately $20,000.
Intangible Assets
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997
------- --------- ------------
<S> <C> <C> <C>
Goodwill $ - $ - $ 11,124,000
Covenant not to compete - - 1,000,000
Deferred financing costs - - 1,215,000
------- --------- ------------
- - 13,339,000
Less - accumulated amortization - - (134,000)
------- --------- ------------
$ - $ - $ 13,205,000
======= ========= ============
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Payroll and payroll related $1,330,000 $ 600,000 $ 979,000
Sales tax 551,000 532,000 947,000
Commissions 179,000 173,000 327,000
Other 268,000 831,000 1,013,000
---------- ---------- ----------
$2,328,000 $2,136,000 $3,266,000
========== ========== ==========
</TABLE>
F-13
<PAGE> 71
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Senior Loan and Security Agreement:
Revolving line of credit $11,269,000 $13,666,000 $14,133,000
Term Loan -- -- 12,000,000
Senior Subordinated Investor Notes, at 19.25 percent,
secured by certain assets, maturing February 2005 -- -- 7,032,000
Subordinated Shareholder Note, interest at 13 percent,
maturing February 2005 -- -- 1,500,000
Senior Subordinated A-Y Shareholders' Notes, interest
at 10 percent, maturing March 2000 -- -- 3,000,000
Note payable secured by transportation equipment,
interest at 8.25 percent, maturing August 2005 3,129,000 3,113,000 3,043,000
Other 2,044,000 2,005,000 1,336,000
----------- ----------- -----------
16,442,000 18,784,000 42,044,000
Less - Current portion (627,000) (689,000) (3,156,000)
----------- ----------- -----------
$15,815,000 $18,095,000 $38,888,000
=========== =========== ===========
</TABLE>
Senior Loan and Security Agreement
The Company has a loan and security agreement (the "Agreement")with certain
senior lenders (the "Banks"), which provides a $25 million revolving line of
credit and a $12 million term loan. The Agreement expires in February 2002. The
revolver bears interest at 1/4 percent over the Bank's prime rate and provides
for a Libor option of 2-1/2 percent over the Libor rate. The term loan bears
interest at 3/4 percent over the Bank's prime rate and provides for a Libor
option of 3 percent over the Libor rate. For the period ended March 31, 1997,
the interest rates ranged from 8.1 to 8.75 percent on the revolver and from 8.6
to 9.3 percent on the term loan. Borrowings under the revolver portion of the
security agreement are based on advance rates of 85 percent and 65 percent of
eligible accounts receivable and inventory, respectively. The Agreement includes
financial covenants for net worth, working capital, fixed charge coverage and
inventory turnover, among others. This agreement has prepayment penalties
associated with early retirement. See Note 10.
Senior Subordinated Investor Notes
During fiscal 1997, the Company entered into a senior subordinated purchase
agreement in an amount of $7 million ("First Closing Note") with an unrelated
investor. The agreement also authorizes an additional note in the amount of $3
million ("Second Closing Note"), none of which was outstanding at March 31,
1997. The First Closing Note bears interest at 19.25 percent per annum of which
6.25 percent is deferred. Such deferred interest is payable no later than
February 2002. In the event the Company completes an initial public offering or
transfers substantially all of the assets of the Company in a consolidation or
merger, the Company will be required to prepay the entire principal balance, all
accrued but unpaid interest and certain prepayment penalties. (See Note 10). The
agreement includes certain financial covenants, as defined. The note is
subordinated to the senior debt and A-Y shareholder notes discussed below.
F-14
<PAGE> 72
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Subordinated A-Y Shareholders' Notes
Under the terms of the A-Y acquisition, the Company entered into three separate
subordinated note agreements with the former shareholders of A-Y, aggregating $3
million. These notes are subordinated to the senior debt. The notes may be
prepaid at the Company's option without penalty. In the event the Company closes
an initial public offering with minimum net proceeds of $15 million, the Company
must use any amount over $15 million to prepay the unpaid principal balance and
accrued interest on these notes. One of the notes, in the amount of $500,000,
contains a non-detachable warrant that allows the holder, in the event of an
initial public offering of the Company, to purchase shares of the Company's
common stock by converting the note payable (A-Y Warrant). The number of shares
issuable upon conversion shall be calculated by dividing the then outstanding
principal balance of the note by an amount equal to 75 percent of the fair value
of one share of the Company's common stock at the date of exercise. The A-Y
Warrant expires the sooner of 20 days after the completion of an initial public
offering or February 25, 2000. In the event the warrant is exercised, the excess
of the fair value of the stock issued over the balance of the note payable will
be charged to interest expense in the period the warrant is exercised.
Annual maturities of long-term debt as of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1998 $ 3,156,000
1999 4,558,000
2000 4,595,000
2001 2,787,000
2002 16,912,000
Thereafter 10,036,000
-----------
$42,044,000
===========
</TABLE>
6. INCOME TAXES
The significant components of the Company's deferred income tax assets
(liability) are as follows:
<TABLE>
<CAPTION>
December 31, March 31, March 31,
Current deferred tax assets: 1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
Inventory reserves $ -- $ -- $ 350,000
Allowance for bad debt -- -- 250,000
Other -- -- 138,000
--------- ---------- ---------
$ -- $ -- $ 738,000
========= ========== =========
Long-term deferred tax liability - Depreciation $ -- $ - $(200,000)
========= ========== =========
</TABLE>
Although realization of the above deferred tax assets is not assured, management
believes that realization is more likely than not through future taxable
earnings.
Prior to the recapitalization transaction completed in February 1997, the
Company was taxed as an S Corporation. Under these provisions, taxable income or
loss was included in the personal tax return of the stockholder of WCIC.
Therefore, no provision for federal or state income taxes was reflected in the
historical financial statements. As an S Corporation, the Company was subject to
a minimum franchise tax of $800, or 1.5% of taxable income, which is included in
the Company's tax provision for the years ended December 31, 1994 and 1995.
F-15
<PAGE> 73
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective February 26, 1997, the Company terminated its S Corporation status and
converted to a C Corporation for both federal and state purposes. As a result of
this change in income tax status, the Company recorded an income tax benefit of
approximately $500,000 to establish net deferred tax assets during the year
ended March 31, 1997. The benefit for income taxes for the year ended March 31,
1997 primarily represents this tax benefit net of C Corporation income taxes.
7. STOCKHOLDERS' EQUITY
At March 31, 1997, the authorized capital stock of WCI consists of 10,000,000
shares of common stock and 5,000,000 shares of preferred stock, of which
3,380,000 shares of preferred stock has been designated.
Senior Redeemable Preferred Stock
In connection with the recapitalization transaction, WCI issued 675,969 of
senior redeemable preferred stock (Senior Preferred Stock) in a private
placement for an aggregate price of $2,650,000. The Senior Preferred Stock
accrues cumulative dividends of eight percent per annum and, in the event of an
initial public offering (IPO) or the sale of the Company, has a mandatory
redemption feature. The Senior Preferred Stock is redeemable for the stated
amount plus accrued dividends (Redemption Price). In the event that WCI does not
complete an IPO or sale of the Company, WCI must offer to redeem the Senior
Preferred Stock on March 1, 2005 at the Redemption Price. The Senior Preferred
Stock has a total liquidation preference of $2,650,000 plus accrued dividends.
Accrued dividends of approximately $19,000 are included in accrued liabilities
as of March 31, 1997.
Convertible Preferred Stock
In connection with the recapitalization transaction, WCI issued 1,496,843 shares
of Series A-1 Preferred Stock ("A-1 Preferred") in a private placement for an
aggregate purchase price of $2,250,000. In addition, WCI issued 683,636 shares
of Series A-2 Preferred Stock ("A-2 Preferred") to WCIC's former shareholder,
together with other consideration, in exchange for all outstanding common shares
of WCIC.
The A-1 Preferred and the A-2 Preferred accrue cumulative dividends of
approximately $393,000 per year. At the option of the holder, each share of the
A-1 and A-2 Preferred can be converted into one share of common stock. Such
conversion is automatic in the event of an IPO or upon merger or sale of the
Company. The conversion rate is subject to adjustment under certain
circumstances pursuant to anti-dilution provisions. In addition, the A-2
Preferred is subject to redemption at $.0146 per share if the Company does not
attain certain earnings levels during the three cumulative fiscal years ending
1999 and the five cumulative fiscal years ended 2001, as defined. Accrued
dividends of approximately $36,000 are included in accrued liabilities as of
March 31, 1997.
Common Stock Warrants
In connection with the issuance of the Senior Redeemable Preferred Stock, the
Company issued warrants to purchase 675,969 shares of common stock at an
exercise price of $0.01 per share (estimated fair value). The warrants expire on
March 1, 2007.
8. EMPLOYEE BENEFIT PLANS
Employee Stock Option Plan
On March 19, 1997, the Company adopted the 1997 Long Term Incentive and Stock
Option Plan ("the Plan"). The Plan reserves for issuance to employees, members
of the board of directors, consultants and independent contractors a maximum of
379,978 shares of the Company's A-1 Preferred or common stock upon exercise of
stock options, stock appreciation rights, and
F-16
<PAGE> 74
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
restricted or performance stock awards. Stock options may be granted as
"Incentive Stock Options" (as defined by the Internal Revenue Code of 1986) or
as nonqualified options. The exercise price is determined by the Compensation
Committee and may not be less than 100 percent of the fair market value at the
date of grant. For Incentive Stock Options the exercise price for options
granted to individuals who own more than ten percent of the total combined
voting power of all classes of the stock of the Company shall be 110 percent of
the fair value at the date of grant. Each option and award shall expire on the
date determined by the Compensation Committee but may not extend beyond ten
years for incentive stock options and fifteen years for nonqualified options.
Awards under the Plan may be granted through February 1, 2007.
Options to acquire an aggregate of 348,976 shares of common stock at an exercise
price of $4.31 per share were granted to employees on March 31, 1997. The
options vest over five years, beginning September 30, 1997 and expire March 31,
2007. At March 31, 1997, a total of 31,002 shares remain available for future
grant under the Plan.
The Company has adopted the disclosure-only provision of SFAS 123. Accordingly,
no compensation cost has been recorded for stock option grants. Had compensation
cost for the Plan been determined based on the fair value at the grant date for
awards in fiscal 1997 consistent with the provision of SFAS 123, the effect
would not have been material for all periods presented.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1997: Dividend yield of zero percent; zero
expected volatility; risk-free rate of 6.38 percent; and expected lives of five
years. The weighted-average exercise price of the options granted during fiscal
1997 is $4.31 per share and the weighted-average fair value is $1.18 per share.
401(k) Plan
The Company maintains a defined contribution benefit plan (the "401(k) Plan")
covering substantially all of its employees. Company contributions to the 401(k)
Plan are voluntary and at the discretion of the Company. The Company's expense
related to the 401 (k) Plan totaled $152,000 and $131,000 for the years ended
December 31, 1994 and December 31, 1995, $2,000 for the three months ended March
31, 1996 and $99,000 for the year ended March 31, 1997.
Other
On February 25, 1997 a major shareholder of the Company sold 100,000 shares of
Series A-2 convertible preferred stock to an officer of the Company for the
estimated fair value of $.0146 per share. Of the shares, 80,000 are subject to
repurchase by the major shareholder. The repurchase option lapses at a rate of
20% a year commencing February 25, 1998.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has entered into operating leases that expire at various dates
through 2004. Total rental expense under these operating leases was
approximately $1,663,000 and $1,743,000 for the years ended December 31, 1994
and 1995, $443,000 for the three months ended March 31, 1996 and $1,868,000 for
the year ended March 31, 1997. Future minimum rentals on these operating leases
are as follows:
F-17
<PAGE> 75
WHITE CAP INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1998 $1,730,000
1999 1,622,000
2000 1,560,000
2001 1,241,000
2002 1,030,000
Thereafter 2,236,000
----------
$9,419,000
==========
</TABLE>
Employment Agreements/Bonus Plans
The Company entered into employment agreements with certain key management
employees with a minimum term of 5 years. These agreements specify annual base
salary levels, incentive bonuses which are payable if the Company attains
certain earnings goals, as defined, and severance provisions that range from
zero to three years of base compensation. The Company accrues for these bonuses
based on management's estimates of achieving such performance goals and has
included these amounts in accrued liabilities at March 31, 1997. One employment
agreement contains a guaranteed bonus of $1 million which is being accrued over
the period benefitted.
Loan Guarantee
The Company leases certain facilities under operating lease agreements with one
of the Company's stockholders and the Company currently guarantees the debt of
the stockholder related to this property.
The stockholder is currently in the process of refinancing this debt and, in
management's opinion, the Company will be released as a guarantor when the
refinancing is completed.
10. SUBSEQUENT EVENTS - (unaudited)
Acquisitions of Stop Supply, Inc. and Viking Distributing Co., Inc.
On May 10, 1997, the Company acquired the common stock of Stop Supply, Inc.
("Stop") in exchange for approximately $3,275,000 in cash and a $250,000 note
that is convertible into common stock of the Company at 75 percent of the
initial public offering price. Stop currently operates one construction supply
store located in Central California. On June 24, 1997, the Company acquired the
common stock of Viking Distributing Co., Inc. ("Viking") in exchange for
approximately $16,250,000 in cash. Viking operates three construction supply
stores located in Northern California. In connection with these acquisitions,
the Company borrowed an additional $8 million under the Senior Subordinated
Investor Agreement and approximately $13 million under the Senior Loan and
Security Agreement (see Note 5). In connection with these acquisitions the
maximum borrowings provided for under the Company's revolving line of credit was
increased to $35 million. The terms of the amended Agreement also provide for
seasonal maximum borrowings of $38 million.
Proposed Public Offering
Subsequent to March 31, 1997 the Company has proposed the filing of a form S-1
Registration Statement with the Securities and Exchange Commission to sell
common stock to the public. The majority of such proceeds will be used to repay
debt. If the Company is successful at completing this offering and repaying the
debt, it will incur debt prepayment charges of approximately $6 million, which
will be charged to operations in the period the debt is repaid. In addition, if
the Company is
F-18
<PAGE> 76
successful at completing this offering, the Company will need to write off
approximately $1.3 million associated with capitalized debt issuance costs.
F-19
<PAGE> 77
To the Board of Directors
A-Y SUPPLY, INC.
North Highlands, California
Independent Auditors' Report
We have audited the accompanying balance sheet of A-Y SUPPLY, INC. as of
December 31, 1995, and the related statements of income, stockholder's equity
and retained earnings and cash flows for the years ended December 31, 1995 and
1994. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 the
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 A-Y SUPPLY INC. as of December
31, 1995, and the results of its operations and its cash flows for the years
ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
/s/ BURNETT, UMPHRESS & KILGOUR
-------------------------------
Rancho Cordova, California
March 1, 1996
F-20
<PAGE> 78
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A-Y Supply, Inc.:
We have audited the accompanying balance sheet of A-Y SUPPLY, INC. (a California
corporation) as of December 31, 1996, and the related statements of income,
stockholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of A-Y Supply, Inc. as of December 31, 1995,
were audited by other auditors whose report dated March 1, 1996, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of A-Y Supply, Inc. as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Sacramento, California
January 31, 1997
F-21
<PAGE> 79
A-Y SUPPLY, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 and 1996
ASSETS
------
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $1,387,893 $1,323,206
Receivables 2,415,939 2,776,951
Inventory 1,734,438 2,941,360
Prepaid expenses 4,494 22,035
Property held for sale 824,841 --
Assets to be distributed to stockholders -- 904,228
---------- ----------
Total current assets 6,367,605 7,967,780
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of accumulated depreciation of $765,330,
and $703,255 in 1996 and 1995 respectively 894,497 903,202
COVENANT NOT TO COMPETE, net of accumulated amortization of $6,612 and $6,112 in 1996 and
1995, respectively 5,500 5,000
---------- ----------
Total assets $7,267,602 $8,875,982
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $350,000 $ 350,000
Accounts payable 1,278,528 1,462,050
Accrued expenses 187,694 227,023
Current maturity of long-term debt 107,538 130,466
Payable to stockholders for assets to be distributed -- 904,228
---------- ----------
Total current liabilities 1,923,760 3,073,767
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, net of current maturity 149,218 117,711
Note payable - related party 200,000 200,000
---------- ----------
Total long-term liabilities 349,218 317,711
---------- ----------
Total liabilities 2,272,978 3,391,478
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 100,000 shares authorized, 348 shares issued and outstanding 34,800 34,800
Retained earnings 4,959,824 5,449,704
---------- ----------
Total stockholders' equity 4,994,624 5,484,504
---------- ----------
Total liabilities and stockholders' equity $7,267,602 $8,875,982
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-22
<PAGE> 80
A-Y SUPPLY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
SALES $ 17,490,588 $ 21,669,850 $ 25,708,057
COST OF SALES 12,471,375 15,446,837 17,319,781
------------ ------------ ------------
Gross profit from sales 5,019,213 6,223,013 8,388,276
EQUIPMENT RENTAL INCOME, net 304,664 390,898 367,218
------------ ------------ ------------
Gross profit from operations 5,323,877 6,613,911 8,755,494
SELLING EXPENSES 1,917,912 2,160,933 2,534,883
GENERAL AND ADMINISTRATIVE EXPENSES 2,415,935 2,488,818 3,147,477
------------ ------------ ------------
Income from operations 990,030 1,964,160 3,073,134
WRITEDOWN OF ASSETS TO BE
DISTRIBUTED TO FAIR MARKET VALUE -- -- (61,780)
OTHER INCOME 230,279 160,836 155,446
OTHER EXPENSES (33,967) (43,976) (135,214)
------------ ------------ ------------
Income before provision for taxes 1,186,342 2,081,020 3,031,586
PROVISION FOR INCOME TAX 17,725 29,821 50,470
------------ ------------ ------------
Net income $ 1,168,617 $ 2,051,199 $ 2,981,116
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-23
<PAGE> 81
A-Y SUPPLY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
SHARES AMOUNT RETAINED EARNINGS TOTAL
----- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993
348 $ 34,800 $ 3,014,422 $ 3,049,222
Net Income -- -- 1,168,617 1,168,617
Distributions to stockholders -- -- (684,329) (684,329)
----- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 348 34,800 3,498,710 3,533,510
Net Income -- -- 2,051,199 2,051,199
Distributions to stockholders -- -- (590,085) (590,085)
----- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 348 34,800 4,959,824 4,994,624
Net Income -- -- 2,981,116 2,981,116
Distributions to stockholders -- -- (1,587,008) (1,587,008)
Assets to be distributed to stockholders -- -- (904,228) (904,228)
----- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 348 $ 34,800 $ 5,449,704 $ 5,484,504
===== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-24
<PAGE> 82
A-Y SUPPLY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,168,617 $ 2,051,199 $ 2,981,116
Adjustments to reconcile net income to net cash provided by operating
activities -
Depreciation and amortization 163,658 189,188 252,553
Provision for doubtful accounts 21,574 32,939 25,460
Provision for inventory reserve -- -- 22,000
Writedown of assets to fair market value -- -- 61,780
Changes in assets and liabilities -
Accounts receivable (69,981) (623,610) (386,472)
Increase (decrease) in inventory 54,919 (145,993) (1,228,922)
Prepaid expenses 14,096 11,222 (17,541)
Increase (decrease) in accounts payable (260,129) 174,576 189,573
Accrued expenses 15,320 48,946 33,278
----------- ----------- -----------
Net cash provided by operating activities 1,108,074 1,738,467 1,932,825
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for equipment and leasehold improvements (149,273) (322,782) (502,835)
Proceeds from disposition of equipment 36,963 25,590 179,429
Investment in property held for sale (474,319) (350,522) (78,519)
Proceeds from employees 15,006 92 --
----------- ----------- -----------
Net cash used in investing activities (571,623) (647,622) (401,925)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from new debt 350,000 -- 350,000
Principal payments on debt (102,994) (106,936) (358,579)
Distributions to stockholders (684,329) (590,085) (1,587,008)
----------- ----------- -----------
Net cash used in financing activities (437,323) (697,021) (1,595,587)
----------- ----------- -----------
Net increase (decrease) in cash 99,128 393,824 (64,687)
CASH, BEGINNING OF YEAR 894,941 994,069 1,387,893
----------- ----------- -----------
CASH, END OF YEAR $ 994,069 $ 1,387,893 $ 1,323,206
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS:
Cash paid for -
Income tax $ 23,825 $ 26,800 $ 42,620
=========== =========== ===========
Interest $ 53,907 $ 60,257 $ 56,803
=========== =========== ===========
Noncash items -
Assets to be distributed to stockholders -- -- $ 904,228
Automotive equipment purchased through debt $ 86,209 $ 294,801 $ --
=========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-25
<PAGE> 83
A-Y SUPPLY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Activities
A-Y Supply, Inc. (the "Company") is engaged primarily in the wholesale
distribution of construction materials and supplies to contractors and the
rental and repair of construction equipment. The Company has facilities located
in North Highlands, Stockton, San Leandro, Clovia and Santa Rosa, California.
Use of Estimates in Preparation of Financial Statements
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 reported period. Actual
results could differ from those estimates.
Concentration of Credit Risk
Cash includes amounts deposited in financial institutions in excess of Federal
Deposit Insurance Corporation limits.
Inventory
Inventory consists of building materials, supplies, tools and equipment which is
stated at the lower of cost (determined on the first-in, first-out method) or
market.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and include
improvements that significantly add to the asset's productivity or extend its
useful life. Costs of maintenance and repairs are charged to expense. Upon
retirement or disposal of equipment and leasehold improvements, the costs and
related depreciation are removed from the accounts, and gain or loss, if any, is
reflected in current operations. Rental equipment represents assets held for
rental to customers. Depreciation is computed using the straight-line and
declining balance method. The estimated useful lives used for calculating
depreciation for equipment and leasehold improvements are as follows:
<TABLE>
<CAPTION>
LIFE
----
<S> <C>
Automotive equipment 5 years
Office equipment 5 - 7 years
Rental equipment 5 years
Leasehold improvements 5 - 39 years
</TABLE>
Covenant Not to Compete
The covenant not to compete is being amortized over 240 months. Amortization
expense for the years ended 1996, 1995 and 1994 was $500 and has been included
in general and administrative expenses.
F-26
<PAGE> 84
A-Y SUPPLY
NOTES TO FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, principally
long-term debt, approximate their estimated fair values.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under these provisions, the Company passes through the
taxable income to its stockholders each year as earned. S corporations doing
business in California are subject to a 1.5% California franchise tax on taxable
income.
Reclassifications
Reclassifications have been made to the 1994 and 1995 financial statements to
conform to the 1996 presentation.
2. SALE TO OUTSIDE INVESTOR
In an agreement dated December 31, 1996, the stockholders have entered into an
agreement to sell the stock of the Company to an outside investor (the
"Investor") for agreed upon consideration. The closing purchase price is
contingent upon a calculation based upon net current assets (as defined in the
agreement) which includes certain audited current assets and current liabilities
of the Company as of December 31, 1996.
Prior to the agreement closing, the stockholders will distribute to themselves
assets listed on the 1995 balance sheet as property held for sale and vehicles
which are included in 1995 equipment and leasehold improvements. During 1996,
these assets were written down to their fair market value and transferred to
assets to be distributed to stockholders on the 1996 balance sheet. The related
payable, termed payable to stockholders for assets to be distributed, represents
the distribution which will be made during 1997.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements as of December 31, 1995 and 1996 consist of
the following:
<TABLE>
<CAPTION>
1995 1996
----------- -------------
<S> <C> <C>
Automotive equipment $ 784,161 $ 846,216
Office equipment 174,331 215,200
Rental equipment 513,660 475,267
Leasehold improvements 125,600 131,849
----------- -----------
1,597,752 1,668,532
Less - Accumulated depreciation (703,255) (765,330)
----------- -----------
$ 894,497 $ 903,202
=========== ===========
</TABLE>
F-27
<PAGE> 85
A-Y SUPPLY
NOTES TO FINANCIAL STATEMENTS
4. NOTE PAYABLE
As of December 31, 1995 the note payable consists of a $1,000,000 line of credit
with WestAmerica Bank. The line bears interest at prime plus 1.75% per annum,
payable monthly and expires on September 30, 1996. The line is secured by
inventory, chattel paper, accounts receivable, contract rights and general
intangibles. The line of credit is personally guaranteed by the Company
stockholders. As of December 31, 1995, there was an outstanding balance of
$350,000 on the note.
As of December 31, 1996, the note payable consists of a $350,000 short-term
promissory note with WestAmerica Bank. The note bears interest at the bank's
index rate plus .75% per annum, with interest payable monthly. The note expires
on May 31, 1997. The note is secured by inventory, chattel paper, accounts
receivable, contract rights and general intangibles.
The note is personally guaranteed by the Company stockholders.
F-28
<PAGE> 86
A-Y SUPPLY
NOTES TO FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt as of December 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Various auto loans, secured by
automotive equipment, aggregate
monthly payments ranging from
$481 to $1,741, including principal
and interest ranging from 8.40% to
13.0%, due through October 2000 $ 256,756 $ 248,177
Less - Current maturity (107,538) (130,466)
--------- ---------
$ 149,218 $ 117,711
========= =========
</TABLE>
Aggregate maturities on long-term debt over the next four years are as follows:
<TABLE>
<CAPTION>
Year Ending December 31
<S> <C>
1997 $130,466
1998 73,842
1999 33,351
2000 10,518
--------
$248,177
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The note payable-related party represents an unsecured amount due to a relative
of the stockholder. Monthly interest payments are made at a rate of 8% per
annum. The note will be paid in full as a part of the purchase described in Note
2.
The Company leases showroom, office, warehouse and distribution space located in
North Highlands, Stockton, San Leandro and Santa Rosa from the stockholders
under various informal operating lease agreements. These informal agreements
will be finalized prior to the sale described in Note 2.
Lease expense related to the above operating leases is reported in general and
administrative expenses. For the years ended December 31, 1994, 1995 and 1996,
these expenses amounted to $298,338, $290,640 and $327,987, respectively.
7. 401(k) PLAN
The Company adopted a defined contribution 401(k) plan during the year ended
December 31, 1994. The amount contributed by the Company is to be determined
annually by the Board of Directors. During the year ended December 31, 1994,
1995, and 1996, the Company contributed approximately $19,927, $24,000 and
$33,000 to the plan, respectively. This amount is included in general and
administrative expenses.
F-29
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Viking Distributing Co.:
We have audited the accompanying balance sheet of Viking Distributing Co. as of
March 31, 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Viking Distributing Co. as of
March 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California,
June 13, 1997
F-30
<PAGE> 88
VIKING DISTRIBUTING CO.
BALANCE SHEET AS OF MARCH 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 145,428
Accounts receivable, net of allowance for
doubtful accounts of $43,000 3,939,518
Inventories 3,917,281
Prepaid expenses 17,295
Deferred taxes 487,981
----------
Total current assets 8,507,503
PROPERTY AND EQUIPMENT, net 943,124
DEPOSITS 28,012
----------
Total assets $9,478,639
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 214,140
Current maturities of obligations under capital leases 33,299
Accounts payable 2,281,603
Accrued liabilities 1,169,259
Income taxes payable 343,687
Sales taxes payable 246,969
----------
Total current liabilities 4,288,957
----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities 501,828
Obligations under capital leases, less current maturities 90,777
Deferred rent 32,392
----------
Total long-term liabilities 624,997
----------
Total liabilities 4,913,954
----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 50,000 shares authorized;
33,363 shares issued and outstanding 51,000
Retained earnings 4,513,685
----------
Total stockholders' equity 4,564,685
----------
Total liabilities and stockholders' equity $9,478,639
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-31
<PAGE> 89
VIKING DISTRIBUTING CO.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C>
NET SALES $ 35,191,898
COST OF GOODS SOLD 24,527,881
------------
Gross profit 10,664,017
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,446,093
------------
Income from operations 1,217,924
OTHER EXPENSE: Interest expense, net (280,175)
------------
Income before provision for income taxes 937,749
PROVISION FOR INCOME TAXES 402,178
------------
Net income $ 535,571
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-32
<PAGE> 90
VIKING DISTRIBUTING CO.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 33,363 $ 51,000 $3,978,114 $4,029,114
Net income 0 0 535,571 535,571
---------- ---------- ---------- ----------
BALANCE, MARCH 31, 1997 33,363 $ 51,000 $4,513,685 $4,564,685
---------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-33
<PAGE> 91
VIKING DISTRIBUTING CO.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 535,571
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 296,316
Changes in assets and liabilities:
Accounts receivable, trade (226,452)
Deferred taxes (374,240)
Inventory (444,161)
Prepaid expenses (3,759)
Accounts payable 96,537
Income taxes payable (28,560)
Deferred rent 8,046
Sales tax payable 23,045
Accrued liabilities 712,396
---------
Net cash provided by operations 594,739
---------
CASH FROM INVESTING ACTIVITIES: Purchases of property and equipment (268,776)
---------
CASH FROM FINANCING ACTIVITIES:
Repayment on line of credit (200,000)
Payments for long-term debt (36,848)
---------
Net cash used for financing activities (236,848)
Net increase in cash 89,115
CASH, beginning of year 56,313
---------
CASH, end of year $ 145,428
---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 260,000
Cash paid during the year for taxes 485,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-34
<PAGE> 92
VIKING DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS
Viking Distributing Co. (the Company) distributes a broad range of
professional-grade portable power tools, fasteners, construction equipment and
supplies to general contractors, specialty contractors and public agencies. The
majority of the Company's sales are in Northern California. The Company is
subject to certain risk factors, including, but not limited to, strong
competition and the volatility of the construction industry. This volatility can
adversely impact the Company's results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires certain estimates be made by management. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are made up of cash on hand and in the bank.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents that are held by the
Company's bank. The Company has not experienced any losses related to its
financial instruments.
INVENTORIES
Inventories are stated at the lower of cost (weighted average, which
approximates first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the useful lives of assets as follows:
Trucks and automobiles 5 years
Furniture and fixtures 7 years
Machinery and equipment 3 to 5 years
Leasehold improvements 10 years or the life of the lease,
whichever is shorter
REVENUE RECOGNITION
Sales are recognized as products are shipped.
DEFERRED RENT
Certain of the Company's leases contain fixed escalations of the minimum annual
lease payments during the original term of the lease. The Company recognizes
rent expense on a straight-line basis, recording the difference between the
rental amount charged to operations and the amount payable under the lease as
deferred rent.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, deferred taxes are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-35
<PAGE> 93
VIKING DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
2. PROPERTY AND EQUIPMENT:
Property and equipment at March 31, 1997, consists of:
<TABLE>
<S> <C>
Trucks and automobiles $ 874,533
Machinery and equipment 603,388
Leasehold improvements 395,473
Furniture and fixtures 71,990
-----------
Total 1,945,384
Less: Accumulated depreciation (1,002,260)
-----------
$ 943,124
-----------
</TABLE>
Total depreciation expense for the year ended March 31, 1997, was $296,316.
Included in property and equipment are depreciated amounts totaling $150,000
related to assets held under capital leases.
3. BANK LINE OF CREDIT:
The Company has a line of credit agreement with a bank to provide for short-term
borrowings with interest at a rate of one point over the bank's prime rate (9.50
percent at March 31, 1997). Loan advances of up to $1,000,000 are available. The
Company had no borrowings outstanding at March 31, 1997, under this agreement.
The outstanding principal is due and payable in full on March 1, 1998.
The Company is required by the bank to maintain certain financial covenants
covering current ratio, tangible net worth, ratio of total liabilities to
tangible net worth, and ratio of cash flow to debt service, and requiring
profitable operations (all as defined in the agreement) in addition to certain
nonfinancial covenants. The Company was in compliance with all of these
covenants as of March 31, 1997.
4. NOTES PAYABLE:
The Company has the following notes payable at March 31, 1997:
F-36
<PAGE> 94
VIKING DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
<TABLE>
<S> <C>
Notes payable to the principal stockholders of the Company, bearing interest at 12 percent per
annum; maturing in June 2001 $ 150,000
Notes payable to related parties, collateralized by several of the Company's
trucks and automobiles, payable in monthly installments, including interest
at annual percentage rates ranging from 9 percent to 9.5 percent and maturing
between August 1997 and March 1999
123,871
Notes payable to a number of financial institutions, collateralized by several of the Company's
trucks and automobiles, payable in monthly installments, including interest at annual
percentage rates ranging from 8.75 percent to 10 percent and maturing between December
1997 and June 1999 87,097
Note payable to a bank, collateralized by receivables, inventories and
equipment, payable in 60 monthly installments of principal of $5,000 plus
interest at 1.25 percent above the bank's prime rate (9.5 percent at March
31, 1997), maturing on March 1, 2001
240,000
Note payable to a bank, collateralized by receivables, inventories and
equipment, payable in 60 monthly installments of principal of $1,667 plus
interest at 1.25 percent above the bank's prime rate (9.5 percent at March
31, 1997), maturing on June 15, 2000
65,000
Note payable to a bank, collateralized by receivables, inventories and
equipment, payable in 48 monthly installments of principal of $3,125 plus
interest at 1.25 percent above the bank's prime rate (9.5 percent at March
31, 1997), maturing on June 15, 1998
50,000
---------
Notes payable 715,968
Less: Current maturities (214,140)
---------
Notes payable, net of current maturities $ 501,828
---------
</TABLE>
Future minimum debt repayments under the notes payable above are as follows:
<TABLE>
<CAPTION>
Year Ended
March 31
--------
<S> <C>
1998 $ 214,140
1999 164,025
2000 103,573
2001 81,736
2002 152,494
----------
$ 715,968
==========
</TABLE>
F-37
<PAGE> 95
VIKING DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
5. LEASES:
The Company conducts its operations from leased facilities consisting of a main
office and warehouse facility and branch sales offices, warehouses and retail
stores. All leases are classified as operating leases and all have a five-year
term. The leases generally provide that the Company pay the taxes, insurance and
maintenance expenses related to the leased properties.
The Company also leases certain vehicles and computer equipment under capital
leases.
The future minimum lease payments in the aggregate are as follows:
<TABLE>
<CAPTION>
Year Ending
March 31 Capital Operating
------------- ----------- -------------
<S> <C> <C>
1998 $ 42,974 $ 351,278
1999 42,974 366,544
2000 40,148 307,634
2001 22,387 50,047
2002 2,974 0
----------- -------------
151,457 $ 1,075,503
=============
Less: Amounts allocated to interest 27,381
-----------
Present value of net minimum payments 124,076
Less: Current maturities 33,299
-----------
Long-term capital obligations $90,777
===========
</TABLE>
Total rent expense under building leases was $326,544 for the year ended March
31, 1997.
The Company is involved in various lawsuits, claims and injuries that are
incidental to its business. In the opinion of management, the resolution of
these matters will not materially affect the business position, results of
operations or liquidity of the Company.
6. INCOME TAXES:
The provision for income taxes shown in the accompanying statement of operations
is composed of the following for the year ended March 31, 1997:
<TABLE>
<S> <C>
Current:
Federal $ 605,605
State 170,813
---------
776,418
---------
Deferred:
Federal (282,875)
State (91,365)
---------
(374,240)
---------
$ 402,178
=========
</TABLE>
F-38
<PAGE> 96
VIKING DISTRIBUTING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
The deferred tax asset reflected in the accompanying balance sheet includes the
following at March 31, 1997:
<TABLE>
<S> <C>
Deferred taxes:
Accrued bonuses $160,000
Accrued vacation and other benefits 142,648
Accrued profit sharing 62,250
State franchise taxes payable 11,859
Obsolescence reserve 21,420
Capitalized overheads related to inventory 45,365
Other 44,439
--------
$487,981
========
</TABLE>
7. PROFIT-SHARING PLAN:
The Company operates a profit-sharing plan covering all of its eligible
employees. The Company can contribute, at the discretion of the Board of
Directors, up to 15 percent of qualified wages to the plan. For the year ended
March 31, 1997, the Company declared a contribution of $150,000 to the plan,
which is included in accrued liabilities at March 31, 1997.
8. SUBSEQUENT EVENT:
During March 1997, the principal stockholders of the Company entered into an
agreement to sell all of the Company's stock to an outside investor for an
agreed-upon consideration as defined in the agreement. This agreement is
expected to close during June 1997. Prior to the closing, the current
stockholders will distribute to themselves $400,000 in bonuses which are
included in accrued liabilities at March 31, 1997.
F-39
<PAGE> 97
=====================================================
NO DEALER, SALESPERSON OR ANY OTHER 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 COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary................................... 4
Risk Factors......................................... 8
Recent Transactions.................................. 12
Use of Proceeds...................................... 13
Dividend Policy...................................... 13
Dilution............................................. 14
Capitalization....................................... 15
Unaudited Pro Forma Combined Financial
Data............................................... 16
Selected Historical Financial and Operating Data..... 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 22
Business............................................. 27
Management........................................... 37
Principal Stockholders............................... 45
Description of Capital Stock......................... 46
Description of Certain Indebtedness.................. 47
Certain Relationships and Related Transactions....... 49
Shares Eligible for Future Sale...................... 51
Underwriting......................................... 53
Legal Matters........................................ 54
Experts.............................................. 54
Additional Information............................... 54
Index to Financial Statements........................ F-1
---------------------------
UNTIL _________, 1997 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
=====================================================
_________ shares
[logo]
WHITE CAP INDUSTRIES, INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ROBERTSON STEPHENS &
COMPANY
__________ __, 1997
<PAGE> 98
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<S> <C>
SEC registration fee...................................................... $26,137
NASD filing fee........................................................... 9,125
Nasdaq National Market original listing fee............................... *
Blue sky fees and expenses (including attorneys' fees and expenses)....... *
Printing and engraving expenses........................................... *
Transfer agent's fees and expenses........................................ *
Accounting fees and expenses.............................................. *
Legal fees and expenses................................................... *
Miscellaneous expenses.................................................... *
-------
Total................................................................ $ *
=======
</TABLE>
- ----------
*To be provided by amendment.
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is, or
is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any person who is, or is threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
Section 145.
II-1
<PAGE> 99
In that regard, the Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director or officer of such corporation, or is or was serving at the request of
such corporation as a director, officer or member of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of such corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. Indemnification in connection with an action or suit
by or in the right of such corporation to procure a judgment in its favor is
limited to payment of settlement of such an action or suit except that no such
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable for negligence or misconduct
in the performance of his duty to the indemnifying corporation unless and only
to the extent that the Court of Chancery of Delaware or the court in which such
action or suit was brought shall determine that, despite the adjudication of
liability but in consideration of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February 1997, in connection with its incorporation and initial
capitalization, the registrant issued Greg Grosch, its Chief Executive Officer:
(i) a $1.5 million subordinated note, which note is being repaid with the
proceeds of the offering made hereby (the "Offering"); (ii) warrants to acquire
shares of convertible preferred stock (subsequently exercised by Mr. Grosch),
which shares will automatically convert into 68,364 shares of Common Stock upon
consummation of the Offering; (iii) 50,000 shares of Common Stock, and (iv)
Convertible Preferred Stock which will automatically convert into 1,538,182
shares of Common Stock upon consummation of the Offering. In connection with the
incorporation and capitalization transactions described above, (i) shares of
redeemable preferred stock and warrants to purchase Common Stock were purchased
by three investment funds and (ii) 550,000 shares of Common Stock and
Convertible Preferred Stock which will automatically convert into 573,933 shares
of Common Stock were issued to KRG Capital Investments II, LLC. Such shares of
redeemable preferred stock will be redeemed upon consummation of the Offering.
In connection with the registrant's acquisition of Viking Distributing Company,
Inc. ("Viking Distributing"), 60,000 shares of Series B Preferred Stock were
issued to the former owners of Viking Distributing. Such shares will
automatically convert into shares of Common Stock on a share-for-share basis
upon consummation of the offering but will remain subject to a repurchase right
by the Company if certain performance targets are not achieved for the Northern
California operations of the registrant. In connection with the registrant's
acquisition of A-Y Supply, Inc. ("A-Y Supply"), a $500,000 subordinated
convertible promissory note convertible into a number of shares of Common Stock
determined by dividing $500,000 by 75% of the initial offering price per share
specified herein was issued to the former owners of A-Y Supply. In connection
with the registrant's acquisition of Stop Supply, Inc. ("Stop Supply"), warrants
to acquire up to $250,000 of Common Stock at an exercise price equal to 75% of
the initial offering price per share specified herein were issued to the former
owners of Stop Supply. Each of the foregoing issuances was exempt from
registration under Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Restated Certificate of Incorporation of the registrant.
3.2* Form of Restated Bylaws of the registrant.
4.1* Form of certificate representing shares of Common Stock, $0.01 par value per share.
4.2* Form of Credit Agreement.
5.1* Opinion and consent of Kirkland & Ellis.
10.1* Form of Stock Incentive Plan.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.2* Employment Agreement dated as of November 1996 by and between White Cap Industries,
Corp. (formerly White Cap Industries, Inc.) ("WCI") and Greg Grosch.
10.3* Employment Agreement dated as of February 1997 by and between WCI and Rick Gagnon.
10.4 Employment Agreement by and between WCI and Chris Lane.
10.5 Employment Agreement dated as of June 24, 1997 by and between WCI and Michael Monroe.
10.6 Employment Agreement dated as of June 24, 1997 by and between WCI and Albert Malatesta.
10.7* Transaction Advisory Agreement by and among the registrant, WCI and KRG Capital
Partners, LLC.
11.1* Earnings Per Share.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Burnett, Umphress & Kilgour.
23.3* Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
27.1* Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment.
(b) Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related
instructions, are inapplicable or not material, or the information called
for thereby is otherwise included in the financial statements and therefore
has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement;
II-3
<PAGE> 101
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement;
provided, however, that the undertakings set forth in paragraph (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
Offering of such securities at that time shall be deemed to be the initial bona
fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
In addition, the undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to be
the initial bona fide Offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Costa Mesa, State of
California on August 15, 1997.
WHITE CAP HOLDINGS, INC.
By: /s/ GREG GROSCH
-------------------------------
Name: Greg Grosch
Title: President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Greg Grosch and Chris Lane and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities (including his capacity as a director and/or officer of White Cap
Holdings, Inc.), to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and Power of Attorney have been signed on August 15,
1997, by the following persons in the capacities indicated with respect to White
Cap Holdings, Inc.:
<TABLE>
<CAPTION>
Signature Capacity
- --------- --------
<S> <C>
/s/ GREG GROSCH Chairman, Chief Executive Officer,
- ----------------------------------- President and Director
Greg Grosch (principal executive officer)
/s/ CHRIS LANE
- ----------------------------------- Chief Financial Officer and Director
Chris Lane (principal accounting and financial officer)
/s/ DAN TSUJIOKA
- ----------------------------------- Director
Dan Tsujioka
/s/ MARK M. KING
- ----------------------------------- Director
Mark M. King
/s/ JAMES A. JOHNSON
- ----------------------------------- Director
James A. Johnson
/s/ BRUCE RODGERS
- ----------------------------------- Director
Bruce Rodgers
/s/ CHARLES GWIRTSMAN
- ----------------------------------- Director
Charles Gwirtsman
/s/ CHARLES HAMILTON
- ----------------------------------- Director
Charles Hamilton
</TABLE>
II-5
<PAGE> 103
EXHIBIT INDEX
The following documents are the exhibits to this Registration Statement on
Form S-1. For convenient reference, each exhibit is listed according to the
Exhibit Table of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Restated Certificate of Incorporation of the registrant.
3.2* Form of Restated Bylaws of the registrant.
4.1* Form of certificate representing shares of Common Stock, $0.01 par value per share.
4.2* Form of Credit Agreement.
5.1* Opinion and consent of Kirkland & Ellis.
10.1* Form of Stock Incentive Plan.
10.2* Employment Agreement dated as of November 1996 by and between White Cap Industries,
Corp. (formerly White Cap Industries, Inc.) ("WCI") and Greg Grosch.
10.3* Employment Agreement dated as of February 1997 by and between WCI and Rick Gagnon.
10.4 Employment Agreement by and between WCI and Chris Lane.
10.5 Employment Agreement dated as of June 24, 1997 by and between WCI and Michael Monroe.
10.6 Employment Agreement dated as of June 24, 1997 by and between WCI and Albert Malatesta.
10.7* Transaction Advisory Agreement by and among the registrant, WCI and KRG Capital
Partners, LLC.
11.1* Earnings Per Share.
21.1 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Burnett, Umphress & Kilgour.
23.3* Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
27.1* Financial Data Schedule.
</TABLE>
- --------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
April 18, 1997 by and between WHITE CAP INDUSTRIES, INC., a California
corporation (the "Company" and "Employer"), and CHRIS LANE, an individual
("Executive"). White Cap Holdings, Inc., a Delaware corporation ("Holdings"),
is a party to this Agreement for purposes of Section 4 hereof.
R E C I T A L S
WHEREAS, the Company desires to retain the services of Executive, and
Executive desires to be employed by the Company, on the terms and subject to
the conditions set forth in this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Employment.
The Company shall employ Executive, and Executive accepts employment with
the Company, upon the terms and conditions set forth in this Agreement for the
period beginning on the date of this Agreement and ending as provided in Section
5 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as a Chief
Financial Officer and Senior Vice President of Finance of the Company and shall
have the normal and reasonable duties, responsibilities and authority
commensurate with such position as determined by the Board of Directors of the
Company, and as directed by the President of the Company. Executive's services
pursuant to this Agreement shall be performed primarily at the Company's
principal place of business in Orange County, California, and at such other
facilities of the Company as are necessary for the Executive to perform his
duties hereunder.
(b) Executive shall report to the President of the Company. Executive
shall devote Executive's reasonable best efforts and Executive's full business
time and attention (except for permitted vacation periods and reasonable
periods of illness or other incapacity and as provided hereinbelow) to the
business and affairs of the Company during the normal business hours of the
executive offices of the Company. Executive shall perform Executive's duties
and responsibilities to the best of Executive's abilities in a reasonably
diligent, trustworthy, businesslike and efficient manner. Notwithstanding the
foregoing, the Company acknowledges and agrees that Executive shall have the
right to: (i) oversee Executive's business of providing accounting, merger and
acquisition, and consulting services unrelated to the Company, and (ii)
participate in other passive investment activities (the "Permitted
Activities"), provided and only
-1-
<PAGE> 2
so long as Executive commits to and provides at least eighty percent (80%) of
his full business time and attention to the business and affairs of the
Company, and such Permitted Activities do not (a) interfere with, or impair,
Executive's discharge of his duties to the Company, and (b) are non-competing
and non-conflicting with the interests and business of the Company. For this
purpose, the determination of whether Executive is providing at least eighty
percent (80%) of his full business time and attention to the business and
affairs of the Company shall be determined by the President of the Company,
whose determination shall take into account the spirit and intent of this
section.
3. Base Salary and Benefits.
(a) For the period commencing on the Effective Date and continuing until
the earlier of the first anniversary of the date of this Agreement or the
closing of an underwritten public offering for shares of common stock of
Holdings, Executive's base salary shall be $240,000 per annum (the "Base
Salary"). Thereafter, Executive's Base Salary shall be $300,000 per annum.
Executive's Base Salary shall be payable in regular installments in accordance
with the Company's general payroll practices, including those related to
withholding for taxes, insurance and similar items. Executive's Base Salary
shall be increased on January 1 of each calendar year, commencing January 1,
1998, by at least the Adjustment Percentage (as defined below) of the Base
Salary applicable to the previous fiscal year. As used herein, "Adjustment
Percentage" means the sum of (x) the Consumer Price Index for the State of
California, published by the Bureau of Labor Statistics of the United States
Department of Labor for the immediately preceding fiscal year, plus (y) three
percent (3%). In addition, during the Employment Period, Executive shall be
entitled to participate in all of the Company's employee benefit, profit
sharing, stock option, incentive compensation, vacation and other perquisite
plans and programs ("Benefits") for which key employees of the Company are
generally eligible; provided, however, in no event shall Executive's benefits
be less than the Benefits described on Exhibit "A" hereto, which benefits shall
include annual dues for membership in a health club selected by Executive.
(b) During the Employment Period, the Company shall reimburse Executive
for all reasonable expenses incurred by Executive in the course of performing
Executive's duties under this Agreement which are consistent with the Company's
policies in effect from time to time with respect to travel, entertainment and
other business expenses, subject to the Company's requirements with respect to
reporting and documentation of such expenses.
(c) During the Employment Period, the Company shall pay for or reimburse
Executive for all fees and reasonable expenses of Executive's participation in
professional organizations, trade associations or other organizations
reasonably related to Executive's position and responsibilities as an officer
of the Company.
4. Restricted Stock Agreement.
Executive shall enter into a Restricted Stock Agreement with Holdings in a
form mutually agreeable to the parties, which Restricted Stock Agreement shall
be effective as of the date of this Agreement.
-2-
<PAGE> 3
5. Term.
(a) The Employment Period shall end on the fifth anniversary hereof
("Original Term") unless extended as set forth below; provided that (i) the
Employment Period shall terminate prior to the Original Term upon Executive's
death or permanent disability or incapacity; (ii) the Employment Period may be
terminated by the Company at any time prior to such date for Cause (as
hereinafter defined) or without Cause; and (iii) the Employment Period may be
terminated by Executive with Good Reason at any time or by his Voluntary
Resignation after the second anniversary hereof. For purposes of the foregoing,
Executive's permanent disability or incapacity shall be determined in
accordance with the Company's disability insurance policy, if such a policy is
then in effect, or if no such policy is then in effect, such permanent
disability or incapacity shall be determined by the Board of the Company in its
good-faith judgment based upon inability to perform the essential functions of
his position, with reasonable accommodation by the Company, for a period in
excess of 180 days during any period of 365 calendar days. For purposes of the
foregoing, Executive's "Voluntary Resignation" shall mean resignation by
Employee other than with Good Reason. The Employment Period shall automatically
extend for successive one-year periods (each, a "Supplemental Term") following
the fifth anniversary of this Agreement, unless either party delivers written
notice to the other party no later than one hundred twenty (120) days prior to
the end of the fifth anniversary of this Agreement or any successive
anniversary of this Agreement, as the case may be, of intent not to renew.
(b) If the Employment Period is terminated without Cause by the
Company or by Executive with Good Reason prior to the end of the Original Term
or a Supplemental Term, as the case may be, the Executive shall be entitled to
receive his Base Salary (determined in accordance with Section 3(a) during the
period that is the lesser of (A) twelve months, or (B) the remainder of the
Original Term or a Supplemental Term, as the case may be. If the Executive's
employment is terminated without Cause by the Company, the Company shall keep
in force existing health insurance covering the Executive and his dependents
for a period of six (6) months from the date of termination on the basis in
effect at the date of termination of the Executive's employment at the
Company's expense. If Executive's employment is a resignation with Good Reason,
the Company shall keep in force existing health insurance covering the
Executive and his dependents for a period of six (6) months from the date of
termination on the basis in effect at the date of Executive's employment.
(c) If the Employment Period is terminated by the Company for Cause
or is terminated as a result of Executive's Voluntary Resignation, Executive
shall be entitled to receive Executive's Base Salary only through the date of
termination.
(d) If the Employment Period is terminated as a result of permanent
disability, incapacity or death, Executive or Executive's representatives or
beneficiaries shall be entitled to receive (i) Executive's Base Salary through
the date of termination, plus six (6) months of Executive's then Base Salary.
If the Executive's employment is terminated by reason of Executive's death,
incapacity or disability, the Company shall keep in force existing health
insurance covering the Executive and his dependents for a period of six (6)
months from the date of termination on the basis in effect at the date of
termination of the Executive's employment.
-3-
<PAGE> 4
The Executive and his dependents shall also be entitled to any continuation of
coverage rights under any applicable law.
(e) The amount of Base Salary payable pursuant to Sections 5(b) and
(d) shall be payable in accordance with the Company's normal payroll procedures
applied to Executive as if he remained an employee of the Company.
(f) All of Executive's rights to any other employee benefit
hereunder (except as described above or pursuant to law) accruing after the
termination of the Employment Period, including, without limitation, any
unvested options, shall cease upon such termination. Upon termination of this
Agreement for any reason whatsoever, Executive shall have the right to receive
any accrued but unused vacation time and any and all benefits due Executive
pursuant to Section 3(a) as of termination.
(g) For purposes of this Agreement, "Cause" shall mean (1) the
conviction of any act constituting a felony under the laws of any state or of
the United States, or a crime involving moral turpitude that causes material
harm to Company and/or Holdings, (2) willful misconduct by Executive causing
material harm to company and/or Holdings, but only if Executive shall not have
discontinued such misconduct within 30 days after receiving written notice from
the Company describing the misconduct and stating that the Company will
consider the continuation of such misconduct as cause for termination of this
Agreement, or (3) substantial failure to perform the duties required by Section
2(a) hereof which is not cured within 180 days after receiving written notice
from the Company describing the failure to perform and stating that the Company
will consider the continuation of such failure to perform as cause for
termination of this Agreement. Resignation with "Good Reason" shall mean (x)
the assignment to Executive of duties substantially and materially inconsistent
with the position and nature of Executive's employment as set forth in Section
2(a) of this Agreement, (y) a reduction of compensation and benefits that
would substantially diminish the aggregate value of Executive's compensation
and benefits or (z) the failure by the Company to obtain from any successor an
agreement to assume and perform this Agreement.
(h) Nothing in this Agreement shall be deemed to limit or otherwise
abrogate the Company's obligation to make the payments under Section 5(b) if
Executive is terminated without Cause following a merger, consolidation or sale
of the Company or following a change in the control of the Company's
outstanding voting securities. A "change in control" shall be deemed to have
occurred if any person or any persons acting together that would constitute a
group (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) other than KRG Capital Partners, LLC, a Colorado limited liability
company ("KRG"), Grosch or their affiliates, or a group in which KRG, Grosch or
their affiliates are the controlling participants shall beneficially own at
least 50% of the aggregate voting power of all classes of capital stock
(including shares convertible into voting securities) entitled to vote on the
election of directors to the Board of the Company. Without limiting the
foregoing, any sale of substantially all of the Company's assets to another
entity without an express assumption by such entity of the Company's obligations
under this Agreement shall be deemed to constitute termination without Cause
pursuant to Section 5(b) above and the Company and Holdings shall be obligated
to make the specified payments pursuant to Section 5(b) upon consummation of
the transaction pursuant to which the Company or Holdings is selling
substantially all of its assets.
4
<PAGE> 5
6. Confidential Information
As used herein, the term "Confidential Information" shall mean all
information disclosed to Executive or known by Executive as a consequence of or
through Executive's employment by the Company and Holdings (including, without
limitation, information belonging to third parties or companies affiliated with
or related to the Company in the Company's and Holding's possession) not
generally known in the trade or industry in which such information is used,
about the Company's and Holding's products, processes, services, customers,
marketing strategy and business plans. Executive agrees that Executive shall not
disclose to any unauthorized person or use for Executive's own account any
Confidential Information without the prior written consent of the Board of the
Company or the President of the Company and Chief Executive Officer of
Holdings, unless and to the extent that the aforementioned matters become
generally known to and available for use by the public other than as a result
of Executive's acts or omissions to act. Executive shall deliver to the Company
and Holdings at the termination of the Employment Period, or at any other time
as the Company and/or Holdings may request, all memoranda, notes, plans,
records, computer tapes and software and other documents and data (and copies
thereof) relating to the Confidential Information or the business of the Company
and/or Holdings or any subsidiary which Executive may then possess or have under
Executive's control.
7. Non-Solicitation.
During the Original Term or during any Supplemental Term, Executive
shall not directly or indirectly through another entity (i) induce or attempt
to induce or encourage any employee of the Company and/or Holdings or any
subsidiary of the Company or Holdings to leave the employ of the Company and/or
Holdings or such subsidiary, (ii) solicit or hire any person who was an
employee of the Company and/or Holdings or any subsidiary of the Company and/or
Holdings at any time during the Employment Period if such person was employed
by the Company and/or Holdings or a subsidiary of the Company and/or Holdings
at any time during the one-year period prior to such hiring, or (iii) induce or
attempt to induce any customer, supplier, licensee or other business relation
of the Company and/or Holdings or any subsidiary of the Company and/or Holdings
to withdraw, curtail or cease doing business with the Company and/or Holdings
or such subsidiary of the Company and/or Holdings.
8. Enforcement.
If, at the time of enforcement of Sections 6 and 7 of this Agreement, a
court holds that the restrictions stated herein are unreasonable under
circumstances then existing, the parties hereto agree that the maximum period
or scope reasonable under such circumstances shall be substituted for the
stated period or scope. Because Executive's services are unique and because
Executive has access to Confidential Information, the parties hereto agree that
money damages would be an inadequate remedy for any breach of this Agreement.
Therefore, in the event a breach or threatened breach of this Agreement, the
Company and/or Holdings or their successors or assigns may, in addition to
other rights and remedies existing in their favor, apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce, or prevent any violations of, the provisions
hereof (without posting a bond or other security).
-5-
<PAGE> 6
9. Representations.
(a) Executive hereby represents and warrants to the Company and
Holdings that (i) the execution, delivery and performance of this Agreement by
Executive does not and will not conflict with, breach, violate or cause a
default under any contract, agreement, instrument, order, judgment or decree
to which Executive is a party or by which Executive is bound, (ii) Executive
is not a party to or bound by any employment agreement, noncompete agreement or
confidentiality agreement with any other person or entity, and (iii) upon the
execution and delivery of this Agreement by the Company and Holdings, this
Agreement shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms.
(b) Company hereby represents and warrants to the Executive that (i)
the execution, delivery and performance of this Agreement by the Company does
not and will not conflict with, breach, violate or cause a default under any
contract, agreement, instrument, order, judgment or decree to which the Company
is a party or by which the Company is bound, and (ii) upon the execution and
delivery of this Agreement by the Executive, this Agreement shall be the valid
and binding obligation of the Company, enforceable in accordance with its terms.
(c) Holdings hereby represents and warrants to the Executive that
(i) the execution, delivery and performance of this Agreement by Holdings does
not and will not conflict with, breach, violate or cause a default under any
contract, agreement, instrument, order, judgment or decree to which Holdings is
a party or by which Holdings is bound, and (ii) upon the execution and delivery
of this Agreement by the Executive, this Agreement shall be the valid and
binding obligation of Holdings, enforceable in accordance with its terms.
10. Successors and Assigns.
This Agreement is intended to bind and inure to the benefit of and be
enforceable by Executive, the Company and Holdings and their respective heirs,
successors and assigns, except that Executive may not assign Executive's rights
or delegate Executive's obligations hereunder without the prior written consent
of the Company. Without limiting the foregoing, the Company and Holdings may
not, without Executive's prior written consent, assign rights or delegate its
obligations under this Agreement.
11. Survival.
Sections 6, 7, 8 and 9 shall survive and continue in full force in
accordance with their terms, notwithstanding any termination of the Employment
Period.
12. Notices.
Any notice provided for in this Agreement shall be in writing and shall
be either personally delivered by nationally recognized overnight courier
service, or mailed by certified mail, return receipt requested, to the
recipient at the address indicated below.
-6-
<PAGE> 7
If to Executive: Chris Lane
19241 Willowbrook Lane
Trabuco Canyon, CA 92679
If to the Company: White Cap Industries, Inc.
c/o KR Capital Corporation
370 17th Street, Suite 2300
Denver, CO 80202
If to Holdings: White Cap Holdings, Inc.
c/o KR Capital Corporation
370 17th Street, Suite 2300
Denver, CO 80202
or such other address or to the attention of such person as the recipient party
shall leave specified by prior written notice to the sending party. Any notice
under this Agreement will be deemed to have been given when so delivered or
mailed. Any Notice of Termination of Executive's employment by the Company
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.
13. Severability.
Whenever possible, each provision of this Agreement will be interpreted
in such manner as to be elective and valid under applicable law but if any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or any other jurisdiction, but this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
14. Complete Agreement.
This Agreement, together with the other agreements referred to herein,
embodies the complete agreement and understanding among the parties and
supersedes and preempts any prior understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
15. Counterparts.
This Agreement may be executed in separate counterparts, each of which
is deemed to be an original and all of which taken together constitute one and
the same agreement.
-7-
<PAGE> 8
16. Choice of Law.
This Agreement will be governed by the internal law and not the laws of
conflicts, of the State of California.
17. Agreement to Arbitrate: Expenses.
Except for the enforcement of any covenant herein that would be the
subject of specific performance contemplated by Section 8, any controversy or
claim arising out of or relating to this Agreement or the formation, breach or
interpretation hereof, will be settled by arbitration before one arbitrator in
accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association in Orange County, California. Judgment
upon the award rendered by the arbitration may be entered and enforced in the
court with jurisdiction over the appropriate party. All controversies not
subject to arbitration or contesting any arbitration will be litigated in the
State of California, Orange County Superior Court or a federal court in the
Central District of California (and each of the parties hereto hereby consents
to the exclusive jurisdiction of such courts and waives any objections
thereto). The expenses (including reasonable attorneys' fees) incurred by the
prevailing party in any arbitration or litigation related to this Agreement
shall be borne by the non-prevailing party in such arbitration or litigation.
18. Amendment and Waiver.
The provisions of this Agreement may be amended or waived only with the
prior written consent of the Company and Holdings and Executive, and no course
of conduct or failure or delay in enforcing the provisions of this Agreement
shall affect the validity, binding effect or enforceability of this Agreement.
19. Nondisclosure and Invention and Copyright Assignment Agreement.
Executive's employment also is subject to the requirement that
Executive sign, observe and agree to be bound, both during and after
Executive's employment, by the provisions of the Employer's Nondisclosure and
Invention and Copyright Assignment Agreement, a copy of which is attached as
Exhibit B. Executive's execution of the Employer's Nondisclosure and Invention
and Copyright Assignment Agreement is an express condition precedent to the
Company's obligations under this Agreement. Executive also agrees to execute,
deliver and perform, during the term of his employment with Employee and
thereafter, any other reasonable confidentiality and nondisclosure agreements
concerning the Company and any of their affiliates which the Employer
promulgates for other key employees and executives of the Company.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COMPANY: WHITE CAP INDUSTRIES, INC.,
a California corporation
By: /s/ GREG GROSCH
---------------------------------
Greg Grosch, President
EXECUTIVE: /s/ CHRIS LANE
---------------------------------
Chris Lane
FOR PURPOSES OF SECTION 4 ONLY:
HOLDINGS: WHITE CAP HOLDINGS, INC.,
a Delaware corporation
By: /s/ GREG GROSCH
---------------------------------
Greg Grosch
Chief Executive Officer
-9-
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Agreement") is entered into as of June 24,
1997 by and between White Cap Industries, Inc., a California corporation (the
"Company"), and Michael Monroe, an individual ("Executive").
RECITALS
WHEREAS, the Company desires to retain the services of Executive, and
Executive desires to be employed by the Company, on the terms and subject to the
conditions set forth in this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement for the period beginning on the date of this Agreement and ending as
provided in Section 5 hereof (the "Employment Period").
2. Position and Duties.
a. During the Employment Period, Executive shall serve as a Regional
Vice President, Sales of the Company and shall have the normal and reasonable
duties, responsibilities and authority commensurate with such position as
determined by the Board of Directors of the Company and as directed by the
President of the Company. Executive's services are more fully described on the
attached Exhibit A. Executive's services pursuant to this Agreement shall be
performed primarily at such facilities of the Company located in the greater
San Francisco metropolitan area as are necessary for the Executive to perform
his duties hereunder.
b. Executive shall report to the President and Executive Vice
Presidents of the Company. Executive shall devote Executive's reasonable best
effort and Executive's full business time and attention (except for permitted
vacations periods and reasonable periods of illness or other incapacity) to the
business and affairs of the Company during the normal business hours of the
executive offices of the Company. Executive shall perform Executive's duties
and responsibilities to the best of Executive's abilities in a reasonably
diligent, trustworthy, businesslike and efficient manner. Executive shall also
comply in all
<PAGE> 2
material respects with the lawful rules, policies and procedures of the
Company, copies of which will be provided to Executive by the Company.
3. Base Salary and Benefits.
a. During the Employment Period, Executive's base salary shall be
$180,000 per annum (the "Base Salary"), which salary shall be payable in
regular installments in accordance with the Company's general payroll
practices, including those related to withholding for taxes, insurance and
similar items. Executive's Base Salary shall be increased on January 1 of each
calendar year, commencing January 1, 1998, by the Adjustment Percentage (as
defined below) of the Base Salary applicable to the previous fiscal year. As
used herein, "Adjustment Percentage" means the sum of (x) the Consumer Price
Index for the State of California, published by the Bureau of Labor Statistics
of the United States Department of Labor for the immediately preceding fiscal
year, plus (y) three percent (3%). In addition, during the Employment Period,
Executive shall be entitled to participate in all of the Company's employee
benefit, profit sharing, stock option, incentive compensation, vacation and
other perquisite plans and programs ("Benefits") for which key employees of the
Company are generally eligible.
b. During the Employment Period, the Company shall reimburse
Executive for all reasonable expenses incurred by Executive in the course of
performing Executive's duties under this Agreement which are consistent with
the Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.
c. During the Employment Period, the Company shall pay for or
reimburse Executive for all fees and reasonable expenses of Executive's
participation in professional organizations, trade associations or other
organizations reasonably related to Executive's position and responsibilities
as an officer of the Company.
4. Bonus. Executive shall be entitled to receive an annual bonus at the
end of each full fiscal year of employment by the Company, payable within 95
days following the end of such fiscal year, equal to $10,000 for each 1% point
increase in "EBITDA" (as defined below) above 5% for the subject fiscal year as
compared to EBITDA for the immediately preceding fiscal year. For purposes of
the foregoing, any fractional percentage point of EBITDA growth shall be
multiplied by $10,000 to determine the bonus allocable to such fractional
percentage point. For purposes of the foregoing, "EBITDA" shall have the
meaning set forth in the Certificate of Designation, Preferences and Rights for
Series B Convertible Preferred Stock of White Cap Holdings, Inc., a Delaware
corporation, as in effect on the date of this Agreement.
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<PAGE> 3
5. Term.
a. The Employment Period shall end on the third
anniversary hereof ("Original Term") unless extended as set forth below;
provided that (i) the Employment Period shall terminate prior to the Original
Term upon Executive's death or permanent disability or incapacity; (ii) the
Employment Period may be terminated by the Company at any time prior to such
date for Cause (as hereinafter defined) or without Cause; and (iii) the
Employment Period may be terminated by Executive for Good Reason at any time or
by his Voluntary Resignation after the second anniversary hereof. For purposes
of the foregoing, Executive's permanent disability or incapacity shall be
determined in accordance with the Company's disability insurance policy, if
such a policy is then in effect, or if no such policy is then in effect, such
permanent disability or incapacity shall be determined by the Board in its good
faith judgment based upon inability to perform the essential functions of his
position, with reasonable accommodation by the Company, for a period in excess
of 90 days during any period of 180 calendar days. For purposes of the
foregoing, Executive's "Voluntary Resignation" shall mean resignation by
Employee other than for Good Reason. The Employment Period shall automatically
extend for successive one year periods (each, a "Supplemental Term") following
the third anniversary of this Agreement unless either party delivers written
notice to the other party no later than sixty (60) days prior to the end of the
third anniversary of this Agreement or any successive anniversary of this
Agreement, as the case may be, of intent not to renew.
b. If the Employment Period is terminated without Cause by
the Company or by Executive with Good Reason prior to the end of the Original
Term or a Supplemental Term, as the case may be, the Executive shall be
entitled to receive (i) his Base Salary (determined in accordance with Section
3(a)) during the period that is the lesser of (A) twelve months, or (B) the
remainder of the Original Term or a Supplemental Term, as the case may be, and
(ii) a prorated portion of any bonus payable pursuant to Section 4 earned
through the date of such termination for the calendar year in which the
termination occurs.
c. If the Employment Period is terminated by the Company
for Cause or is terminated as a result of Executive's Voluntary Resignation,
(i) Executive shall be entitled to receive Executive's Base Salary only through
the date of termination, and (ii) Executive shall not be entitled to any
Incentive Compensation payment not paid as of the date of termination.
d. If the Employment Period is terminated as a result of
permanent disability, incapacity or death, Executive or Executive's
representatives or beneficiaries shall be entitled to receive (i) Executive's
Base Salary through the date of termination, plus twelve months of Executive's
then Base Salary, and (ii) a prorated portion of any bonus payable pursuant to
Section 4 earned through the date
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<PAGE> 4
of such termination for the calendar year in which the termination occurs. If
the Executive's employment is terminated by reason of Executive's death or
disability, the Company shall keep in force existing health insurance covering
the Executive and his dependents for a period of 18 months from the date of
termination on the basis in effect at the date of termination of the
Executive's employment. The Executive and his dependents shall also be entitled
to any continuation of coverage rights under any applicable law.
e. The amount of Base Salary payable pursuant to Sections 5(b) and
(c) shall be payable in accordance with the Company's normal payroll procedures
applied to Executive as if he remained an employee of the Company. The amount
of any bonus payable pursuant to Sections 5(b) and (c) shall be paid in
accordance with the terms of Section 4.
f. All of Executive's rights to any other employee benefit
hereunder (except as described above or pursuant to law) accruing after the
termination of the employment Period shall cease upon such termination. Upon
termination of this Agreement for any reason whatsoever, Executive shall have
the right to receive any accrued but unused vacation time and any and all
benefits due Executive pursuant to Section 3(a) as of termination.
g. For purposes of the Agreement, "Cause" shall mean (1) the
conviction of any act constituting a felony under the laws of any state or of
the United States, or a crime involving moral turpitude that causes material
harm to Company, (2) willful misconduct by Executive causing material harm to
Company, but only if Executive shall not have discontinued such misconduct
within 10 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement, or (3) substantial
failure to perform the duties required by Section 2(a) hereof which is not
cured within 30 days after receiving written notice from the Company describing
the failure to perform and stating that the Company will consider the
continuation of such failure to perform as cause for termination of this
Agreement. Resignation with "Good Reason" shall mean (x) the assignment to
Executive of duties substantially and materially inconsistent with the position
and nature of Executive's employment as set forth in Section 2(a) of this
Agreement, (y) a reduction of compensation and benefits that would
substantially diminish the aggregate value of Executive's compensation and
benefits without Executive's consent, and (z) the failure by the Company to
obtain from any successor an agreement to assume and perform this Agreement.
6. Confidential Information. As used herein, the term
"Confidential Information" shall mean all information disclosed to Executive
or known by Executive as a consequence of or through Executive's employment by
the Company (including, without limitation, information belonging to third
parties or companies
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<PAGE> 5
affiliated with or related to the Company in the Company's possession) not
generally known in the trade or industry in which such information is used,
about the Company's products, processes, services, customers, marketing
strategy and business plans. Executive agrees that Executive shall not disclose
to any unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions
to act. Executive shall deliver to the Company at the termination of the
Employment Period, or at any other time as the Company may request, all
memoranda, notes, plans, records, computer tapes and software and other
documents and data (and copies thereof) relating to the Confidential
Information or the business of the Company or any subsidiary which Executive
may then possess or have under Executive's control.
7. Non-solicitation. During the five-year period commencing on the
date of this Agreement or during any Supplemental Term, Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any subsidiary to leave the employ of the
Company or such subsidiary, (ii) hire any person who was an employee of the
Company or any subsidiary of the Company at any time during the Employment
Period if such person was employed by the Company or a subsidiary of the
Company at any time during the one-year period prior to such hiring, or (iii)
induce or attempt to induce any customer, supplier, licensee or other business
relations of the Company or any subsidiary to withdraw, curtail or cease doing
business with the Company or such subsidiary.
8. Enforcement. If, at the time of enforcement of Sections 6 and 7
of this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum period or scope reasonable under such circumstances shall be
substituted for the stated period or scope. Because Executive's services are
unique and because Executive has access to Confidential Information, the parties
hereto agree that money damages would be an inadequate remedy for any breach
of this Agreement. Therefore, in the event a breach or threatened breach of this
Agreement, the Company or its successors or assigns may, in addition to other
rights and remedies existing in their favor, apply to any court of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce, or prevent any violations of, the provisions hereof (without posting
a bond or other security).
9. Intellectual Property.
(a) Disclosure and Assignment. Executive shall promptly disclose in
writing to the Company complete information concerning each and every
invention, discovery, improvement, device, design, apparatus, practice, process,
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<PAGE> 6
method or product, whether patentable or not, made, developed, perfected,
devised, conceived or first reduced to practice by Executive, either solely
or collaboration with others, during the term of this Agreement, whether or not
during regular working hours, relating either directly or indirectly to the
business, products, practices or techniques of the Company (hereinafter
referred to as "Developments"). Executive, to the extent that he has the legal
right to do so, hereby acknowledges that any and all of such Developments are
the property of the Company and hereby assigns and agrees to assign to the
Company any and all of Executive's right, title and interest in and to any
and all such Developments.
(b) Future Developments. As to any future Developments made by
Executive which relate to the business, products or practices of the Company
and which are first conceived or reduced to practice during the term of this
Agreement, but which are claimed for any reason to belong to an entity or
person other than the Company, Executive shall promptly disclose the same in
writing to the Company and shall not disclose the same to others if the
Company, within 20 days thereafter, shall claim ownership of such Developments
under the terms of this Agreement. If the Company makes such claim, Executive
agrees that, insofar as the rights (if any) of Executive are involved, it shall
be settled by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association in Orange County, California. If the
Company makes no such claim, Executive hereby acknowledges that the Company has
made no promise to receive and hold in confidence any such information
disclosed by Executive.
(c) Limitation on Sections 9(a) and 9(b). The provisions of Sections
9(a) and 9(b) shall not apply to any Development meeting the following
conditions:
(i) such Development was developed entirely on Executive's own
time; and
(ii) such Development was made without the use of any Company
equipment, supplies, facility, or trade secret information; and
(iii) such Development does not relate (A) directly to the
business of the Company, or (B) to the Company's actual or demonstrably
anticipated research or development; and
(iv) such Development does not result from any work performed by
Executive for the Company.
(d) Assistance of Executive. Upon request and without further
compensation therefor, but at no expense to Executive, and whether during the
term of this Agreement or thereafter, Executive shall do all lawful acts,
including, but not limited to, the execution of papers and lawful oaths and the
giving of
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<PAGE> 7
testimony, that in the opinion of the Company, its successors and assigns, may
be necessary or desirable in obtaining, sustaining, reissuing, extending and
enforcing United States and foreign Letters Patent, including, but not limited
to, design patents, on any and all of such Developments, and for perfecting,
affirming and recording the Company's complete ownership and title thereto, and
to cooperate otherwise in all proceedings and matters relating thereto.
10. Representations.
a. Executive hereby represents and warrants to the Company that
(i) the execution, delivery and performance of this Agreement by Executive does
not and will not conflict with, breach, violate or cause a default under any
contract, agreement, instrument, order, judgment or decree to which Executive is
a party or by which Executive is bound, (ii) Executive is not a party to or
bound by any employment agreement, noncompete agreement or confidentiality
agreement with any other person or entity, and (iii) upon the execution and
delivery of this Agreement by the Company, this Agreement shall be the valid and
binding obligation of Executive, enforceable in accordance with its terms.
b. Company hereby represents and warrants to the Executive that
(i) the execution, delivery and performance of this Agreement by the Company
does not and will not conflict with, breach, violate or cause a default under
any contract, agreement, instrument, order, judgment or decree to which
Executive is a party or by which Executive is bound, and (ii) upon the execution
and delivery of this Agreement by the Executive, this Agreement shall be the
valid and binding obligation of the Company, enforceable in accordance with its
terms.
11. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company. Without limiting the foregoing, the
Company may not, without Executive's prior written consent, assign rights or
delegate its obligations under this Agreement.
12. Survival. Sections 6, 7, 8, 9 and 10 shall survive and continue
in full force in accordance with their terms, notwithstanding any termination of
the Employment Period.
13. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered by nationally recognized
overnight courier service, or mailed by certified mail, return receipt
requested, to the recipient at the address indicated below.
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<PAGE> 8
Notices to Executive:
Michael Monroe
c/o Viking Distributing Co., Inc.
1225 6th Street
San Francisco, California 94107
Notices to the Company:
White Cap Industries, Inc.
3120 Airway Avenue
Costa Mesa, CA 92626
Attn: President
or such other address or to the attention of such person as the recipient party
shall leave specified by prior written notice to the sending party. Any notice
under this Agreement will be deemed to have been given when so delivered or
mailed. Any Notice of Termination of Executive's employment by the Company shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.
14. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be elective and valid under
applicable law but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
15. Complete Agreement. This Agreement, together with the other
agreements referred to in the Recitals above, embodies the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
16. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
17. Choice of Law. This Agreement will be governed by the internal
law, and not the laws of conflicts, of the State of California.
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<PAGE> 9
18. Agreement to Arbitrate; Expenses. Except for the enforcement of
any covenant herein that would be the subject of specific performance
contemplated by Section 8, any controversy or claim arising out of or relating
to this Agreement or the formation, breach or interpretation hereof, will be
settled by arbitration before one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in Orange County,
California. Judgment upon the award rendered by the arbitration may be entered
and enforced in the court with jurisdiction over the appropriate party. All
controversies not subject to arbitration or contesting any arbitration will be
litigated in the State of California, Orange County Superior Court or a federal
court in the Central District of California (and each of the parties hereto
hereby consent to the exclusive jurisdiction of such courts and waive any
objections thereto). The expenses (including reasonable attorneys' fees)
incurred by the prevailing party in any arbitration or litigation related to
this Agreement shall be borne by the non-prevailing party in such arbitration or
litigation.
19. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
WHITE CAP INDUSTRIES, INC.
/s/ GREG GROSCH
-------------------
By: Greg Grosch
Its: President
/s/ MICHAEL MONROE
------------------
Michael Monroe
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<PAGE> 10
EXHIBIT A
Job Title: Regional Vice President, Sales Manager
Department: Sales/Marketing
Reports To: Vice President - Sales
FLSA Status: Exempt
Prepared Date: 6/97
SUMMARY: Manages sales activity of Northern California Region by performing the
duties set forth below. This region is comprised of Northern California (AY,
Stop Supply and Viking) and is based out of San Francisco, California.
SUPERVISORY RESPONSIBILITIES
1. Supervises the activities of all District Sales Managers in the region.
2. Performs regularly scheduled performance evaluations for all direct
reports.
3. Assures that regularly scheduled performance evaluations are conducted
for all sales personnel in the region.
4. Implements and applies White Cap Human Resource Policies and Procedures
in a consistent manner designed to develop and maintain positive
employee relations in the region.
5. Ability to review all revisions to company policy and procedures that
will affect the Northern California Region.
ESSENTIAL DUTIES AND RESPONSIBILITIES:
1. Helps with setting sales/profitability goals for Northern California
regional sales force.
2. Implements White Cap commission program for sales force.
3. Helps establish compensation (bonuses, perks, spiffs) for special
promotions, campaigns, target market groups, etc.
4. Directs staffing, training, and performance evaluations to develop and
manage the sales program.
<PAGE> 11
5. Coordinates sales and promotional activities in the Northern California
branches.
6. Implements approved sales distribution strategy including territories,
quotas, and goals, and advises dealers, distributors, and clients
concerning sales and advertising techniques.
7. Assigns sales territory and accounts to sales personnel and implements
house account sales/marketing program with prior input from Vice
President of Sales.
8. Analyzes sales statistics to help formulate policy and to assist outside
sales people in promoting sales.
9. Reviews market analyses to determine customer needs, volume potential,
gross margin return, price schedules, discount rates and develops
campaigns to achieve goals of company.
10. Represents company at trade association meetings to promote products and
services.
11. Ensures coordination between outside, inside and counter sales.
12. Analyzes and controls expenditures for the regions to conform to
budgetary requirements.
13. Assists other departments within the organization to prepare manuals and
technical publications.
14. Prepares periodic sales reports that indicate sales volume and potential
sales.
15. Within the assigned region, implements and maintains programs or systems
designed to gather and analyze customer feedback. Analyzes that feedback
for the purpose of assuring the delivery of the highest level of
customer service possible.
16. Develops a relationship with the top 10 customers in the region.
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of June
24, 1997 by and between White Cap Industries, Inc., a California corporation
(the "Company"), and Albert Malatesta, an individual ("Executive").
RECITALS
WHEREAS, the Company desires to retain the services of Executive, and
Executive desires to be employed by the Company, on the terms and subject to
the conditions set forth in this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date of this Agreement and
ending as provided in Section 5 hereof (the "Employment Period").
2. Position and Duties.
a. During the Employment Period, Executive shall serve as
a Regional Vice President, Branch Operations of the Company and shall have the
normal and reasonable duties, responsibilities and authority commensurate with
such position as determined by the Board of Directors of the Company and as
directed by the President of the Company. Executive's services are more fully
described on the attached Exhibit A. Executive's services pursuant to this
Agreement shall be performed primarily at such facilities of the Company
located in the greater San Francisco metropolitan area as are necessary for the
Executive to perform his duties hereunder.
b. Executive shall report to the President, Executive Vice
President, and National Sales Manager of the Company. Executive shall devote
Executive's reasonable best efforts and Executive's full business time and
attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity) to the business and affairs of the Company during
the normal business hours of the executive offices of the Company. Executive
shall perform Executive's duties and responsibilities to the best of
Executive's abilities in a reasonably diligent, trustworthy, businesslike and
efficient manner. Executive shall also comply in all
<PAGE> 2
material respects with the lawful rules, policies and procedures of the
Company, copies of which will be provided to Executive by the Company.
3. Base Salary and Benefits.
a. During the Employment Period, Executive's base salary
shall be $180,000 per annum (the "Base Salary"), which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices, including those related to withholding for taxes, insurance and
similar items. Executive's Base Salary shall be increased on January 1 of each
calendar year, commencing January 1, 1998, by the Adjustment Percentage (as
defined below) of the Base Salary applicable to the previous fiscal year. As
used herein, "Adjustment Percentage" means the sum of (x) the Consumer Price
Index for the State of California, published by the Bureau of Labor Statistics
of the United States Department of Labor for the immediately preceding fiscal
year, plus (y) three percent (3%). In addition, during the Employment Period,
Executive shall be entitled to participate in all of the Company's employee
benefit, profit sharing, stock option, incentive compensation, vacation and
other perquisite plans and programs ("Benefits") for which key employees of the
Company are generally eligible.
b. During the Employment Period, the Company shall
reimburse Executive for all reasonable expenses incurred by Executive in the
course of performing Executive's duties under this Agreement which are
consistent with the Company's policies in effect from time to time with respect
to travel, entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.
c. During the Employment Period, the Company shall pay for
or reimburse Executive for all fees and reasonable expenses of Executive's
participation in professional organizations, trade associations or other
organizations reasonably related to Executive's position and responsibilities
as an officer of the Company.
4. Bonus. Executive shall be entitled to receive an annual bonus
at the end of each full fiscal year of employment by the Company, payable
within 95 days following the end of such fiscal year, equal to $10,000 for each
1% point increase in "EBITDA" (as defined below) above 5% for the subject
fiscal year as compared to EBITDA for the immediately preceding fiscal year.
For purposes of the foregoing, any fractional percentage point of EBITDA growth
shall be multiplied by $10,000 to determine the bonus allocable to such
fractional percentage point. For purposes of the foregoing, "EBITDA" shall have
the meaning set forth in the Certificate of Designation, Preferences and Rights
for Series B Convertible Preferred Stock of White Cap Holdings, Inc., a
Delaware corporation, as in effect on the date of this Agreement.
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<PAGE> 3
5. Term.
a. The Employment Period shall end on the third
anniversary hereof ("Original Term") unless extended as set forth below;
provided that (i) the Employment Period shall terminate prior to the Original
Term upon Executive's death or permanent disability or incapacity; (ii) the
Employment Period may be terminated by the Company at any time prior to such
date for Cause (as hereinafter defined) or without Cause; and (iii) the
employment Period may be terminated by Executive for Good Reason at any time or
by his Voluntary Resignation after the second anniversary hereof. For purposes
of the foregoing, Executive's permanent disability or incapacity shall be
determined in accordance with the Company's disability insurance policy, if
such a policy is then in effect, or if no such policy is then in effect, such
permanent disability or incapacity shall be determined by the Board in its good
faith judgment based upon inability to perform the essential functions of his
position, with reasonable accommodation by the Company, for a period in excess
of 90 days during any period of 180 calendar days. For purposes of the
foregoing, Executive's "Voluntary Resignation" shall mean resignation by
Employee other than for Good Reason. The Employment Period shall automatically
extend for successive one year periods (each, a "Supplemental Term") following
the third anniversary of this Agreement unless either party delivers written
notice to the other party no later than sixty (60) days prior to the end of the
third anniversary of this Agreement or any successive anniversary of this
Agreement, as the case may be, of intent not to renew.
b. If the Employment Period is terminated without Cause by
the Company or by Executive with Good Reason prior to the end of the Original
Term or a Supplemental Term, as the case may be, the Executive shall be
entitled to receive (i) his Base Salary (determined in accordance with Section
3(a)) during the period that is the lesser of (A) twelve months, or (B) the
remainder of the Original Term or a Supplemental Term, as the case may be, and
(ii) a prorated portion of any bonus payable pursuant to Section 4 earned
through the date of such termination for the calendar year in which the
termination occurs.
c. If the Employment Period is terminated by the Company
for Cause or is terminated as a result of Executive's Voluntary Resignation,
(i) Executive shall be entitled to receive Executive's Base Salary only through
the date of termination, and (ii) Executive shall not be entitled to any
Incentive Compensation payment not paid as of the date of termination.
d. If the Employment Period is terminated as a result of
permanent disability, incapacity or death, Executive or Executive's
representatives or beneficiaries shall be entitled to receive (i) Executive's
Base Salary through the date of termination, plus twelve months of Executive's
then Base Salary, and (ii) a prorated portion of any bonus payable pursuant to
Section 4 earned through the date
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<PAGE> 4
of such termination for the calendar year in which the termination occurs. If
the Executive's employment is terminated by reason of Executive's death or
disability, the Company shall keep in force existing health insurance covering
the Executive and his dependents for a period of 18 months from the date of
termination on the basis in effect at the date of termination of the
Executive's employment. The Executive and his dependents shall also be
entitled to any continuation of coverage rights under any applicable law.
e. The amount of Base Salary payable pursuant to Sections
5(b) and (c) shall be payable in accordance with the company's normal payroll
procedures applied to Executive as if he remained and employee of the Company.
The amount of any bonus payable pursuant to Sections 5(b) and (c) shall be paid
in accordance with the terms of Section 4.
f. All of Executive's rights to any other employee benefit
hereunder (except as described above or pursuant to law) accruing after the
termination of the Employment Period shall cease upon such termination. Upon
termination of this Agreement for any reason whatsoever, Executive shall have
the right to receive any accrued but unused vacation time and any and all
benefits due Executive pursuant to Section 3(a) as of termination.
g. For purposes of the Agreement, "Cause" shall mean (1)
the conviction of any act constituting a felony under the laws of any state or
of the United States, or a crime involving moral turpitude that causes
material harm to Company, (2) willful misconduct by Executive causing material
harm to Company but only if Executive shall not have discontinued such
misconduct within 10 days after receiving written notice from the company
describing the misconduct and stating that the Company will consider the
continuation of such misconduct as cause for termination of this Agreement, or
(3) substantial failure to perform the duties required by Section 2(a) hereof
which is not cured within 30 days after receiving written notice from the
Company describing the failure to perform and stating that the Company will
consider the continuation of such failure to perform as cause for termination
of this Agreement. Resignation with "Good Reason" shall mean (x) the
assignment to Executive of duties substantially and materially inconsistent
with the position and nature of Executive's employment as set forth in Section
2(a) of this Agreement, (y) a reduction of compensation and benefits that would
substantially diminish the aggregate value of Executive's compensation and
benefits without Executive's consent, and (z) the failure by the Company to
obtain from any successor an agreement to assume and perform this Agreement.
6. Confidential Information. As used herein, the term
"Confidential Information" shall mean all information disclosed to Executive or
known by Executive as a consequence of or through Executive's employment by the
Company (including, without limitation, information belonging to third parties
or companies
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<PAGE> 5
affiliated with or related to the Company in the Company's possession) not
generally known in the trade or industry in which such information is used,
about the Company's products, processes, services, customers, marketing
strategy and business plans. Executive agrees that Executive shall not disclose
to any unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions
to act. Executive shall deliver to the Company at the termination of the
Employment Period, or at any other time as the Company may request, all
memoranda, notes, plans, records, computer tapes and software and other
documents and data (and copies thereof) relating to the Confidential
Information or the business of the Company or any subsidiary which Executive
may then possess or have under Executive's control.
7. Non-Solicitation. During the five-year period commencing on the
date of this Agreement or during any Supplemental Term, Executive shall not
directly or indirectly through another entity (i) induce or attempt to induce
any employee of the Company or any subsidiary to leave the employ of the
Company or such subsidiary, (ii) hire any person who was an employee of the
Company or any subsidiary of the Company at any time during the Employment
Period if such person was employed by the Company or a subsidiary of the
Company at any time during the one-year period prior to such hiring, or (iii)
induce or attempt to induce any customer, supplier, licensee or other business
relation of the Company or any subsidiary to withdraw, curtail or cease doing
business with the Company or such subsidiary.
8. Enforcement. If, at the time of enforcement of Sections 6 and 7 of
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum period or scope reasonable under such circumstances shall be
substituted for the stated period or scope. Because Executive's services are
unique and because Executive has access to Confidential Information, the
parties hereto agree that money damages would be an inadequate remedy for any
breach of this Agreement. Therefore, in the event a breach or threatened breach
of this Agreement, the Company or its successors or assigns may, in addition to
other rights and remedies existing in their favor, apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce, or prevent any violations of, the provisions hereof
(without posting a bond or other security).
9. Intellectual Property.
(a) Disclosure and Assignment. Executive shall promptly disclose
in writing to the Company complete information concerning each and every
invention, discovery, improvement, device, design, apparatus, practice, process,
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<PAGE> 6
method or product, whether patentable or not, made, developed, perfected,
devised, conceived or first reduced to practice by Executive, either solely or
in collaboration with others, during the term of this Agreement, whether or not
during regular working hours, relating either directly or indirectly to the
business, products, practices or techniques of the Company (hereinafter
referred to as "Developments"). Executive, to the extent that he has the legal
right to do so, hereby acknowledges that any and all of such Developments are
the property of the Company and hereby assigns and agrees to assign to the
Company any and all of Executive's right, title and interest in and to any and
all of such Developments.
(b) Future Developments. As to any future Developments
made by Executive which relate to the business, products or practices of the
Company and which are first conceived or reduced to practice during the term
of this Agreement, but which are claimed for any reason to belong to an entity
or person other than the Company, Executive shall promptly disclose the same in
writing to the Company and shall not disclose the same to others if the
Company, within 20 days thereafter, shall claim ownership of such Developments
under the terms of this Agreement. If the Company makes such claim, Executive
agrees that, insofar as the rights (if any) of Executive are involved, it shall
be settled by arbitration in accordance with the Commercial Arbitration Rules
of the American Arbitration Association in Orange County, California. If the
Company makes no such claim, Executive hereby acknowledges that the company has
made no promise to receive and hold in confidence any such information
disclosed by Executive.
(c) Limitation on Sections 9(a) and 9(b). The provisions
of Sections 9(a) and 9(b) shall not apply to any Development meeting the
following conditions:
(i) such Development was developed entirely on
Executive's own time; and
(ii) such Development was made without the use of any
Company equipment, supplies, facility or trade secret information; and
(iii) such Development does not relate (A) directly to
the business of the company, or (B) to the Company's actual or
demonstrably anticipated research or development; and
(iv) such Development does not result from any work
performed by Executive for the Company.
(d) Assistance of Executive. Upon request and without
further compensation therefor, but at no expense to Executive, and whether
during the term of this Agreement or thereafter, Executive shall do all lawful
acts, including, but not limited to, the execution of papers and lawful oaths
and the giving of
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<PAGE> 7
testimony, that in the opinion of the Company, its successors and assigns, may
be necessary or desirable in obtaining, sustaining, reissuing, extending and
enforcing United States and foreign Letters Patent, including, but not limited
to, design patents, on any and all of such Developments, and for perfecting,
affirming and recording the Company's complete ownership and title thereto, and
to cooperate otherwise in all proceedings and matters relating thereto.
10. Representations.
a. Executive hereby represents and warrants to the Company that
(i) the execution, delivery and performance of this Agreement by Executive does
not and will not conflict with, breach, violate or cause a default under any
contract, agreement, instrument, order, judgment or decree to which Executive is
a party or by which Executive is bound, (ii) Executive is not a party to or
bound by any employment agreement, noncompete agreement or confidentiality
agreement with any other person or entity, and (iii) upon the execution and
delivery of this Agreement by the Company, this Agreement shall be the valid and
binding obligation of Executive, enforceable in accordance with its terms.
b. Company hereby represents and warrants to the Executive that
(i) the execution, delivery and performance of this Agreement by the Company
does not and will not conflict with, breach, violate or cause a default under
any contract, agreement, instrument, order, judgment or decree to which
Executive is a party or by which Executive is bound, and (ii) upon the execution
and delivery of this Agreement by the Executive, this Agreement shall be the
valid and binding obligation of the Company, enforceable in accordance with its
terms.
11. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
Executive's rights or delegate Executive's obligations hereunder without the
prior written consent of the Company. Without limiting the foregoing, the
Company may not, without Executive's prior written consent, assign rights or
delegate its obligations under this Agreement.
12. Survival. Sections 6, 7, 8, 9 and 10 shall survive and continue
in full force in accordance with their terms, notwithstanding any termination of
the Employment Period.
13. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered by nationally recognized
overnight courier service, or mailed by certified mail, return receipt
requested, to the recipient at the address indicated below.
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<PAGE> 8
Notices to Executive:
Albert Malatesta
c/o Viking Distributing Co., Inc.
1225 6th Street
San Francisco, California 94107
Notices to the Company:
White Cap Industries, Inc.
3120 Airway Avenue
Costa Mesa, CA 92626
Attn: President
or such other address or to the attention of such person as the recipient party
shall leave specified by prior written notice to the sending party. Any notice
under this Agreement will be deemed to have been given when so delivered or
mailed. Any Notice of Termination of Executive's employment by the Company shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.
14. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be elective and valid under
applicable law but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
15. Complete Agreement. This Agreement, together with the other
agreements referred to in the Recitals above, embodies the complete agreement
and understanding among the parties and supersedes and preempts any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
16. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
17. Choice of Law. This Agreement will be governed by the internal
law, and not the laws of conflicts, of the State of California.
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<PAGE> 9
18. Agreement to Arbitrate; Expenses. Except for the enforcement of
any covenant herein that would be the subject of specific performance
contemplated by Section 8, any controversy or claim arising out of or relating
to this Agreement or the formation, breach or interpretation hereof, will be
settled by arbitration before one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in Orange County,
California. Judgment upon the award rendered by the arbitration may be entered
and enforced in the court with jurisdiction over the appropriate party. All
controversies not subject to arbitration or contesting any arbitration will be
litigated in the State of California, Orange County Superior Court or a federal
court in the Central District of California (and each of the parties hereto
hereby consent to the exclusive jurisdiction of such courts and waive any
objections thereto). The expenses (including reasonable attorneys' fees)
incurred by the prevailing party in any arbitration or litigation related to
this Agreement shall be borne by the non-prevailing party in such arbitration or
litigation.
19. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
WHITE CAP INDUSTRIES, INC.
/s/ GREG GROSCH
-------------------
By: Greg Grosch
Its: President
/s/ ALBERT MALATESTA
--------------------
Albert Malatesta
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<PAGE> 10
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto.
WHITE CAP HOLDINGS, INC.
By /s/ GREGORY GROSCH
---------------------------------
Name: Gregory Grosch
Title: President
/s/ MICHAEL MONROE
------------------------------------
MICHAEL MONROE
/s/ ALBERT MALATESTA
------------------------------------
ALBERT MALATESTA
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<PAGE> 11
EXHIBIT A
Job Title: Regional Vice President, Branch Operations
Department: Operations
Reports To: Chief Operations Officer
FLSA Status: Exempt
Prepared Date: 6/97
SUMMARY: Directs and coordinates activities involved in operating branches in
an assigned region by performing the following duties personally or through
subordinate supervisors. This region is comprised of Northern California (AY,
Stop Supply and Viking) and is based out of San Francisco, California.
SUPERVISORY RESPONSIBILITIES
1. Supervises the activities of all Branch Managers in the region.
2. Performs regularly scheduled performance evaluations for all direct
reports.
3. Assures that regularly scheduled performance evaluations are conducted
for all personnel in the region.
4. Implements and applies White Cap Human Resources Policies and Procedures
in a consistent manner designed to develop and maintain positive
employee relations in the region.
5. Ability to review all revisions to company policy and procedures that
will affect the Northern California Region.
ESSENTIAL DUTIES AND RESPONSIBILITIES:
1. Supervises implementation of employee training and monitors company
designed policies and procedures relating to safety, inventory
management, sales, customer service, merchandising, store maintenance,
and human resource management.
2. Supports and supervises Branch Managers and offers suggestions designed
to assist them in meeting or exceeding monthly sales objectives and
profit goals.
3. Educates Branch Managers on how to analyze and use various corporate
reports in managing their respective Branches in an effort to maximize
sales and profit.
<PAGE> 12
4. Supervises Branch Managers so that they can ensure that all company
owned equipment is maintained and in proper working order.
5. Manages activity in the region in a manner designed to ensure that
employees comply with established company policies, procedures and
standards in the areas of safekeeping of company funds and property.
6. In order to determine profitability at the respective branches in the
regions, reviews operational records and reports pertaining to sales to
determine store profitability. Supervises branch managers to develop
and adhere to operational budgets.
7. Coordinates merchandising activities in the Northern California
branches.
8. Analyzes marketing potential of new and existing store locations.
9. Responsible for initial approval on all hiring, firing, salary
adjustments, and disciplinary actions at the branch level.
10. Routinely visits all branches in assigned regions and produces monthly
activity reports for C.O.O. resulting from those visits.
11. Based on visitations, makes needed recommendations to improve branch
performance and profitability.
12. Responsibility for obtaining approval on any changes relating to
security (access codes, keys, etc.).
13. Periodically visits the corporate office for regularly scheduled
operations meetings.
14. Trains and develops staff to handle sales account servicing and
purchasing responsibilities that this position currently handles. This
is to ensure that when the Regional Vice President, Branch Operations is
in the field, those functions are handled satisfactorily.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
White Cap Industries, Inc. (name to be changed to White Cap Industries, Corp.)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
---------------------------
Orange County, California
August 13, 1997
<PAGE> 1
EXHIBIT 23.2
August 12, 1997
The Board of Directors
White Cap Holdings, Inc.
We consent to the use of our report included herein.
/s/ BURNETT, UMPHRESS & KILGOUR
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