<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998.
REGISTRATION NO. 333-49947
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
SPECIALTY PRODUCTS & INSULATION CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 5033 23-1713012
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
1097 COMMERCIAL AVENUE, P.O. BOX 576, EAST PETERSBURG, PENNSYLVANIA 17520-
0576 (717) 569-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MR. RONALD L. KING
SPECIALTY PRODUCTS & INSULATION CO.
1097 COMMERCIAL AVENUE,
P.O. BOX 576
EAST PETERSBURG, PENNSYLVANIA 17520-0576
(717) 569-3900
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS A. RALPH, ESQ. JAMES M. PAPADA III, ESQ.
CHRISTOPHER G. KARRAS, ESQ. DEAN M. SCHWARTZ, ESQ.
DECHERT PRICE & RHOADS STRADLEY, RONON, STEVENS & YOUNG,
4000 BELL ATLANTIC TOWER, 1717 ARCH LLP
STREET 2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103- PHILADELPHIA, PENNSYLVANIA 19103-
2793 7098
(215) 994-4000 (215) 564-8000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 26, 1998
PROSPECTUS
2,000,000 SHARES
SPECIALTY PRODUCTS
& INSULATION CO.
[LOGO OF SPECIALITY PRODUCTS APPEARS HERE]
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by Specialty Products & Insulation Co. (the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price per share will
be between $10.00 and $12.00. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "SPIE."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON
PAGE 8.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................... $ $ $
- --------------------------------------------------------------------------------
Total(3)..................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted to the Underwriters an option, exercisable for 30
days from the date of the Offering, to purchase up to an aggregate of
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior
sale, when, as and if issued to and accepted by them, subject to their right to
reject any order in whole or in part and to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject offers in whole or in part. It is expected that delivery of certificates
for the shares will be made at the offices of Legg Mason Wood Walker,
Incorporated, Baltimore, Maryland on or about , 1998.
LEGG MASON WOOD WALKER ADVEST, INC.
INCORPORATED
, 1998
<PAGE>
[Graphic portrays map of United States showing locations of Company service
centers. Text below maps reads as follows: "Our national service center
network supplies customers around the world with a wide range of products and
services from leading manufacturers of specialty construction materials."]
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 OVER-ALLOT 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."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. For purposes of this Prospectus, the "Company" refers to
Specialty Products & Insulation Co. and its consolidated subsidiary, unless the
context otherwise requires. Unless otherwise indicated, the information
contained in this Prospectus (i) gives effect to the spin-off of the Company
from its parent, Irex Corporation ("Irex"), through the pro rata distribution
of 100% of the capital stock of the Company to the shareholders of Irex (the
"Separation"), (ii) gives effect to the recapitalization of each share of the
Company's previously issued common stock into 291.3547 shares of Common Stock
and (iii) assumes no exercise of the Underwriters' over-allotment option in
connection with the Offering.
THE COMPANY
Specialty Products & Insulation Co. is a leading national distributor and
fabricator of mechanical insulation, architectural/acoustical products and
specialty products to commercial and industrial markets. The Company also
offers customized fabrication, export and other value-added services related to
its core product lines. The Company operates through a national network of 52
distribution centers, including seven fabrication facilities, at strategically
chosen locations in 21 states. Through this network, the Company offers
approximately 25,000 stock keeping units ("SKUs") to more than 9,000 customers,
including specialty contractors, facility owners, general contractors, original
equipment manufacturers ("OEMs"), exporters and supply houses. The Company's
principal product categories include piping and equipment insulation as well as
acoustical ceilings and specialty wall panels for use in new construction,
maintenance, renovation and repair.These categories include the products of
more than 150 manufacturers including Armstrong World Industries, Owens
Corning, Johns Manville, Dow Chemical and Pittsburgh Corning. Since commencing
operations in the early 1980s, the Company has experienced significant growth
as a result of its ability to capitalize on industry changes including,
principally, the increased reliance on distributors by manufacturers and
customers. Net sales of the Company increased from $118.4 million in 1995 to
$158.5 million in 1997, and operating income grew from $4.1 million in 1995 to
$7.0 million in 1997. In the first three months of 1998, net sales and
operating income totalled $42.7 million and $1.4 million, respectively, as
compared to $36.3 million and $1.1 million, respectively, in the first three
months of 1997.
Significant changes in the Company's markets have resulted in the emergence
of an independent distribution channel. Independent distribution has reduced
duplicate functions performed by both manufacturers and customers, allowing
them to devote greater resources to their core competencies. Manufacturers have
been able to reduce logistical costs, lower marketing expenses and better
manage inventories by outsourcing the distribution function to independent
distributors. Customers have also been able to lower operating costs, reduce
their number of supply sources and gain high-quality, value-added services
through the utilization of independent distributors. This evolution has
produced markets which are highly fragmented and populated by many smaller
local and regional distributors. However, the Company believes the industry is
undergoing a significant trend toward consolidation as both manufacturers and
customers seek to enhance efficiencies and reduce costs while maintaining high
levels of product and service quality. The Company believes that large,
national distributors with significant purchasing power, integrated information
systems and relatively low infrastructure costs can offer greater value to
customers and will be well positioned to exceed market growth rates in this
industry.
Two key components of the Company's growth strategy have been acquisitions
and openings of distribution and service centers ("distribution centers").
Historically, the Company grew as it solidified its presence in regional
markets. More recently, the Company has implemented a growth strategy that is
being executed on a national scale. Through targeted acquisitions and
distribution center openings, the Company pursues opportunities to expand its
presence in new geographic areas with strong growth characteristics. This
strategy enables the Company to further penetrate existing markets, broaden its
product and service capabilities and take advantage of current industry
dynamics. For the five-year period ended December 31, 1997, the Company
acquired 11 distribution operations, including three from affiliates, which
together contributed approximately $13.2 million, or 8.3%, of the Company's
1997 net sales. During the same period, the Company opened 10 distribution
centers, which together contributed approximately $12.3 million, or 7.8%, of
the Company's 1997
3
<PAGE>
net sales. Since January 1, 1998, the Company has completed one acquisition and
opened three distribution centers.
The Company is focused on its traditional strengths as a broadly based
national distributor and fabricator of mechanical insulation,
architectural/acoustical products, specialty products and value-added services.
The Company is committed to capitalizing on the expertise, knowledge and
experience it has developed in these core markets to increase market share and
profitability. In addition, the Company's operating strategy includes the
following key elements:
. Superior Customer Service. With distribution centers and sales forces in
each area that it serves, the Company provides its customers with rapid
delivery and localized service. The Company believes that providing a high
level of customer service leads to long-term relationships with its
customers.
. National Network of Distribution Centers. The Company believes its national
distribution network enables the Company to attract customers that have
multiple locations, participate with key vendors in the development of
national marketing and sales strategies, achieve geographic diversification
and facilitate best-practice benchmarking as well as innovation and
knowledge-sharing within the Company.
. Strong Supplier Relationships. The Company believes its national presence,
financial strength and partnering philosophy have enabled the Company to
become the preferred distributor for many of its suppliers. The Company
works with its suppliers to develop common expansion programs as well as
customer-oriented product solutions.
. Low Cost of Operations. The Company believes that its volume of purchases
and desirability as a vendor enable it to obtain purchase terms that are as
favorable as those available to other large competitors. The Company is also
able to realize advantages from the economies of large-scale operation in
the areas of administrative processing, information systems, financing
terms, technical expertise, inventory and working capital management.
. Innovative and Committed Employees. Management believes the Company's
corporate culture and values allow it to attract, develop and retain
innovative and committed employees. The Company's senior management has an
average of approximately 10 years' experience with the Company, and many of
its sales and service staff have been working in the same markets for 10
years or more.
The Company believes that its operating strategy provides a foundation for
growth in each of the markets in which it participates. See "Business--Growth
Strategy." The Company's growth strategy includes the following key elements:
. Increase Sales of Existing and Accessory Products. Management believes the
Company's strengths and operating strategies will lead to increased sales to
its existing customer base. The Company believes acquisitions, the opening
of new distribution centers and other strategic initiatives will generate
additional sales of existing products to new customers.
. Open New Distribution Centers. The Company expects to continue to open new
distribution centers as a result of new market opportunities, customer
service requirements, supplier initiatives and strategic opportunities. As
the Company continues to broaden its national distribution network, the
Company believes that it will be able to capitalize on operating
efficiencies and the benefits of large-scale operation.
. Continue Acquisitions. The Company is committed to continuing its strategy
to acquire distribution businesses with strong market positions, supplier
support or attractive customer bases. Acquisitions allow the Company to
accelerate revenue growth, expand its geographical presence, add product
lines and technical expertise and achieve greater operating efficiencies.
. Emphasize National Accounts. Management believes that the Company's national
distribution network gives the Company a competitive advantage in securing
national and multi-regional customers seeking to reduce vendors, outsource
non-core operations, integrate supply and gain value-added services such as
procurement and material management.
4
<PAGE>
. Add Product Lines. The Company intends to leverage its core product and
technical expertise to add product lines which are complementary to those
currently offered. The Company believes that its existing national
distribution infrastructure enables it to add new product lines without
incurring significant additional cost.
The Company's executive offices are located at 1097 Commercial Avenue, East
Petersburg, Pennsylvania 17520, and its telephone number is (717) 569-3900.
RECENT ACQUISITION
On March 1, 1998, the Company acquired certain assets relating to mechanical
insulation distribution and fabrication operations of Extol of Texas, Inc. in
Houston and Corpus Christi, Texas ("Extol") for approximately $5.6 million in
cash. The acquisition was financed by borrowings from Irex. For the year ended
December 31, 1997, Extol generated sales of approximately $13.2 million. See
"Acquisition and Expansion Background." The Company has entered into a letter
of intent to purchase certain assets of a mechanical insulation fabricator with
fiscal year 1997 net sales of approximately $4.0 million.
SEPARATION FROM PARENT
Since commencing operations in 1982, the Company has been a wholly owned
subsidiary of Irex. Through its operating subsidiaries other than the Company,
Irex is primarily engaged in the business of specialty contracting throughout
the United States and Canada. In January 1998 Irex announced plans to effect
the Separation through a pro rata distribution of 100% of the capital stock of
the Company to the shareholders of Irex. The Separation will occur immediately
prior to consummation of the Offering, and the Offering is conditioned upon the
consummation of the Separation. Immediately following the Separation and the
Offering, all of the capital stock of the Company will be owned by the
shareholders of Irex who receive shares of Common Stock in the Separation and
by new shareholders who purchase Common Stock in the Offering. See "Separation
from Irex."
The decision to effect the Separation is based on a number of factors. The
Separation will provide both corporations with greater managerial, operational
and financial flexibility to focus on and respond to changing market conditions
in their respective business environments. The Company also believes that its
ability to pursue and finance acquisitions and other business opportunities
will be enhanced if the Company operates independently. Furthermore, financial
advisors have advised Irex and the Company that equity capital necessary to
meet the business needs of Irex and the Company can be most effectively raised
through an initial public offering of the stock of the Company following its
Separation from Irex, rather than through a stock offering by either Irex or
the Company while Irex continues to hold a substantial equity interest in the
Company. In addition, management believes the Separation will assist the
Company in serving certain customers. Through the specialty contracting
businesses operated by its other subsidiaries, Irex competes with customers
whose business is solicited by the Company, and the Company believes these
customers will be more likely to purchase products from the Company after it is
independent from Irex. The Separation will also enable the Company to provide
its management and employees with incentive compensation in the form of direct
and indirect equity ownership in the Company.
In connection with the Separation, the Company will enter into several
agreements with Irex and its subsidiaries setting forth the terms and
conditions of the Separation and governing certain interim and longer-term
relationships between the companies. See "Separation from Irex--Agreements with
Irex."
5
<PAGE>
THE OFFERING
Common Stock offered by the
Company........................ 2,000,000 shares
Common Stock to be outstanding
after the Offering............. 4,913,547 shares(1)
Use of Proceeds................. For the repayment of certain indebtedness,
including indebtedness incurred to pay a
dividend to Irex in connection with the
Separation, and working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market Symbol... The Common Stock has been approved for
quotation on the Nasdaq National Market under
- -------- the symbol "SPIE."
(1) Does not include up to 491,355 shares of Common Stock that may be subject
to a stock option plan which the Company expects to adopt prior to the
consummation of the Offering. See "Management--Stock Options" and
"Description of Capital Stock."
RISK FACTORS
See "Risk Factors" beginning on page 8 for a discussion of certain
information that should be considered by prospective purchasers of the Common
Stock offered hereby.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary historical and pro forma consolidated
financial information of the Company as of and for the periods indicated. The
pro forma balance sheet information assumes the Offering closed on March 31,
1998. The pro forma income statement information assumes the Offering closed as
of January 1, 1997. The summary consolidated financial information should be
read in conjunction with the "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and the
related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $118,395 $141,800 $158,510 $36,280 $42,669
---------- ---------- ---------- ---------- ---------
Gross profit............ 25,892 31,110 34,252 7,725 9,360
---------- ---------- ---------- ---------- ---------
Operating income........ 4,051 6,348 7,023 1,137 1,368
Interest expense, net... 1,840 1,854 1,939 448 516
---------- ---------- ---------- ---------- ---------
Income before income
taxes.................. 2,211 4,494 5,084 689 852
Income tax provision.... 918 1,810 2,077 281 349
---------- ---------- ---------- ---------- ---------
Net income.............. $ 1,293 $ 2,684 $ 3,007 $ 408 $ 503
========== ========== ========== ========== =========
Net income per share--
basic.................. $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Net income per share--
diluted................ $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Weighted average number
of common shares
outstanding--basic..... 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
Weighted average number
of common shares
outstanding--diluted... 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
PRO FORMA INCOME
STATEMENT DATA (1):
Operating income........ $ 7,023 $ 1,368
Interest expense, net... 1,123 339
---------- ---------
Income before income
taxes.................. 5,900 1029
Income tax provision.... 2,412 422
---------- ---------
Net income.............. $ 3,488 $ 607
========== =========
Net income per share--
basic.................. $ 0.71 $ 0.12
Net income per share--
diluted................ $ 0.71 $ 0.12
Weighted average number
of common shares
outstanding--basic..... 4,913,547 4,913,547
Weighted average number
of common shares
outstanding--diluted... 4,913,547 4,913,547
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF MARCH 31, 1998
----------------------- -------------------------------------
ACTUAL ACTUAL PRO FORMA (3) AS ADJUSTED (4)
----------------------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $11,266 $10,471 $ (19) $14,735
Total assets............ 47,651 53,743 53,743 53,743
Total long-term debt
(2).................... 26,493 27,792 27,792 18,722
Shareholder's equity.... 9,180 9,587 (903) 18,657
</TABLE>
- --------
(1) Gives pro forma effect to the sale of the Common Stock offered hereby and
the application of the estimated net proceeds as described in "Use of
Proceeds" as if such transactions had occurred on January 1, 1997. See "Use
of Proceeds."
(2) Total long-term debt includes notes payable to affiliate (both the long-
term and current portions) and payable to affiliates, excluding the
dividend payable to Irex.
(3) Represents actual data as of March 31, 1998 as adjusted to give effect to
the $10.5 million planned dividend to Irex.
(4) Represents actual data as of March 31, 1998 as adjusted to give pro forma
effect to the sale of Common Stock offered hereby and the application of
the net proceeds therefrom as described in "Use of Proceeds." See "Use of
Proceeds."
7
<PAGE>
RISK FACTORS
In evaluating an investment in the Common Stock offered hereby, prospective
investors should carefully consider the following risk factors as well as the
other information set forth elsewhere in this Prospectus.
LACK OF INDEPENDENT OPERATING HISTORY
Concurrent with the Offering, the Company will separate from Irex pursuant
to the Separation. Prior to the Separation, the Company operated as a wholly
owned subsidiary of Irex, historically relied on Irex for various financial,
administrative and managerial services necessary for its operations and
maintained a minimal executive, financial and administrative staff. After the
Separation, the Company will maintain its own lines of credit and banking
relationships and perform its own financial, administrative and managerial
functions without the benefit of such services, and Irex will have no
obligation to provide assistance to the Company except pursuant to certain
agreements as described in "Separation from Irex--Agreements with Irex." While
management believes that the Separation will have a positive impact on the
Company, the Company may encounter financial, administrative, managerial or
other difficulties as a result of its lack of independent operating history or
the discontinuance of its reliance on the financial and other services of
Irex. No assurance can be given that the Company, as an independent entity,
will achieve operating results comparable to those prior to the Separation.
See "Separation from Irex."
LIMITATIONS ON ABILITY TO RAISE EQUITY CAPITAL AND POTENTIAL DEPENDENCE ON
DEBT FINANCING
In order to preserve the tax-free status of the Separation, the Company's
future ability to issue Common Stock may be limited under federal income tax
laws for a period of two years following consummation of the Separation. The
Company's limited ability to issue capital stock during such period (including
its ability to issue Common Stock in connection with acquisitions) may require
the Company to rely on other financing sources, such as bank credit facilities
or debt offerings. Although the Company believes it can obtain financing
necessary to maintain its acquisition and growth program, reliance on such
alternative financing sources could adversely affect the Company's ability to
continue its acquisition program, create significant debt service obligations
and create other risks for the Company and its shareholders. No assurance can
be given that the Company will be able to obtain the capital it will need to
meet its operating needs and finance its acquisition program. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Growth Strategy."
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS; ABILITY TO MANAGE GROWTH
The Company's growth strategy contemplates further acquisitions of
distribution and related businesses. The Company's future success is
dependent, in part, upon its ability to identify, finance and acquire suitable
businesses on favorable terms and then to integrate and manage the acquired
businesses quickly and successfully. Acquisitions involve special risks,
including risks associated with unanticipated liabilities, diversion of
management attention, possible adverse effects on earnings resulting from
increased goodwill amortization, potential increased interest costs,
dependence on retention, hiring and training of key personnel and difficulties
relating to the integration of the acquired businesses. Although the Company
believes that it can successfully implement its acquisition program, there can
be no assurance that the Company will be able to identify or acquire
acceptable acquisition candidates on terms favorable to the Company and in a
timely manner to the extent necessary to fulfill the Company's growth
strategy. The Company's ability to achieve and manage its growth will depend
on a number of factors, including the availability of working capital to
support such growth, existing and emerging competition and the Company's
ability to maintain sufficient profit margins. Continued growth could place
additional demands on the Company's administrative, operational and financial
resources. Furthermore, the Company's ability to pay for acquisitions with
stock may be materially limited in the two-year period following the
Separation and the Company's ability to implement its acquisition program may
be adversely affected as a result. There can be no assurance that the Company
will be able to continue to achieve or manage growth effectively, or that
future acquisitions will not have an adverse effect upon the Company's
8
<PAGE>
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Growth Strategy."
SEASONALITY; INDUSTRY AND ECONOMIC CYCLES
The Company's business is seasonal. The Company has in the past experienced
seasonal fluctuations in sales and operating results from quarter to quarter.
Operating results are weakest in the first calendar quarter because of the
effects of winter weather on commercial and industrial construction and the
consequent reduction in sales of mechanical insulation and
architectural/acoustical products. Fluctuations in the Company's quarterly
sales and operating results could result in significant volatility in, and
otherwise adversely affect, the market price of the Common Stock. See
"Management's Discussion of Financial Condition and Results of Operations--
Seasonality and Quarterly Results of Operations."
Some of the principal markets for the products and services offered by the
Company are subject to cyclical economic fluctuations that generally affect
pricing, availability and demand for mechanical insulation and
architectural/acoustical products. Cyclical fluctuations could also affect
growth rates in the markets served by the Company's customers, the
availability of products from vendors and the availability of suitable
acquisition candidates. As a result, changes in general economic conditions
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Seasonality and Cyclicality."
DEPENDENCE ON SUPPLIER RELATIONSHIPS
The Company's distribution operations are materially dependent on its
relationships with its suppliers. Generally, distribution agreements between
the Company and its suppliers may be terminated without cause by the suppliers
at any time. As a result, even the largest of the Company's suppliers could
terminate the flow of its products to the Company at any time and the Company
would have to obtain substitute products to maintain its reserves. Although
management believes that the Company can maintain its relationships with its
suppliers for the foreseeable future, there can be no assurance that it will
be able to do so. The termination or limitation by any key supplier of its
relationship with the Company could have a material adverse effect on the
Company's business, operating results and financial condition.
POTENTIAL RISKS DUE TO CHANGES IN INDUSTRY TRENDS
The distribution industry is undergoing significant change. Historically,
distributors of mechanical insulation and architectural/acoustical products
served primarily as suppliers and extensions of manufacturers' sales forces.
In recent years, both manufacturers and customers have been increasingly
relying on distributors such as the Company to reduce purchasing costs and
provide a broad range of value-added services. As customers increasingly seek
low-cost alternatives to traditional methods of purchasing and sources of
supply, they are, among other things, reducing the number of their suppliers.
Although the Company believes it can maintain current customer relationships,
there can be no assurance that the Company will not lose customers, including
key accounts, as existing customers reduce the number of distributors with
which they do business. Also, distributors are consolidating to achieve
economies of scale and increase efficiencies. This consolidation trend could
cause the industry to become more competitive. The failure by the Company to
respond effectively to such consolidation and increased competition or to
other changes in the industry could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Industry Overview."
DEPENDENCE ON IREX INFORMATION SYSTEMS; POTENTIAL SYSTEMS CONVERSION; YEAR
2000 ISSUE
The Company utilizes and will continue to utilize information systems
provided by Irex, which play an integral role in product tracking, pricing and
availability; order processing and shipping; distribution center operations;
purchasing; inventory management; financial reporting; and other financial and
operational functions.
9
<PAGE>
The Company will enter into an agreement with Irex pursuant to which Irex will
provide information system services to the Company for three years following
the Separation. During such period the Company intends to evaluate its
existing and future information system requirements and examine its options
for obtaining such services. These options include, among others, continuing
the existing relationship with Irex or replacing the Company's current
systems. If the Company decides to install new information systems, there can
be no assurance that it will be able to successfully implement, integrate and
operate such systems without experiencing unanticipated delays, complications
and expenses. Significant disruptions in the Company's information systems or
the failure to successfully complete a conversion to new information systems
on a timely basis could result in operational and financial disruptions and
adversely affect the Company's business, operating results and financial
condition. See "Business--Information Systems."
The Company does not expect to have material exposure to Year 2000
conversion risks following the installation of an upgrade to its information
system software scheduled for October 1998. This planned upgrade has been
installed and tested by the software system vendor in other information
systems and, as a result, the Company believes its information systems will be
Year 2000 compliant following the upgrade. The Company is presently unable to
determine the effects of Year 2000 compliance by its suppliers and customers,
and the failure of suppliers or customers to address such issues effectively
could have a material adverse effect on the Company. See "Business--
Information Systems."
POTENTIAL LIABILITY FOR TAXES RELATED TO THE SEPARATION
In connection with the Separation, the Company will enter into a tax sharing
and indemnification agreement with Irex (the "Tax Agreement"). Under the Tax
Agreement the Company will be restricted, for a period of two years following
the date of the Separation, from engaging in certain transactions, including
certain issuances of stock, redemptions of stock or ceasing to engage in its
trade or business, without first obtaining either a ruling from the Internal
Revenue Service or an opinion from nationally recognized tax counsel that such
transaction will not affect the tax-free nature of the Separation to Irex or
its shareholders. The Tax Agreement also requires the Company to indemnify
Irex and its shareholders for tax liabilities that may be incurred by Irex or
its shareholders as a result of actions that the Company may undertake
following the Separation and that cause the Separation to be treated as a
taxable transaction to Irex or its shareholders. Under recently enacted
changes to the Internal Revenue Code applicable to spin-off distributions, a
distributing corporation (Irex) will recognize gain on the appreciation in the
stock of the distributed corporation (the Company) if the distribution is part
of a plan or series of related transactions pursuant to which one or more
persons acquire, directly or indirectly, 50% or more of the voting power or
value of the stock of either corporation. There is a rebuttable presumption
that any acquisitions of stock (including acquisitions through stock issuances
by the Company) occurring during the period beginning two years before and
ending two years after the Separation are part of such a plan (or series if
related transactions). Such presumption may be rebutted by establishing that
the Separation and acquisitions of such stock are not pursuant to a plan or
series of related transactions. Although the Company does not expect these
restrictions to materially inhibit its operations or growth opportunities, if
there is a final determination that any or all of the distributions of Common
Stock effected in connection with the Separation are taxable, the Company
could become liable for a portion of any taxes due in connection with the
Separation to the extent that such tax liability cannot be collected from Irex
or the remaining members of the Irex consolidated group. The Company will also
be required to indemnify Irex and its subsidiaries for specified tax
liabilities otherwise imposed upon or attributable to the Company related to
the Company for periods prior to the Separation. See "Separation from Irex--
Agreements with Irex--Tax Sharing and Indemnification Agreement."
LACK OF ARM'S-LENGTH BARGAINING ON AGREEMENTS WITH IREX
The Company will enter into certain agreements with Irex and its
subsidiaries (the "Separation Agreements") in connection with the Separation
which will set forth the terms of the Separation, the right to utilize Irex's
information system, tax sharing and indemnification, and benefits sharing.
Although management
10
<PAGE>
of the Company believes that the terms of the Separation Agreements will be
fair to the Company, the terms of the Separation Agreements will be fixed
between Irex and the Company when they are parent and subsidiary and not
independent parties negotiating on an arm's-length basis. Accordingly, there
is no assurance that the terms of the Separation Agreements will be as
favorable to the Company as those that might be obtained from an unaffiliated
third party.
POTENTIAL INFLUENCE OF CHAIRMAN OF THE BOARD OF DIRECTORS
Upon completion of the Offering and Separation, W. Kirk Liddell will
beneficially own approximately 5.5% of the Company's outstanding Common Stock.
In addition, approximately 5.5% of the Company's outstanding Common Stock will
be held by a custodian for Mr. Liddell's minor children. See "Principal
Shareholders." Mr. Liddell will become Chairman of the Board of Directors of
the Company prior to consummation of the Offering. He is also President, Chief
Executive Officer and a director of Irex and the beneficial owner of
approximately 9.3% of issued and outstanding Irex common stock. As a result of
his share ownership of and positions with Irex and the Company, Mr. Liddell
will be in a position to influence the business and affairs of Irex and the
Company. To the extent the Company and Irex have differing interests, Mr.
Liddell could be presented with conflicts of interests in his roles as a
director of each company. There can be no assurance that actions of the
Company taken in the context of such conflicts of interests will be as
favorable to the Company as actions taken in the absence of such conflicts.
BENEFITS TO IREX AND ITS AFFILIATES AS A RESULT OF THE SEPARATION AND OFFERING
Irex and its affiliates other than the Company, none of which will be
affiliated with the Company following the Separation and the Offering, will
receive the following benefits as a result of the Separation and Offering:
(i) a $10.5 million cash dividend to be paid by the Company to Irex
immediately prior to the Separation, which dividend will be paid by executing
a note to Irex to be repaid with proceeds of the Offering; (ii) payment of
approximately $9.1 million of debt owed by the Company to Irex or affiliates
of Irex, which will be paid with proceeds of the Offering; and (iii) payment
of $17.8 million owed to Irex pursuant to an intercompany account which the
Company intends to pay with funds borrowed from a credit facility which it
will enter into upon consummation of the Offering. See "Use of Proceeds" and
"Separation from Irex."
COMPETITION
The Company's markets are fragmented and highly competitive, and feature
numerous distribution channels, including national, regional and local
distributors, and local supply houses as well as direct sales by
manufacturers. Many of the Company's competitors are smaller businesses that
sell to customers in a limited geographic area, but the Company also competes
against several significant regional distributors. Certain of the Company's
competitors sell identical or equivalent products at competitive prices, and
the Company also competes on the basis of responsiveness to the needs of
customers for quality service, product diversity and availability. There can
be no assurance that the Company will be able to compete successfully in the
markets in which it operates.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are highly dependent on the skills, experience and
efforts of its Chief Executive Officer and senior management, and the Company
may depend on the senior management of any significant businesses it acquires
in the future. Although prior to the Offering the Company intends to enter
into employment agreements containing confidentiality and non-competition
provisions with its Chief Executive Officer and other members of its senior
management, the business and prospects of the Company could be adversely
affected if any of these persons does not continue in his position, and the
Company is unable to attract and retain a qualified replacement. See
"Management."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Pennsylvania law and the Company's restated articles
of incorporation and bylaws could make it more difficult for a third party to
acquire, or could discourage a third party from attempting to
11
<PAGE>
acquire, control of the Company. Although the Company has opted out of
Subchapters E, G and H of Chapter 25 of the Pennsylvania Business Corporation
Law of 1988, as amended (the "PBCL"), the Company is governed by Subchapter F
of Chapter 25 of the PBCL, which prohibits the Company from engaging in a
"business combination" with an "interested shareholder" for a period of five
years after the date of the transaction as a result of which such shareholder
became an "interested shareholder," unless the business combination is
approved in a prescribed manner. The Company's restated articles of
incorporation divide the Board of Directors into three classes, each serving a
staggered three-year term. By extending the period of time required to re-
elect or replace the entire Board of Directors, such classification may have
the effect of discouraging persons seeking to effect a takeover or assume
control of the board. In addition, shares of the Company's Preferred Stock,
par value $.01 per share (the "Preferred Stock"), may be issued by the Board
of Directors without shareholder approval on such terms and conditions, and
having such rights, privileges and preferences, as the Board of Directors may
determine. The rights of the holders of the Common Stock may be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The Company has no current plans to
issue any shares of Preferred Stock and may be otherwise limited in its
ability to issue Preferred Stock in the two-year period following the
Separation. However, the potential issuance of Preferred Stock could have the
effect of delaying, deterring or preventing a change of control of the
Company. See "Description of Capital Stock--Preferred Stock" and "Description
of Capital Stock--Certain Provisions of the Pennsylvania Business Corporation
Law."
ABSENCE OF PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for inclusion on the Nasdaq
National Market, there can be no assurance that an active or liquid trading
market in the Common Stock will develop upon completion of the Offering or, if
developed, that it will be sustained. The initial public offering price of the
Common Stock will be determined through negotiations between the Company and
the Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. The market price for shares of the Company's Common
Stock may be highly volatile and may be significantly affected by such factors
as quarter-to-quarter variations in the Company's results of operations,
changes in general market conditions and other factors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations and Seasonality" and "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering and Separation could adversely affect the market price
for the Common Stock. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will
have on the market price of the Common Stock prevailing from time to time. The
number of outstanding shares of Common Stock available for sale in the public
market will be limited by (i) contractual agreements between the Company and
certain shareholders of the Company not to sell for two years the shares of
Common Stock received by them in the Separation; (ii) the lock-up agreements
under which the Company, its officers and directors, and certain Company
shareholders have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Legg Mason Wood Walker, Incorporated, on behalf of
the Underwriters; (iii) limitations relating to the tax-free status of the
Separation (see "--Limitations on Ability Raise Equity Capital and Dependence
on Debt Financing"); and (iv) applicable restrictions under the Securities Act
of 1933, as amended (the "Securities Act"). Upon the consummation of the
Offering, the 2,194,064 shares of Common Stock distributed in the Separation
to nonaffiliates of the Company will be eligible for resale. An additional
719,483 shares of Common Stock will be distributed to affiliates of the
Company and will become eligible for resale following expiration of the
foregoing agreements and restrictions. See "Shares Eligible for Future Sale."
Sales of substantial amounts of Common Stock, including those shares eligible
for sale following the Offering and Separation and those eligible for sale
following the expiration of the foregoing agreements and restrictions, or the
perception that such sales could occur, could adversely affect the prevailing
market price of the Common Stock.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be approximately $19.6 million (approximately $22.6 million in
the event the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $11.00 per share and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company intends to use such
proceeds as follows: (i) to repay approximately $6.3 million of long-term
debt, of which $6.2 million will be paid to Irex; (ii) to repay approximately
$2.8 million of other indebtedness to Irex; (iii) to repay indebtedness
incurred by the declaration of a $10.5 million dividend to Irex in connection
with the Separation; and (iv) for working capital and general corporate
purposes. Rates of interest of the debt to be repaid with such proceeds range
from 6.63% to 9.25% per annum, and the maturity dates of such debt extend from
December 1, 1998 to July 10, 2009. For additional information on the terms of
such debt, see note 7 to the consolidated financial statements of the Company
included elsewhere in this Prospectus. For additional information on the
dividend to Irex, see "Separation from Irex."
DIVIDEND POLICY
The Company does not plan to pay dividends on its Common Stock in the
foreseeable future and plans to retain any future earnings to finance its
operations and expand its business. Any future determination as to the payment
of cash dividends will be at the discretion of the Company's Board of
Directors and will depend, among other factors, upon the Company's earnings,
financial condition and capital requirements and the terms of the Company's
financing agreements. In addition, the Company's future financing agreement
may contain limitations on the payment of cash dividends.
13
<PAGE>
DILUTION
The net tangible book value (tangible assets minus total liabilities) of the
Company as of March 31, 1998 was $8.0 million, or $2.74 per share of
outstanding Common Stock. After giving effect to the sale of the 2,000,000
shares of Common Stock offered by the Company hereby at an assumed initial
offering price of $11.00 per share (and deducting the estimated underwriting
discount and offering expenses), the pro forma net tangible book value of the
Company as of March 31, 1998 would have been approximately $17.1 million, or
$3.47 per share. This change represents an immediate increase in net tangible
book value of $0.73 per share to the existing shareholders of the Company (the
"Existing Shareholders") and an immediate dilution of $7.53 per share to
investors purchasing shares of Common Stock in this Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $11.00
Net tangible book value per share before this Offering..... $ 2.74
Increase in net tangible book value per share attributable
to this Offering.......................................... 0.73
------
Net tangible book value per share after this Offering........ 3.47
------
Dilution per share to new investors.......................... $ 7.53
======
</TABLE>
The following table summarizes as of March 31, 1998 the differences between
the Existing Shareholders and investors purchasing shares of Common Stock in
this Offering with respect to the number of shares of Common Stock distributed
to Irex shareholders in the Separation or purchased from the Company in the
Offering (assuming no exercise of the Underwriters' over-allotment option),
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES DISTRIBUTED
OR PURCHASED TOTAL CONSIDERATION
--------------------- -------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 2,913,547 59.3% $ -- -- $ --
New investors........... 2,000,000 40.7% 22,000,000 100.0% 11.00
----------- ------- ----------- -----
Total................. 4,913,547 100.0% $22,000,000 100.0%
=========== ======= =========== =====
</TABLE>
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1998 and as adjusted to give effect to the Separation
and the sale of 2,000,000 shares of Common Stock offered by the Company in the
Offering at an assumed initial public offering price of $11.00 per share,
after deducting the estimated underwriting discounts and commissions and
estimated Offering expenses payable by the Company, and the application of
estimated net proceeds therefrom. See "Use of Proceeds." This table should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------
AS
ACTUAL PRO FORMA (1) ADJUSTED (2)
------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt............ $ 1,450 $ 1,450 $ --
======= ======= =======
Payable to affiliates........................ $21,536 $21,536 $18,722
======= ======= =======
Long-term debt:
Notes payable to affiliate................. $ 4,742 $ 4,742 $ --
Other...................................... 64 64 --
------- ------- -------
Total long-term debt..................... $ 4,806 $ 4,806 $ --
------- ------- -------
Shareholder's equity:
Common Stock............................... $ 29 $ 29 $ 49
Paid in surplus............................ 974 974 20,514
Retained earnings.......................... 8,584 (1,906) (1,906)
------- ------- -------
Total shareholder's equity............... $ 9,587 $ (903) $18,657
------- ------- -------
Total capitalization..................... $14,393 $ 3,903 $18,657
======= ======= =======
</TABLE>
- --------
(1) Adjusted to give effect to the planned dividend to Irex.
(2) Adjusted to reflect (i) the Separation, (ii) the sale of 2,000,000 shares
of Common Stock by the Company at an assumed initial public offering price
of $11.00 per share and (iii) the application of approximately
$19.6 million of the net proceeds to the repayment of indebtedness (both
long-term and payable to affiliates) as well as the repayment of
indebtedness in connection with the declaration of a dividend in the
amount of $10.5 million to Irex immediately prior to the Separation.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial information presented below as of and for the years
ended December 31, 1996 and December 31, 1997, and for the year ended December
31, 1995 has been derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. This information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's consolidated financial
statements and related notes included elsewhere in this Prospectus. The
historical financial information as of and for the years ended December 31,
1993 and December 31, 1994 and for the three months ended March 31, 1997 and
March 31, 1998 and as of December 31, 1995 and March 31, 1998 have been
derived from the unaudited consolidated financial statements of the Company
and, in the opinion of management, include all adjustments (consisting only of
normal, recurring adjustments) necessary to present fairly the information set
forth therein.
The pro forma financial information has been prepared on the basis of
certain assumptions and estimates and may not be indicative of the results
that would have been achieved if the recapitalization and the Offering had
been effected on the dates indicated or that may be achieved in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $89,396 $101,895 $118,395 $141,800 $158,510 $36,280 $42,669
---------- ---------- ---------- ---------- ---------- --------- ---------
Gross profit........... 18,937 21,564 25,892 31,110 34,252 7,725 9,360
Selling, general, and
administrative
expense............... 17,426 18,957 21,841 24,762 27,229 6,588 7,992
---------- ---------- ---------- ---------- ---------- --------- ---------
Operating income....... 1,511 2,607 4,051 6,348 7,023 1,137 1,368
Interest expense, net.. 913 1,194 1,840 1,854 1,939 448 516
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before income
taxes................. 598 1,413 2,211 4,494 5,084 689 852
Income tax provision... 216 655 918 1,810 2,077 281 349
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income ............ $ 382 $ 758 $ 1,293 $ 2,684 $ 3,007 $ 408 $ 503
========== ========== ========== ========== ========== ========= =========
Net income per share-
basic................. $ 0.13 $ 0.26 $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Net income per share-
diluted............... $ 0.13 $ 0.26 $ 0.44 $ 0.92 $ 1.03 $ 0.14 $ 0.17
Weighted average number
of common shares
outstanding--basic.... 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
Weighted average number
of common shares
outstanding--diluted.. 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547 2,913,547
PRO FORMA INCOME
STATEMENT DATA (1):
Operating income....... $ 7,023 $ 1,368
Interest expense, net.. 1,123 339
---------- ---------
Income before income
taxes................. 5,900 1,029
Income tax provision... 2,412 422
---------- ---------
Net income............. $ 3,488 $ 607
========== =========
Net income per share--
basic................. $ 0.71 $ 0.12
Net income per share--
diluted............... $ 0.71 $ 0.12
Weighted average number
of common shares
outstanding--basic.... 4,913,547 4,913,547
Weighted average number
of common shares
oustanding--diluted... 4,913,547 4,913,547
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1998
------------------------------------- -------------------------------------
1993 1994 1995 1996 1997 ACTUAL PRO FORMA (3) AS ADJUSTED (4)
------- ------ ------ ------- ------- ------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $10,198 $9,166 $9,839 $10,804 $11,266 $10,471 $ (19) $14,735
Total assets........... 28,480 31,814 36,026 38,935 47,651 53,743 53,743 53,743
Total long-term debt
(2)................... 19,055 20,819 22,996 22,370 26,493 27,792 27,792 18,722
Shareholder's equity... 3,279 3,655 4,200 6,421 9,180 9,587 (903) 18,657
</TABLE>
- --------
16
<PAGE>
(1) Adjusted to reflect the reduction in interest expense and the
corresponding income tax related to the reduction in long-term debt and
payable to affiliates from the estimated net proceeds of the Offering as
if it had occurred on January 1, 1997.
(2) Total long-term debt is composed of:
(a) Long-term debt with an affiliate ($8,550 from 1993 through 1995, $7,364
in 1996, $6,178 in 1997 and $6,178 in 1998) and other long-term debt
($94 in 1997 and $78 in 1998).
(b) Payable to affiliates. This balance was $10,505 in 1993, $12,269 in
1994, $14,446 in 1995, $15,006 in 1996, $20,221 in 1997 and $21,536 in
1998.
(3) Represents actual data as of March 31, 1998 as adjusted to give effect to
the planned $10.5 million dividend to Irex.
(4) Adjusted to reflect (i) the Separation, (ii) the sale of 2,000,000 shares
of Common Stock by the Company at an assumed initial public offering price
of $11.00 per share and (iii) the application of approximately
$19.6 million of the net proceeds to the repayment of indebtedness (both
long-term and payable to affiliates) as well as the repayment of
indebtedness incurred in connection with the declaration of a $10.5
million dividend to Irex immediately prior to the Separation.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements appearing elsewhere in this Prospectus.
The Company is a leading distributor and fabricator of mechanical
insulation, architectural/acoustical products and specialty products and
services for the commercial and industrial markets. The Company has developed
a national network of 52 distribution centers, including seven fabrication
facilities, at strategically chosen locations in 21 states. Through this
network, the Company distributes a variety of mechanical insulation,
architectural/acoustical products and numerous specialty products to customers
for use in the new construction, renovation and maintenance sectors of
industrial and commercial markets. The markets in which the Company competes
have generally exhibited steady and relatively non-cyclical growth due to the
Company's geographic diversity and broad customer base. The Company provides
products and services to customers in a range of industries, including the
general commercial construction, utilities, petro-chemical, pulp and paper,
cold storage, chemical, marine and original equipment manufacturing
industries, among others.
Historically, the supply markets in which the Company operates have been
highly fragmented and populated by many smaller local and regional
distributors. The industry has begun a trend toward consolidation due
principally to the economies of scale realized by large distributors, the
increasing demand by customers for fewer sources of supply, the benefits of
volume purchasing by larger vendors and demands by customers for additional
value-added services which require substantial investments in technology,
human resources and infrastructure. The Company believes that those
distributors which develop the capabilities and strengths to take advantage of
these trends will be well-positioned to gain market share.
In order to capitalize on its core competencies and take advantage of market
opportunities, the Company has adopted a growth strategy which focuses
primarily on acquiring and opening new distribution centers. The Company
initially adopted a growth strategy to strengthen its presence in regional
markets and has recently begun to implement its strategy on a national scale.
For the three-year period ended December 31, 1997, the Company acquired seven
distribution operations and opened six new distribution centers. Through
targeted acquisitions and distribution center openings, the Company is able to
expand its geographic presence into new markets, meet supplier initiatives and
customer service requirements, pursue strategic opportunities, broaden its
product and service capabilities and take advantage of current industry
dynamics. Distribution centers opened through start-ups or acquisitions during
the three-year period ended December 31, 1997 accounted for approximately
37.2% of the $40.1 million increase in the Company's net sales during that
period. The Company believes that future results of operations will depend in
large part on the Company's ability to continue to make acquisitions on
attractive terms and open new distribution centers in strategic locations, and
then to successfully integrate and manage these new facilities.
Newly opened distribution centers typically generate an operating loss
during the first one to two years of operations. A greater number of
distribution center openings by the Company in the two-year period ended
December 31, 1997 resulted in a higher percentage of facility and personnel
expenses in 1997 as compared to 1996. However, as the Company generates
incremental volume through acquired or newly opened distribution centers, the
Company believes it will realize improvement in its operating margins by
carrying its fixed costs over a larger revenue base.
On January 19, 1998, Irex announced the Separation. The transaction will
provide the Company with increased flexibility to fund and execute its growth
strategy of internal expansion and acquisitions. The Company's participation
in a consolidating industry, where customers and suppliers desire
relationships with fewer distributors that can provide a range of value-added
products and services, affords additional growth opportunities. The spin off
will create a management team and capital structure devoted solely to
capitalizing on
18
<PAGE>
these opportunities. The Company has entered into an agreement with Irex which
provides, among other things, for Irex to continue to provide information
services to the Company for a three-year period following the Separation. See
"Separation from Irex."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statements of income expressed as a percentage
of net sales:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------- ------------
1995 1996 1997 1997 1998
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales..................... 78.1% 78.1% 78.4% 78.7% 78.1%
------- ------- ------- ----- -----
Gross profit...................... 21.9% 21.9% 21.6% 21.3% 21.9%
Selling, general and administra-
tive expenses.................... 18.4% 17.4% 17.2% 18.2% 18.7%
------- ------- ------- ----- -----
Operating income.................. 3.5% 4.5% 4.4% 3.1% 3.2%
Interest expense, net............. 1.6% 1.3% 1.2% 1.2% 1.2%
------- ------- ------- ----- -----
Income before income taxes........ 1.9% 3.2% 3.2% 1.9% 2.0%
Income tax provision.............. 0.8% 1.3% 1.3% 0.8% 0.8%
------- ------- ------- ----- -----
Net income........................ 1.1% 1.9% 1.9% 1.1% 1.2%
======= ======= ======= ===== =====
</TABLE>
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
Net Sales. The Company's net sales increased $6.4 million, or 17.6%, to
$42.7 million in the three months ended March 31, 1998 from $36.3 million in
the three months ended March 31, 1997. Of this increase, approximately $4.6
million, or 71.9%, resulted from the opening of five new distribution centers
and three acquisitions in 1997 and 1998. The remaining $1.8 million, or 28.1%,
is accounted for through volume growth in existing operations.
Gross Profit. Gross profit increased $1.6 million, or 21.2%, to $9.4 million
in the three months ended March 31, 1998 from $7.7 million in the three months
ended March 31, 1997. As a percentage of net sales, gross profit also
increased to 21.9% from 21.3% over the same period. This increase was
primarily the result of two recent acquisitions in the relatively higher
margin fabrication and industrial mechanical markets. Sales of products
shipped directly from manufacturers, which generate lower margins, decreased
by $2.0 million in the period.
Selling, General and Administrative Expenses ("SG&A"). SG&A increased 21.3%
to $8.0 million in the three months ended March 31, 1998 from $6.6 million in
the three months ended March 31, 1997. As a percentage of net sales, SG&A
increased to 18.7% from 18.2% over the same period. The higher level of SG&A
is a result of a greater number of acquisitions and new distribution center
openings since December 31, 1996. New distribution centers typically require
expenditures in advance of full revenue generation.
Interest Expense. Interest expense was $0.5 million in the three months
ended March 31, 1998 as compared to $0.4 million in the three months ended
March 31, 1997. The long-term notes payable to affiliate accounted for $0.2
million of interest expense in both years. The remainder of $0.3 million in
1998 and $0.2 million in 1997 represented the Irex interest charge allocated
to the Company based on the monthly balance in the payable to affiliates
account. The recent acquisitions and increased levels of inventory and
accounts receivable were funded through short-term borrowings with Irex.
Income Tax Provision. The effective tax rate was 41.0% in the three months
ended March 31, 1998 and 40.8% in the three months ended March 31, 1997. The
Company's tax return is included in the consolidated income tax return of
Irex. However, the Company's income tax provision in 1998 and 1997 is based on
the amount which would have resulted had the Company filed a separate tax
return.
19
<PAGE>
Acquisitions. During the first quarter of 1998, the Company purchased
certain assets of Extol of Texas, Inc. ("Extol") in Houston and Corpus
Christi, Texas. The transaction closed on March 1, 1998 and accounted for
sales of $1.2 million in the quarter ended March 31, 1998. In fiscal year
1997, Extol had net sales of approximately $13.2 million. The quarter ended
March 31, 1998 also included the results of operations of Constructions
Systems, Inc. from which the Company purchased certain assets on December 8,
1997. Net sales for the first quarter 1998 aggregated $2.4 million.
SUBSEQUENT EVENTS
On May 13, 1998, the Company executed a letter of intent to purchase certain
assets of a mechanical insulation fabricator with fiscal year 1997 sales of
approximately $4.0 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. The Company's net sales increased $16.7 million, or 11.8%, to
$158.5 million in 1997 from $141.8 million in 1996. Of this increase,
approximately 34.4% was attributable to sales volume from six distribution
centers opened in 1996 and 1997. Growth from existing operations accounted for
approximately 39.0% of the increase in net sales as volume remained strong
across each of the Company's primary lines of business. Export sales, which
primarily consist of sales to domestic exporters and are included in the
growth from existing operations, comprised 10.0% of the Company's net sales
and contributed $5.0 million of this increase. The remaining increase in net
sales, representing $4.4 million, resulted from six acquisitions completed
during the two-year period ended December 31, 1997.
Gross Profit. Gross profit increased 10.1% to $34.3 million in 1997 from
$31.1 million in 1996. As a percentage of net sales, the gross profit
decreased slightly to 21.6% from 21.9% in 1996. The slight decrease was
primarily the result of greater sales of products shipped directly from
manufacturers to the customers ("direct-ship business"), which generate lower
margins for the Company. Management does not expect direct-ship business to
increase as a percentage of total sales.
Selling, General and Administrative Expenses. SG&A primarily consist of
personnel-related expenses and facility lease and operating expenses. SG&A
increased 10.0%, to $27.2 million in 1997 from $24.8 million in 1996. As a
percentage of net sales, SG&A decreased to 17.2% in 1997 from 17.4% in 1996.
The improvement was generally the result of a decrease in the provision for
losses on accounts receivable as the Company has made significant efforts
toward improving the quality of its credit portfolio. This decrease in the
loss provision was partially offset by increases in personnel and facility
lease expenses due to newly opened distribution centers.
It is the Company's practice to determine the need for specific reserves
based on a review of all account balances exceeding specified parameters. In
addition, a non-specific reserve is maintained for all accounts not
specifically reviewed. During 1995 and 1996, there were several accounts which
were specifically reviewed by management and determined to require specific
reserves. At December 31, 1997 the number of problem accounts, those subject
to specific reserve review, declined due to a concentrated effort to improve
the credit quality and collection process. The success of this overall effort
is evidenced by the decline of days sales outstanding from 69.7 days at
December 31, 1995 to 63.5 days at December 31, 1997.
The method used to establish the non-specific reserve during this same
period remained unchanged.
Interest Expense, Net. Interest expense was $1.9 million in both 1997 and
1996. A portion of the interest expense was attributable to the long-term
notes payable to affiliate, which accounted for $0.7 million of interest
expense in both 1997 and 1996. The remaining interest expense was primarily
associated with the payable to affiliates account. Based upon the activity in
this account, Irex charged the Company interest of $1.2 million in 1997 and
$1.1 million in 1996.
20
<PAGE>
Income Tax Provision. The effective tax rate was 40.9% in 1997 and 40.3% in
1996. The Company's tax return is included in the consolidated income tax
return filed by Irex. However, the Company's income tax provision is based on
the amount which would have resulted had the Company filed a separate tax
return.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. The Company's net sales increased $23.4 million, or 19.8%, to
$141.8 million in 1996 from $118.4 million in 1995. Higher sales volume at
existing centers accounted for approximately 80.9% of the increase. Export
sales, included in the growth from existing centers, increased to $11.0
million in 1996 from $2.0 million in 1995. The increase in export sales was
primarily the result of sales made to two domestic exporters of products
destined for Russia. Three distribution centers opened in 1996 contributed
approximately 7.5% of the increase. The remaining increase in net sales,
representing $2.7 million, resulted from four acquisitions completed during
the two-year period ended December 31, 1996.
Gross Profit. Gross profit increased 20.2% to $31.1 million in 1996 from
$25.9 million in 1995. As a percentage of net sales, the gross profit remained
stable at 21.9% in both 1996 and 1995. An increase in direct-ship business,
which carries lower gross margins, was offset by higher gross margins on the
sales of fabricated products.
Selling, General and Administrative Expenses. SG&A increased 13.4% to $24.8
million in 1996 from $21.8 million in 1995. The increase was primarily
attributable to higher personnel expenses from the opening of new distribution
centers, the pursuit of new industrial customers in the Southwest and the
securing of a new national account as reflected in the increase in sales
volume. However, as a percentage of net sales, SG&A decreased to 17.4% in 1996
from 18.4% in 1995. This decrease was primarily due to the ability of the
Company to increase sales without a corresponding increase in its overhead
structure.
Interest Expense, Net. Interest expense remained relatively unchanged in
1995 and 1996 at $1.9 million. A portion of the interest expense was
attributable to the long-term notes payable to affiliate, which accounted for
interest expense of $0.7 million in 1996 and $0.8 million in 1995. The
remaining interest expense was primarily associated with the payable to
affiliates account. Based upon the activity in this account, Irex charged the
Company interest of $1.1 million in 1996 and $1.0 million in 1995.
Income Tax Provision. The effective tax rate was 40.3% in 1996 and 41.5% in
1995. The Company's tax return is included in the consolidated income tax
return filed by Irex. However, the Company's income tax provision is based on
the amount which would have resulted had the Company filed a separate tax
return.
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The following table presents certain unaudited quarterly data from the
Company's consolidated statements of income for each of the last nine fiscal
quarters. In the opinion of the Company's management, this quarterly
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Prospectus and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the unaudited quarterly results set forth herein. The Company's
quarterly results may be subject to fluctuation; thus, the operating results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $32,553 $35,187 $37,689 $36,371 $36,280 $37,553 $41,548 $43,129 $42,669
Cost of net sales....... 25,494 27,570 29,659 27,967 28,555 29,376 32,450 33,877 33,309
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 7,059 7,617 8,030 8,404 7,725 8,177 9,098 9,252 9,360
Selling, general and
administrative
expenses............... 5,825 6,087 6,067 6,783 6,588 6,585 6,822 7,234 7,992
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ $ 1,234 $ 1,530 $ 1,963 $ 1,621 $ 1,137 $ 1,592 $ 2,276 $ 2,018 1,368
======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
(AS A PERCENTAGE OF NET SALES)
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net sales....... 78.3 78.4 78.7 76.9 78.7 78.2 78.1 78.5 78.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 21.7 21.6 21.3 23.1 21.3 21.8 21.9 21.5 21.9
Selling, general and
administrative
expenses............... 17.9 17.3 16.1 18.6 18.2 17.5 16.4 16.8 18.7
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 3.8% 4.3% 5.2% 4.5% 3.1% 4.3% 5.5% 4.7% 3.2%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. The primary factor that may affect the
Company's quarterly operating results is lower sales volumes in the first
quarter due to winter weather conditions in certain regions of the country,
which reduces the number of new construction, renovation and maintenance
projects and consequently decreases demand for the Company's products and
services.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily relied on cash flow from operations and borrowings
from the Company's affiliates prior to the Separation to finance its
operations. During the quarter ended March 31, 1998, net cash provided by
operating activities totalled $4.4 million as compared to $0.9 million in the
first quarter of 1997. The increase was primarily a result of an increase in
accounts payable and the increase in accounts receivable as a result of sales.
Net cash used for investing activities totalled $5.7 million in the first
quarter of 1998 as compared to $0.1 million in the comparable period in 1997.
The 1998 period reflects the acquisition which resulted in goodwill of
approximately $0.7 million which will be amortized over 15 years. The net cash
provided from financing activities in the first quarter of 1998 was a result
of borrowings from affiliates.
Net cash provided by operating activities totaled $1.2 million during 1997
compared to $1.9 million during 1996. The decrease was primarily attributable
to an increase in accounts receivable, partially offset by an increase in
accounts payable, each of which resulted from the Company's higher sales
volume. While the balance for receivables and inventories has increased as a
result of the growth in sales and the number of distribution centers, the
Company's focus on effective asset management has led to an improvement in
both accounts receivable turnover and inventory turnover. Receivables
turnover, calculated using 12-month average balance for accounts
22
<PAGE>
receivable, improved to 5.7x in 1997 from 5.2x in 1995. Inventory turnover,
exclusive of sales shipped directly from manufacturers to customers, increased
to 7.2x in 1997 from 6.7x in 1995.
Net cash used for investing activities totaled $4.0 million in 1997 and $0.8
million in 1996. The Company completed three acquisitions in the fourth
quarter of 1997 for aggregate cash consideration of $3.5 million, which
collectively resulted in goodwill of approximately $0.9 million that is being
amortized principally on a straight-line basis over 15 years. Capital
expenditures totaled $0.6 million in each of 1997 and 1996.
Net cash provided by financing activities totaled $3.2 million in 1997
compared to net cash used of $1.1 million in 1996. The $4.2 million change was
attributable to an increase in the Company's payable to affiliates account.
During 1997 and 1996, the Company made debt repayments of $1.2 million to an
affiliate of the Company.
As of March 31, 1998 the Company had, and as of the date of this Prospectus
the Company has, no material commitments for capital expenditures.
The Company expects to enter into a four-year committed revolving credit
facility agreement in connection with and prior to consummation of the
Offering. The credit facility is expected to provide an aggregate of $30
million in senior unsecured debt at an interest rate subject to quarterly
adjustment to reflect the Company's debt level as a function of its operating
results. The Company expects that funds from operations and availability under
the credit facility will be sufficient to meet its working capital and growth
strategy requirements for the foreseeable future. The remaining net proceeds
of the Offering after payment of the debt incurred to pay the dividend to Irex
will be utilized to repay long-term and a portion of the short-term borrowings
from Irex. Long-term borrowings from Irex currently are approximately $6.2
million. The Company plans to utilize funding from the credit facility to
repay the short-term borrowings from affiliates and for general working
capital. The credit facility will also be utilized to finance acquisitions
including related working capital requirements. The Company is currently
evaluating the utilization of an interest rate swap to effectively convert a
portion of the funding to a fixed rate.
INFLATION
The Company does not believe that inflation has had a material effect on its
results of operations in recent years. There can be no assurance, however,
that the Company's business will not be affected by inflation in the future.
YEAR 2000 ISSUE
The Company utilizes information systems owned and maintained by Irex. The
Company's ability to conduct its day-to-day operations is dependent in part on
an integrated software program and data-based system, which serves as a
critical tool in carrying out functions in several key areas of the business,
including inventory management, pricing, sales, financial reporting and
personnel administration.
The Company has entered into an agreement with Irex pursuant to which Irex
will continue to provide information services to the Company on a fee for
services basis for a three-year period subsequent to the Separation. See
"Separation from Irex--Agreements with Irex."
The Company has reviewed all of its current computer applications with
respect to the Year 2000 issue. The Company believes all of its relevant
applications will be Year 2000 compliant following the installation of an
upgrade to the system software scheduled for October 1998. The Company
believes that any additional costs with respect to Year 2000 compliance will
not be material to the Company. The Company is unable to determine the effects
of Year 2000 compliance by its suppliers and customers.
23
<PAGE>
ACQUISITION AND EXPANSION BACKGROUND
Two key components of the Company's growth strategy have been acquisitions
and the opening of distribution centers. Historically, the Company grew as it
solidified its presence in regional markets by opening new distribution
centers or acquiring business operations with well-developed market positions.
More recently, the Company has begun to implement a growth strategy executed
on a national scale. Through targeted acquisitions and distribution center
openings, the Company pursues opportunities to expand its presence in new
geographic areas with strong growth characteristics. The Company believes that
being a broadly based national distributor provides it with a competitive
advantage over regional and local competitors, especially in servicing
customers with multiple locations that desire a single-supplier relationship.
This strategy has enabled the Company to further penetrate existing markets,
broaden its product and service capabilities and take advantage of current
industry dynamics. The Company believes that these components of its growth
strategy have been significant factors in producing compound annual growth
rates in net sales and operating income of 14.6% and 57.7%, respectively, for
the five-year period ended December 31, 1997.
For the five-year period ended December 31, 1997, the Company acquired 11
distribution operations (including three from affiliates), which together
contributed approximately $13.2 million, or 8.3%, to the Company's 1997 net
sales. During the same period, the Company opened 10 distribution centers,
which together contributed approximately $12.3 million, or 7.8%, to the
Company's 1997 net sales. Since January 1, 1998, the Company has completed one
acquisition and opened three distribution centers. The Company has entered
into a letter of intent to purchase certain assets of a mechanical insulation
fabricator with fiscal year 1997 net sales of approximately $4.0 million.
The Company pursues acquisitions and opens distribution centers as the
result of strategic opportunities. In addition, the Company's approach to
acquisitions and distribution center openings is influenced by the following
factors:
Expand Product Lines and Broaden Technical Expertise. The Company is able
to expand its product lines and broaden its technical expertise through
acquisitions. The Company believes that its national infrastructure allows
it to add new product lines and capabilities for existing customers without
incurring significant additional cost.
Service Customer Requirements. The Company opens distribution centers and
pursues acquisitions in regions where it can better serve its existing
customers' product requirements. Once operational, the Company seeks to
drive incremental volume through these locations.
Pursue Market Opportunities. The Company opens distribution centers in
locations where it believes volume levels can support stand-alone
operations. Such opportunities may result from general economic growth in
particular regions or product lines, inadequate servicing of markets by
competitors and other factors identified in the Company's experience.
Respond to Supplier Initiatives. Acquisitions and distribution center
openings also result from the Company's strong relationships with its
suppliers. Through these relationships the Company becomes an integral part
of suppliers' expansion strategies. The Company works together with its
suppliers to serve their common growth strategies and increase its market
share.
The Company's management has significant experience integrating acquired and
newly opened operations into its nationwide business. Following acquisitions,
the Company attempts to eliminate redundancies, conform inventory and
administrative practices, streamline administrative functions and systems,
leverage purchasing power and improve asset management. Similarly, new
distribution centers are opened with the goal of increasing operating
efficiencies. Once a site and operating management have been identified for a
new location, the Company expects new distribution centers can be operational
within 30 days after investments of approximately $25,000 in start-up costs
and approximately $50,000 in initial inventory. Historically, the Company has
found that successful new distribution center operations, on average, break
even during the second year and become profitable during the third year after
start-up.
24
<PAGE>
The following table sets forth the number of distribution centers opened and
the number of acquisitions completed, as well as associated net sales for the
five-year period ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR OF OPERATION
-------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New centers opened................. 4 0 0 3 3
Cumulative total since January 1,
1993............................. 4 4 4 7 10
Acquisitions completed (1)......... 1 3 1 3 3
Cumulative total since January 1,
1993............................. 1 4 5 8 11
REVENUE SOURCES:
New centers opened since 1993..... $ 2,475 $ 4,775 $ 4,399 $ 7,074 $ 12,346
Acquisitions completed since
1993............................. 508 1,300 5,125 7,802 13,173
Operations existing prior to
1993............................. 86,413 95,820 108,871 126,924 132,991
------- -------- -------- -------- --------
TOTAL REVENUE.................... $89,396 $101,895 $118,395 $141,800 $158,510
======= ======== ======== ======== ========
</TABLE>
- --------
(1) Includes two acquisitions in 1996 and one acquisition in 1993 from
affiliates.
The following table sets forth brief summaries of acquisitions completed by
the Company since January 1, 1997:
<TABLE>
<CAPTION>
NET SALES IN LAST
FULL FISCAL YEAR
PRIOR TO
DATE ACQUISITION ACQUISITION PRINCIPAL BUSINESSES
- ------------- ------------------------------ ----------------- --------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
October 1997 Common Stock of Richlar $ 2,602 Precision die cutting,
Industries, Inc., lamination and specialty
East Syracuse, New York fabrication
December 1997 Certain Assets of Construction $ 9,305 Distribution of architectural/
Systems, Inc., Houston, Texas acoustical (including specialty
drywall and metal studs) and
specialty products from two
strategic service centers
December 1997 Certain Assets of R.E. Kramig, $ 500 (1) Distribution of mechanical
Louisville, Kentucky insulation products primarily to
the industrial market
March 1998 Certain Assets of $ 13,196 Mechanical insulation
Extol of Texas, Inc., Houston fabrication and distribution to
and Corpus Christi, Texas the industrial market
</TABLE>
- --------
(1) Estimated by management of the Company.
25
<PAGE>
The following table sets forth the distribution centers that have been
opened since 1993 as well as 1997 net sales of each.
<TABLE>
<CAPTION>
YEAR OPENED DISTRIBUTION CENTER 1997 NET SALES (1)
----------- -------------------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
1993 Ft. Worth, Texas $1,624
Ft. Myers, Florida (2) 266
Ft. Lauderdale, Florida 2,178
1996 Oklahoma City, Oklahoma 947
Austin, Texas 2,159
Charleston, West Virginia 2,529
1997 Bridgeport, Connecticut 362
Newark, Delaware (2) 135
Charleston, South Carolina 1,321
1998 Augusta, Georgia Not applicable
Pittsburgh, Pennsylvania Not applicable
Nashville, Tennessee Not applicable
</TABLE>
- --------
(1) Figures reflect sales for all operations, including operations added as a
result of expansion since the opening date.
(2) Satellite operation of nearby primary facility.
26
<PAGE>
BUSINESS
INTRODUCTION
Specialty Products & Insulation Co. is a leading national distributor and
fabricator of mechanical insulation, architectural/acoustical products and
specialty products to commercial and industrial markets. The Company also
offers customized fabrication, export and other value-added services related
to its core product lines. The Company operates through a national network of
52 distribution centers, including seven fabrication facilities, at
strategically chosen locations in 21 states. Through this network, the Company
offers approximately 25,000 stock keeping units to more than 9,000 customers,
including specialty contractors, facility owners, general contractors,
original equipment manufacturers ("OEMs"), exporters and supply houses. The
Company's principal product categories include piping and equipment insulation
as well as acoustical ceilings and specialty wall panels, and include the
products of more than 150 manufacturers including Armstrong World Industries,
Owens Corning, Johns Manville, Dow Chemical and Pittsburgh Corning. Since
commencing operations in the early 1980s, the Company has experienced
significant growth as a result of its ability to capitalize on industry
changes including, principally, the increased reliance on distributors by
manufacturers and customers. Net sales of the Company increased from $118.4
million in 1995 to $158.5 million in 1997, and operating income grew from $4.1
million in 1995 to $7.0 million in 1997. In the first three months of 1998,
net sales and operating income totalled $42.7 million and $1.4 million,
respectively, as compared to $36.3 million and $1.1 million respectively, in
the first three months of 1997.
INDUSTRY OVERVIEW
The Company competes in the highly fragmented and consolidating commercial
and industrial segment of the building products industry. The Company broadly
defines its two core markets as mechanical insulation, consisting primarily of
pipe, duct and equipment insulation and architectural/acoustical products,
consisting primarily of acoustical ceiling systems, fiberglass-reinforced
panels and other wall and ceiling products. The Company participates in the
commercial and industrial markets by supplying products for use in (i) new
construction, (ii) renovation of existing facilities, (iii) ongoing
maintenance and (iv) OEM applications.
The channels of supply in the Company's markets have experienced significant
change. In the early 1980s, product sales in the Company's markets were
characterized by direct sales from manufacturers to contractors who in turn
sold the products to other contractors and end-users. An expanding and
increasingly diverse customer base made it difficult for the typical
manufacturer to directly serve its entire potential customer universe. Also,
as manufacturers realized opportunities to enhance profitability and improve
returns on capital, the need for independent distributors evolved. Through
this evolution, independent distributors have enabled manufacturers to reduce
logistical expenses, lower marketing expenses and better manage inventories.
In addition, customers began to utilize independent distribution sources in
order to lower costs, reduce supply sources and gain high-quality, value-added
services. Customers are increasingly outsourcing non-core business functions
to distributors able to provide value-added services such as procurement,
delivery and inventory management. The emergence of the distribution channel
has reduced duplicate functions performed by both manufacturers and customers,
thereby affording them more resources for their core competencies.
The evolution toward independent distribution has produced an industry
populated by many smaller local and regional distributors. The Company
believes the industry is now starting to undergo a significant trend toward
consolidation of these smaller distributors as both suppliers and customers
seek to enhance efficiencies, focus on their core competencies and reduce
costs while maintaining high levels of product and service quality. The
Company believes that those distributors that develop the capabilities and
strengths to satisfy these demands will be well positioned to exceed market
growth rates in this industry. Specifically, the Company believes that large,
national distributors with significant volumes, sophisticated information
systems and relatively low infrastructure costs can offer more value to
customers and therefore gain higher market share.
Key customer categories in the markets served by the Company include the
following:
Specialty Contractors, such as insulation and acoustical contractors,
constitute the primary customer segment for the installation and
maintenance of mechanical insulation and architectural/acoustical systems.
27
<PAGE>
The Company believes specialty contractors are increasingly developing
long-term relationships with distributors in order to improve labor
productivity, eliminate inventories and reduce material handling costs.
Facility Owners, such as manufacturing and process plants, large
retailers, universities and other institutions, represent a growing source
of business for distributors as these customers increasingly separate
material and labor purchases and perform their own maintenance and new
construction. The Company believes that facility owners with locations
nationwide value distributors that can provide products and services to
multiple locations.
General Contractors, such as mechanical contractors and engineering
firms, are increasingly purchasing materials for their projects and
performing their own insulation work. The Company believes these customers
seek distributors with strong sourcing capabilities, processes and
information systems.
Original Equipment Manufacturers, such as manufacturers of appliances,
modular office equipment and air conditioning systems, benefit from the
purchasing, fabrication, material handling, inventory management,
procurement and delivery capabilities of larger distributors.
Exporters, representing purchasers of materials required for projects
overseas, benefit from the product knowledge, purchasing power,
consolidation capabilities and delivery flexibility of large distributors.
Supply Houses, such as plumbing wholesalers, are generally distributors
in specialized fields that re-sell products to other customer groups. These
customers include specialty and integrated suppliers that may benefit from
the purchasing, warehousing and service capabilities of larger, more
sophisticated distributors.
Mechanical Insulation Products. The mechanical insulation product market
includes thermal insulation materials and systems for use in the commercial
and industrial sectors of the construction industry as well as OEM
applications. Mechanical insulation is used in new construction, maintenance,
renovation and upgrades of manufacturing facilities, process plants,
commercial buildings and mechanical equipment. These products enable customers
to improve the performance of their mechanical systems and products, reduce
energy costs, decrease emissions, such as carbon dioxide and sulfur dioxide,
and improve the comfort and safety of the work environment. According to the
American Society of Heating, Refrigerating and Air Conditioning Engineers
("ASHRAE"), current insulation practices in the United States often result in
the under-insulation of equipment, commercial buildings and industrial
facilities. If such equipment, buildings and facilities were insulated at the
ASHRAE standard, the Company believes that significant reductions in energy
consumption, utility costs and carbon dioxide emissions could be achieved.
Architectural/Acoustical Products. The architectural/acoustical product
market includes ceiling panels and grid systems and specialty wall panels for
the new construction, renovation and retail market segments. These products
are used in commercial office buildings, education facilities, health care
institutions, entertainment complexes and correctional facilities. Independent
estimates forecast that the strongest areas of future growth in the
nonresidential construction market include hotels, educational and public
administration facilities. The ceiling systems segment includes acoustical and
decorative ceilings and suspension systems. Ceiling systems provide an array
of design option benefits to the customer such as acoustic performance, fire
resistance, humidity resistance, light reflectance and durability or ease of
maintenance. The specialty wall segment includes decorative, acoustical and
specialized panels designed for specific uses such as trade show dividers,
modular office systems and kitchen, bath and clean room environments. Many
specialty products are included within this market, the largest component
being passive firestop and fire protection products which are used in new
construction and renovation projects for occupancy safety and property
protection.
OPERATING STRATEGY
The Company is focused on its traditional strengths as a broadly based
national distributor and fabricator of mechanical insulation,
architectural/acoustical products, specialty products and value-added
services. The Company is committed to capitalizing on the expertise, knowledge
and experience its has developed in these
28
<PAGE>
core markets to increase market share and profitability. In addition, the
Company's operating strategy includes the following key elements:
Superior Customer Service. Customers choose suppliers based, in significant
part, on the quality of the service provided. With distribution and sales
forces in each area that it serves, the Company provides its customers with
rapid delivery and localized service. The Company believes its well-trained,
technically competent workforce provides a level of customer service that
leads to long-term relationships with its customers. The Company also believes
that the ongoing assessment of customer satisfaction is critical in the
distribution industry. The Company has implemented a customer satisfaction
survey program and is committed to the ongoing measurement of customer
satisfaction.
National Network of Distribution Centers. Management believes the Company's
national distribution network provides a platform for growth and
profitability. The Company's 51 distribution centers combine warehouse and
office facilities at strategically chosen locations in 21 states. This
national network enables the Company to (i) attract customers that have
multiple locations and provide them with services from multiple distribution
centers within a single service agreement; (ii) participate with key vendors
in the development of national marketing and sales strategies; (iii) achieve
geographic diversification to lessen the impact of reduced demand in any given
region; and (iv) facilitate best-practice benchmarking as well as innovation
and knowledge-sharing within the Company. Management believes the Company's
national network provides it with a unique competitive advantage.
Strong Supplier Relationships. The Company believes that it has excellent
and long-term relationships with its major suppliers. The Company believes its
national presence, financial strength and partnering philosophy have enabled
the Company to become the preferred distributor for many of its suppliers. The
Company works with its suppliers to develop common expansion programs as well
as customer-oriented product solutions.
Low Cost of Operations. The Company believes that its volume of purchases
and desirability as a vendor enable it to obtain purchase terms that are as
favorable as those available to other large competitors. The Company is also
able to realize advantages from the economies of large-scale operation in the
areas of administrative processing, information systems, financing terms,
technical expertise, inventory and working capital management.
Innovative and Committed Employees. Management believes the Company's
corporate culture and values provide it with a competitive advantage. The
Company is focused on recruiting, developing and retaining highly innovative
and committed employees. The Company's senior management has an average of
approximately 10 years' experience with the Company, and many of its sales and
service staff have been working in the same markets for 10 years or more.
GROWTH STRATEGY
The Company believes that its operating strategy provides a foundation for
growth in each of the markets in which it participates. The Company's growth
strategy includes the following key elements:
Increase Sales of Existing and Accessory Products. Management believes the
Company's strengths and operating strategies will lead to increased sales of
existing products to its existing customer base. In addition, the Company
believes that expansion through acquisitions, new distribution center openings
and other strategic initiatives will generate additional sales of existing
products to new customers. Through improved sales efforts, the Company is also
focused on increasing sales of accessory products, such as adhesives and
tools, which are related to its core product lines and customer requirements.
Open New Distribution Centers. The Company expects to continue to open new
distribution centers as a result of new market opportunities, customer service
requirements, supplier initiatives and strategic opportunities.
29
<PAGE>
As the Company continues to broaden its national distribution network through
additional openings, the Company believes it will be able to capitalize on
operating efficiencies and the benefits of a large-scale operation.
Continue Acquisitions. The Company is committed to continuing its
acquisition program to acquire distribution businesses with strong market
positions, supplier support or attractive customer bases. Acquisitions allow
the Company to accelerate revenue growth, expand its geographical presence and
add product lines and technical expertise. The distribution industry continues
to consolidate, and management believes the Company will be able to capitalize
on significant growth opportunities through acquisitions of smaller regional
and local distribution operations.
Emphasize National Accounts. The Company has implemented a national accounts
marketing program directed at facility owners and general contractors.
Management believes that the Company's national distribution network gives the
Company a competitive advantage in securing national and multi-regional
customers seeking to reduce vendors, outsource non-core operations, integrate
supply and gain value-added services such as procurement and material
management.
Add Product Lines. The Company intends to leverage its core product and
technical expertise to add product lines which are complementary to those
currently offered. The Company believes that its existing national
distribution infrastructure enables it to add new product lines without
incurring significant additional cost. For example, the Company utilized its
expertise in both of its core product lines to enter the passive fire
protection market.
PRODUCTS AND SERVICES
The Company offers complete lines of mechanical insulation,
architectural/acoustical products and specialty products as well as customized
fabrication solutions and other value-added services, enabling it to satisfy a
broad range of customer requirements. In all, the Company offers approximately
25,000 stock keeping units from more than 70 product lines, including those of
the leading manufacturers in the industries it serves. The Company believes it
offers significant depth and breadth in its core product lines throughout its
nationwide operations, enabling customers to satisfy most, if not all, of
their product needs through a single source.
In addition, as the distribution industry continues to evolve and
consolidate, customers are increasingly relying on the Company to perform
various value-added services in connection with product distribution. The
Company's fabrication business represents its most significant value-added
service to customers. Its fabrication capabilities extend across all major
product lines and include custom-fitted pipe covering, decorative wall panels
and precision die-cutting. The Company also offers a range of other value-
added services, including energy audits, technical advice, materials handling
and electronic order processing.
30
<PAGE>
The following table sets forth representative samples of the products and
services offered by the Company in its four principal product and service
categories as a percentage of the Company's 1997 net sales from each category:
<TABLE>
<CAPTION>
PRODUCT/SERVICE % OF AGGREGATE 1997
CATEGORY REPRESENTATIVE PRODUCTS REPRESENTATIVE SERVICES NET SALES
- ------------------------ ------------------------ ------------------------ -------------------
<S> <C> <C> <C>
Mechanical Insulation Calcium Silicate, Delivery, Electronic 46.7%
Products Cellular Glass, Processing, Energy
Fiberglass, Jacketing, Audits, Fabrication,
Mineral Fiber, Rigid Innovative Supply
Polyurethane Foam, Agreements, Quantity
Polystyrene Rubber Definition, Product
Shipment Consolidation,
Technical Advice
Architectural/Acoustical Acoustical and Delivery, Electronic 38.3%
Products Decorative Ceiling Processing, Fabrication,
Systems, Acoustical and Quantity Definition,
Decorative Wall Panels, Material Management,
Building Insulation, Product Shipment
Drywall, Fiberglass Consolidation, Technical
Reinforced Panels, Advice
Interior Doors, Metal
Studs
Fabrication Services Acoustical Decorative Customized Fabrication 11.0%
and Display Panels, Solutions, Delivery,
Lamination, OEM Electronic Processing,
Products, Insulation Material Management,
Pipe Covering, Equipment Private Label
Segments and Fittings, Fabrication, Product
Pipe and Tank Wrap, Shipment Consolidation
Precision Die Cutting,
Pre-Cut Insulation
Jacketing
Specialty Products Passive Firestop/Fire Delivery, Quantity 4.0%
Proofing Systems, Floor Definition, Electronic
Covering, Exterior Processing, Material
Insulation Finish Management, Product
Systems Training, Product
Shipment Consolidation,
Technical Advice
</TABLE>
CUSTOMERS
The Company currently serves more than 9,000 customers, including specialty
contractors, facility owners, general contractors, OEMs, exporters and supply
houses. The Company's top 10 customers (including two affiliates) in terms of
net sales accounted for approximately 17% of net sales in 1997, and no single
customer accounted for more than 5% of net sales in 1997.
DISTRIBUTION NETWORK
The Company's distribution network is organized into eight regional
territories encompassing 52 distribution centers in 21 states. Regional
managers are members of the Company's senior management team and have
responsibility for overall operations within each region. Each individual
service center has its own customer-focused team that typically consists of a
branch manager, outside and inside sales representatives and customer service
representatives who include distribution center driver teams and support
staff. The Company's branches are organized as autonomous, decentralized units
and are capable of meeting local market needs as well
31
<PAGE>
as offering competitive prices within the Company's overall policies. Each
branch handles one or more of the Company's product groups and operates as a
separate profit center. Branch managers have the authority and responsibility,
within Company guidelines, to set pricing and tailor the facility's product
offering and mix, as well as the nature of services offered to meet the local
market environment. In addition, each branch manager is responsible for
purchasing, maintenance of adequate inventory levels, cost controls and
customer relations. Common accounting, information systems, insurance, tax and
other administrative functions are provided at the corporate level to
eliminate duplicate administrative expenses.
SALES AND MARKETING
The Company has approximately 88 outside sales representatives, including
branch managers, and 87 inside sales/customer service representatives.
Generally, the inside sales/customer service representatives support the
outside sales representatives and have independent sales responsibility,
including specific customer service and order entry duties. Each outside sales
representative works in an assigned sales territory associated with one of the
Company's 52 distribution facilities and is actively supported by the branch
and regional teams. National accounts are supported by two specialists and the
Company's senior management in conjunction with the total distribution
network. All sales representatives are employees of the Company and are
generally compensated on a salary and incentive-based compensation
arrangement. The incentive portion of the salesperson's compensation is based
on a return-on-assets model and averages above 20% of base compensation.
The Company also markets its products through sales brochures, customer
events, occasional sales promotions, and its Internet web site at
http://www.spi-co.com.
The Company's return and allowance policy generally provides for the return
of standard inventoried products that do not satisfy customer requirements,
provided they are in resalable condition, or products which do not meet
quality standards. Special-order and fabricated products cannot be returned.
The customer is responsible for applicable freight costs and a handling charge
may be levied against the return, depending upon the Company's agreement with
the customer. The Company's suppliers maintain similar policies with the
Company. The Company's experience with returns and allowances has not had a
material effect on the Company's business or financial condition.
SUPPLIERS
The Company has a broad base of approximately 150 suppliers that includes
all major manufacturers in the industries the Company serves. The Company's
leading suppliers of mechanical insulation include Owens-Corning Fiberglas,
Johns Manville, Armstrong World Industries, Dow Chemical, CertainTeed, H.B.
Fuller, Pittsburgh Corning, Thermal Ceramics, Calsilite Group, Childers
Products, RPR Industries and RBX Corporation, among others. The Company's
leading suppliers of architectural/acoustical products include Armstrong World
Industries, STO, National Gypsum, Kemlite, Lasco and Sequentia, among others.
INFORMATION SYSTEMS
The Company utilizes information systems owned and maintained by Irex. The
systems use software that unites the Company's distribution centers and
integrates product tracking, pricing and availability; order processing and
shipping; distribution center operations; purchasing; inventory management;
receivables management; financial reporting; and other financial and
operational functions. A new release of the system software has been fully
tested by other customers of the system vendor and is scheduled to be
installed in 1998 to address Year 2000 compliance issues and provide other
function upgrades. See "Risk Factors--Dependence On Information Systems;
Systems Conversion; Year 2000 Issue."
The Company has entered into an agreement with Irex pursuant to which Irex
will continue to provide information system services to the Company on a fee-
for-services basis for a three-year period following consummation of the
Offering and Separation. During such period the Company intends to evaluate
its existing
32
<PAGE>
and future information system requirements and examine its options for
obtaining such services. These options include, among others, continuing the
existing relationship with Irex or replacing the Company's current systems.
See "Separation from Irex--Agreements with Irex--Corporate Separation
Agreement."
COMPETITION
The Company's markets are highly competitive. Historically, the markets in
which the Company participates have been highly fragmented and populated by a
large number of smaller, local and regional distributors operating in single
geographic areas. These smaller, often owner-operated, distributors have
constituted the principal competition to the Company, but other significant
competitors include regional distributors as well as manufacturers selling
directly to end-users. Certain of the Company's competitors sell identical or
equivalent products at competitive prices, and the Company also competes on
the basis of responsiveness to the needs of customers for product quality,
service, product diversity, and availability.
SEASONALITY AND CYCLICALITY
The Company's business is seasonal and in the past has experienced seasonal
fluctuations in sales and operating results from quarter to quarter. Operating
results are weakest in the first calendar quarter because of the effects of
winter weather on commercial and industrial construction and the consequent
reduction in sales of mechanical insulation and architectural/acoustical
products. Fluctuations in the Company's quarterly sales and operating results
could result in significant volatility in, and otherwise adversely affect, the
market price of the Common Stock. See "Management's Discussion of Financial
Condition and Results of Operations--Seasonality and Quarterly Results of
Operations."
Some of the principal markets for the products and services offered by the
Company are subject to cyclical economic fluctuations that generally affect
pricing, availability and demand for mechanical insulation and
architectural/acoustical products. Cyclical fluctuations can also affect
growth rates in the markets served by the Company's customers, the
availability of products from vendors and the availability of suitable
acquisition candidates. As a result, changes in general economic conditions
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Risk Factors--Seasonality; Industry and
Economic Cycles."
EMPLOYEES
On May 20, 1998, the Company had 556 employees, including 138 sales
representatives, 245 distribution center, delivery, clerical and support
personnel, 113 fabrication personnel and 60 supervisors and managers,
including the Company's executive officers. None of the Company's employees is
covered by a collective bargaining agreement. Management considers the
Company's relations with its employees to be good.
PROPERTIES
The Company leases all of its office and distribution center space. The
typical distribution center lease is for a three- to five-year term and
requires the Company to pay all ongoing expenses such as taxes, utilities,
insurance and maintenance expenses. The following table sets forth certain
information with respect to the Company's significant distribution and
fabrication facilities:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE
-------- --------------
<S> <C>
Atlanta, Georgia......................................... 24,600
Benicia, California...................................... 26,417
Camden, New Jersey....................................... 30,000
Charleston, South Carolina............................... 20,000
Chicago, Illinois........................................ 32,093
Dallas, Texas............................................ 19,840
Indianapolis, Indiana.................................... 21,000
Philadelphia, Pennsylvania............................... 20,000
Syracuse, New York....................................... 22,000
Tampa, Florida........................................... 22,338
</TABLE>
The Company's corporate headquarters are located in approximately 8,900
square feet of leased office space in East Petersburg, Pennsylvania.
33
<PAGE>
LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation. In the
ordinary course of its business, the Company is from time to time involved in
various contractual, warranty, product liability and other cases and claims.
None of the cases currently pending are expected, individually or in the
aggregate, to have a material adverse effect on the Company's business,
operating results or financial condition.
REGULATORY MATTERS
The Company's operations and properties are subject to federal, state, local
and foreign laws, regulations and ordinances relating to the use, storage,
handling, generation, transportation, treatment, emission, release, discharge
and disposal of certain materials, substances and wastes, including laws
pertaining to employee health and safety in connection with the foregoing.
Based upon the Company's experience to date, the Company believes that the
future cost of compliance with existing environmental and employee health and
safety laws, regulations and ordinances will not have a material adverse
effect on the Company's business, operating results or financial condition.
However, future events, such as changes in existing laws and regulations or
their interpretation, may give rise to additional compliance costs or
liabilities that could have a material adverse effect on the Company's
business, operating results and financial condition. Compliance with more
stringent laws or regulations, as well as more vigorous enforcement policies
of regulatory agencies or stricter or different interpretations of existing
laws, may require additional expenditures by the Company that may be material.
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Ronald L. King.......... 54 President, Chief Executive Officer and Director
Michael J. Hughes....... 42 Vice President, Chief Financial Officer, Secretary and Treasurer
Daniel D. Bofinger...... 40 Vice President and Regional Manager
Michael T. Conner....... 45 Vice President and Regional Manager
Michael C. Feehery...... 40 Vice President and Regional Manager
Gregory S. Ganster...... 32 Vice President and Regional Manager
Raymond J. Horan........ 47 Vice President and Regional Manager
Charles F. Schattgen.... 46 Vice President and Regional Manager
W. Kirk Liddell*........ 48 Chairman of the Board of Directors
William W. Adams*(1).... 64 Director
David C. Kleinman*(1)... 62 Director
Wilson D. 68 Director
McElhinny*(2)..........
G. Clay von 56 Director
Seldeneck*(1)..........
John O. Shirk*(2)....... 54 Director
</TABLE>
- --------
* Has agreed to become a member of the Board of Directors and the indicated
committee prior to consummation of the Offering.
(1) Member of the Audit and Finance Committee.
(2) Member of the Compensation and Benefits Committee.
Ronald L. King has been President and Chief Executive Officer of the Company
since June 1997. He previously served as Executive Vice President of the
Company since 1993. Prior to joining the Company, Mr. King was President of
Distribution International and held senior management positions with the Anco
Industries group of companies. He has recently been elected President of the
World Insulation & Acoustic Congress Organization and is a past president of
the National Insulation Association.
Michael J. Hughes became Vice President, Chief Financial Officer, Secretary
and Treasurer of the Company in April 1998. From 1996 until joining the
Company he was Senior Vice President, Investment Banking, of Berwind
Financial, L.P., a regional investment banking firm based in Philadelphia,
Pennsylvania. From 1990 to 1996, Mr. Hughes was Senior Vice President-External
Finance for Meridian Bancorp, Inc.
Daniel D. Bofinger has been Regional Manager, with responsibility for
central Pennsylvania and New England, since 1992 and has been a Vice President
of the Company since 1996. Mr. Bofinger joined the Company in 1982 as a
production superintendent, and became manager of the Lancaster Fabrication
Division in 1986.
Michael T. Conner has been Vice President and Regional Manager of the
Company, with responsibility for the Midwest, since 1996. He joined the
Company in 1986 as a sales representative and served as branch manager of the
Company's Indianapolis operations until his promotion to his current position.
35
<PAGE>
Michael C. Feehery has been Vice President and Regional Manager of the
Company, with responsibility for the Southwest, since 1996. He joined the
Company in 1989 and was branch manager from 1990 until his promotion to his
current position.
Gregory S. Ganster has been Vice President of the Company since 1998 and
Regional Manager of the Company, with responsibility for the Chicago region,
since 1996. He joined the Company in 1992 and was branch manager of the
Company's Elk Grove, Illinois facility from 1995 until his promotion to his
current position. He was previously employed by Armstrong World Industries.
Raymond J. Horan has been Vice President and Regional Manager of the
Company, with responsibility for the mid-Atlantic region, since 1996. He
joined the Company in 1987 as branch manager for the Company's Chicago
operations. Mr. Horan previously held various sales position with the ceilings
division of Armstrong World Industries.
Charles F. Schattgen has been Vice President and Regional Manager of the
Company, with responsibility for the Southeast, since 1991. He joined the
Company in 1985 as branch manager and became area manager in 1987. Before
joining the Company, Mr. Schattgen was employed by Owens Corning Fiberglas.
W. Kirk Liddell will become Chairman of the Board of Directors of the
Company prior to consummation of the Offering. Since 1984 he has been
President, Chief Executive Officer and a director of Irex Corporation, the
parent of the Company prior to the Offering and Separation. Mr. Liddell also
serves on the boards of directors of High Industries, Inc., Penn Fuel Gas,
Inc., the Pennsylvania Chamber of Business and Industry and the Lancaster
Alliance and is President of the Economic Development Company of Lancaster
County.
G. Clay von Seldeneck will become a director of the Company prior to
consummation of the Offering. Mr. von Seldeneck is Managing Director of Snyder
& Company, a private investment banking firm based in Philadelphia,
Pennsylvania. Snyder & Company has performed services for Irex and the Company
in connection with the Offering and the Separation. Prior to joining Snyder &
Company in 1987 Mr. von Seldeneck was Senior Vice President and Chief
Financial Officer for Fidelity Mutual Life Group.
William W. Adams will become a director of the Company prior to consummation
of the Offering. Mr. Adams is former Chairman and President of Armstrong World
Industries, Inc. Mr. Adams joined Armstrong in 1956 and was elected an
Executive Vice President and member of the Armstrong Board of Directors in
1982. He was named Chairman and President in 1988 and retired on January 1,
1995. Mr. Adams is a Director Emeritus of Bell Atlantic Corporation and a
director of High Industries, Inc., Irex Corporation, the National Association
of Corporate Directors and the Lancaster Alliance. He also serves on the
Senior Executive Committee of SCP Private Equity Partners, and is a member of
the Advisory Board of Boardroom Consultants.
David C. Kleinman will become a director of the Company prior to
consummation of the Offering. Since 1971 Mr. Kleinman has been an Adjunct
Professor of Strategic Management at the University of Chicago Graduate School
of Business. Mr. Kleinman is a director of The Acorn Funds, Plymouth Tube
Company, Wisconsin Paper and Products Company, InterAmericas Communications
Corporation, Organics Management Company, Sonic Foundry, Inc. and Irex
Corporation.
Wilson D. McElhinny will become a director of the Company prior to
consummation of the Offering. Before retiring in 1990, Mr. McElhinny was
Chairman, President and Chief Executive Office of Hamilton Bank, and a member
of the Management Committee of Hamilton's parent company, CoreStates Financial
Corporation. He previously served as President and Vice Chairman of CoreStates
Bank, and remains a member of CoreStates Bank's Advisory Board. Mr. McElhinny
is the Chairman of Irex Corporation and a director of The Hunt Corporation,
Reading Eagle Company, Educators Mutual Life Insurance Company, Wohlsen
Construction Company and Production Finance, Inc.
John O. Shirk will become a director of the Company prior to consummation of
the Offering. He has been a partner in the law firm of Barley, Snyder, Senft &
Cohen, LLP, Lancaster, Pennsylvania, since 1973 and was
36
<PAGE>
managing partner from 1983 to 1994. The Company intends to retain Barley,
Snyder, Senft & Cohen, LLP following the Separation and the Offering. Mr.
Shirk is a director of the Economic Development Company of Lancaster County,
EDC Finance Corporation, Harrisburg Area Community College Foundation, Fulton
Financial Corporation, The Horst Group, Inc., Educators Mutual Life Insurance
Company and Irex Corporation.
DIRECTOR COMPENSATION AND ARRANGEMENTS
Directors not affiliated with the Company are paid an annual fee of $10,000
for serving on the Board of Directors, a fee of $1,000 for attending each
Board of Directors meeting and a fee of $1,000 for attending each meeting of a
committee of the Board of Directors not held concurrently with a board
meeting. Committee chairs receive an additional annual fee of $1,000 and the
Chairman of the Board of Directors receives an additional annual fee of
$15,000. Directors are reimbursed for expenses incurred in connection with
meetings of the Board of Directors or committees thereof. All payments of
annual fees are made in Common Stock of the Company, payable following the
annual shareholders' meeting during the year for which such payment is made.
Meeting fees may, at the option of the director, be paid in cash or in Common
Stock of the Company. Common Stock for director payments shall be valued based
on the average of daily closing prices during the three-month period preceding
such valuation. Directors may defer payments of Common Stock pursuant to a
deferred payment plan the Company expects to adopt prior to consummation of
the Offering.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ended December 31, 1997,
certain information regarding the cash compensation paid by the Company, as
well as certain other compensation paid or accrued for such year, to the
executive officers of the Company named below (the "named executive
officers"), in all capacities in which they served:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
STOCK OPTION
AWARDS (1) ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (# SHARES) COMPENSATION (2)
--------------------------- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Ronald L. King.............. $ 135,000 $ 70,101 200 $8,009
President and Chief
Executive Officer
Charles F. Schattgen........ $ 84,540 $ 31,855 150 $6,094
Vice President and Regional
Manager
Raymond J. Horan............ $ 84,000 $ 31,651 150 $6,053
Vice President and Regional
Manager
</TABLE>
- --------
(1) All options granted were for Irex common stock pursuant to the Irex
Corporation Non-Qualified Stock Option Plan.
(2) Includes matching payments paid by Irex pursuant to Irex's 401(k) plan and
Irex's Employee Stock Ownership Plan.
37
<PAGE>
The following table provides information pertaining to individual grants of
options to purchase Irex common stock made by Irex to the named executive
officers during 1997:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
STOCK
OPTIONS % OF ALL OPTIONS EXERCISE GRANT DATE
GRANTED (1) GRANTED TO ALL PRICE EXPIRATION PRESENT
(# SHARES) EMPLOYEES (PER SHARE) DATE VALUE (2)
----------- ---------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ronald L. King.......... 200 4.3% $21.875 12/31/07 $1,040
Charles F. Schattgen.... 150 3.3% $21.875 12/31/07 $ 780
Raymond J. Horan........ 150 3.3% $21.875 12/31/07 $ 780
</TABLE>
- --------
(1) All options granted were options to purchase Irex common stock pursuant to
the Irex Corporation Non-Qualified Stock Option Plan. As of May 19, 1998,
there were 418,584 shares of Irex common stock outstanding.
(2) The grant date present value was calculated using the Black-Scholes option
pricing model with the following assumptions: (i) expected volatility of
23.0%, (ii) a risk-free interest rate of 6.1%, (iii) expected life of
three years and (iv) no dividend yield.
The following table sets forth certain information with respect to
unexercised options to purchase common stock of Irex held by the named
executive officers at the end 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NAME UNEXERCISED OPTIONS(1) IN-THE-MONEY OPTIONS (1)
---- ------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald L. King.............. 1,000 350 $11,375 $1,931
Charles F. Schattgen........ 1,000 300 $ 5,688 $1,650
Raymond J. Horan............ 750 300 $ 5,688 $1,650
</TABLE>
- --------
(1) All options are options to purchase Irex common stock pursuant to the Irex
Corporation Non-Qualified Stock Option Plan.
STOCK OPTION PLAN
Prior to consummation of the Offering, the Company intends to adopt the 1998
Specialty Products & Insulation Co. Stock Option Plan (the "Plan"), which is
expected to provide for the granting of non-qualified stock options
("Options") to certain officers and key employees of the Company. The Plan may
also permit the Company to issue qualified stock options or stock appreciation
rights. The Plan will be administered by the Compensation and Benefits
Committee of the Board of Directors of the Company (the "Compensation and
Benefits Committee"). The aggregate maximum number of shares of Common Stock
available for awards under the Plan will be 491,355 shares (521,355 shares if
the Underwriters exercise their over-allotment option in full), subject to
adjustment to reflect changes in the Company's capitalization. The Company
intends to award approximately 25% of the maximum number of shares available
under the Plan during the first year after the Plan is adopted and may award
the remaining shares available under the Plan during the following nine years.
No awards can be made under the Plan more than 10 years after the date it is
adopted.
The exercise price of the Options will be determined by the Compensation and
Benefits Committee in its discretion, provided that the exercise price of any
Option cannot be less than the fair market value of a share of Common Stock on
the date such Option is granted. Options will vest and may be exercised three
years after the date of grant. No Option may be exercised more than 10 years
after the date of grant. The Options may not be exercised following
termination of the grantee's employment with the Company, except that in the
event a grantee's employment terminates due to death, disability or
retirement, options held by such grantee or his or her estate shall be
exercisable, if vested at the time of termination of employment, for a period
of three months after termination.
38
<PAGE>
In connection with the Offering, the Compensation and Benefits Committee is
expected to approve the grant of Options to certain officers and employees of
the Company to purchase an aggregate of shares of Common Stock under the
Plan, including grants of options to purchase shares, shares and
shares of Common Stock to Messrs. King, Schattgen and Horan, respectively.
The exercise price of these options is expected to be at the offering price.
401(K) PLAN
Prior to consummation of the Offering the Company expects to adopt the
Employees' Savings Incentive Plan (the "401(k) Plan"). The 401(k) Plan is a
savings and retirement plan intended to satisfy the tax qualification
requirements of Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). Subject to certain terms and conditions of the 401(k)
Plan, substantially all of the Company's employees who are employed on the
date of the consummation of the Separation and who are compensated on the
basis of a monthly salary will be immediately eligible to participate in the
401(k) Plan. Thereafter, salaried employees will be eligible to participate in
the 401(k) Plan on the January 1 or July 1 coincident with or next following
the date on which the employee is hired by the Company. Eligible employees may
contribute between 2% and 15% of their compensation to the 401(k) Plan on a
pre-tax or after-tax basis.
The Company will make matching contributions to the 401(k) Plan each year
equal to 100% of the first 3%, and 50% of the second 3%, of each participant's
compensation that is contributed to the 401(k) Plan either on a pre-tax or
after-tax basis. In addition, the Company, in it discretion, may make profit-
sharing contributions each year in cash or Common Stock of the Company. Any
profit-sharing contributions made by the Company will be allocated to each
participant's account under the 401(k) Plan in a proportionate amount based on
the participant's compensation for the year in relation to all participants'
compensation for the year. All Company and employee contributions to the
401(k) Plan are allocated to a participant's individual account.
All Company and employee contributions to the 401(k) Plan plus the earnings
thereon are 100% vested. Employees may direct the investment of their accounts
to various investment funds. The 401(k) Plan provides for hardship withdrawals
and loans to participants. The trustee of the 401(k) Plan is Vanguard
Fiduciary Trust Company.
INSURANCE AND INDEMNIFICATION
Prior to the Separation, the Company intends to obtain directors' and
officers' insurance against certain liabilities such persons may incur on
behalf of the Company. For a discussion of the limitations on liability of the
Company's directors and the indemnification by the Company of such directors
set forth in the Company's bylaws , see "Description of Capital Stock--
Limitation on Liability and Indemnification."
EMPLOYMENT AGREEMENTS
Prior to consummation of the Offering, the Company expects to enter into
employment agreements with Ronald L. King, Michael J. Hughes and each of the
executive officers of the Company. The agreement with Mr. King provides that
Mr. King will serve as the President and Chief Executive Officer of the
Company for a period of three years after the date of the agreement. Under the
agreement, the Company or Mr. King may terminate Mr. King's employment with or
without cause. If Mr. King's employment is terminated by the Company without
cause, the Company must continue to pay Mr. King's salary at the time of
termination for the remainder of the term of the agreement. Mr. King is
subject to a non-competition covenant during the term of the agreement and for
a one-year period following the earlier of his termination of employment or
expiration of the agreement. The agreements with the executive officers of the
Company are similar to the agreement with Mr. King, except that the term of
each such agreement is one year. Mr. Hughes will have an agreement which
protects him in the event of a change of control.
39
<PAGE>
PRINCIPAL SHAREHOLDERS
As of the date of this Prospectus, all of the Company's capital stock is
owned by Irex. Immediately following the Separation and the Offering, all of
the Company's capital stock will be owned by the shareholders of Irex who
receive shares of Common Stock in the Separation and by new shareholders who
purchase Common Stock in the Offering. See "Separation from Irex." The
following table sets forth certain information known to the Company regarding
the beneficial ownership of the Company's Common Stock immediately following
consummation of the Separation and the Offering with respect to (i) each
person who the Company expects will become the beneficial owner of more than
5% of the outstanding Common Stock, (ii) each director and named executive
officer of the Company and (iii) all directors and executive officers of the
Company as a group. Unless otherwise specified, each person set forth below
has sole voting and investment power with respect to the shares reported.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
NUMBER OF SHARES COMMON STOCK BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED
---------------- --------------------- -------------------------
<S> <C> <C>
James E. Hipolit (2)
c/o Irex Corporation
120 North Lime Street
Lancaster, Pennsylvania
17608........................ 303,851 6.2%
W. Kirk Liddell (3)
c/o Irex Corporation
120 North Lime Street
Lancaster, Pennsylvania
17608........................ 272,127 5.5%
Ronald L. King (4)............ 15,311 *
Michael J. Hughes............. -- --
William W. Adams.............. 14,671 *
David C. Kleinman............. 18,792 *
Wilson D. McElhinny........... 20,413 *
G. Clay von Seldeneck......... -- --
John O. Shirk (5)............. 32,266 *
Charles F. Schattgen (4)...... 16,306 *
Raymond J. Horan (4).......... 11,970 *
All directors and executive
officers as a group (4)...... 415,632 8.5%
</TABLE>
- --------
*Less than 1%.
(1) Based on beneficial ownership of Irex common stock as of May 19, 1998 and
after giving effect to (i) the recapitalization of the Common Stock of the
Company prior to the Separation, (ii) the distribution of Common Stock to
Irex shareholders effected in connection with the Separation and (iii) the
Offering.
(2) Includes 31,548 shares with respect to which Mr. Hipolit will have sole or
share voting and investment power and a total of 272,303 shares to be held
by Mr. Hipolit as custodian for the minor children of W. Kirk Liddell
under the Pennsylvania Uniform Transfers to Minors Act. Mr. Hipolit
disclaims beneficial ownership of the shares he will hold as custodian.
(3) Includes 173,177 shares with respect to which Mr. Liddell will have sole
voting and investment power and 98,950 shares held by Mr. Liddell's
spouse, with respect to which Mr. Liddell disclaims beneficial ownership.
Does not include shares owned by the minor children of Mr. Liddell held by
Mr. Hipolit as custodian, as reported above.
(4) In connection with the Separation and the Offering, the Company expects to
grant options to purchase an aggregate of shares of Common Stock to
certain officers and employees of the Company under the Company's stock
option plan, including grants of options to Messrs. King, Schattgen and
Horan to purchase shares, shares and shares, respectively. The
options will be granted upon and
40
<PAGE>
following consummation of the Separation and the Offering. See
"Management--Stock Option Plan" and "Separation from Irex--Agreements with
Irex--Benefits Sharing Agreement." All of the options have limitations on
exercise and none are included in the table above.
(5) Includes 10,342 shares with respect to which Mr. Shirk will have sole
voting and investment power, 3,828 shares held by Mr. Shirk's spouse, 696
shares held by Mr. Shirk as custodian under the Pennsylvania Uniform Gift
to Minors Act and 17,400 shares held by Barley, Synder, Senft & Cohen,
LLP, of which Mr. Shirk is a partner.
SEPARATION FROM IREX
BACKGROUND AND REASONS FOR THE SEPARATION
Since commencing operations in 1982, the Company has been a wholly owned
subsidiary of Irex. Through its operating subsidiaries other than the Company,
Irex is primarily engaged in the business of specialty contracting throughout
the United States and Canada. In January 1998 Irex announced plans to effect
the Separation through a pro rata distribution of 100% of the capital stock of
the Company to the shareholders of Irex. The Separation will occur immediately
prior to the consummation of the Offering, and the Offering is conditioned
upon the consummation of the Separation. Immediately following the Separation
and the Offering, all of the capital stock of the Company will be owned by the
shareholders of Irex who receive shares of Common Stock in the Separation and
by new shareholders who purchase Common Stock in the Offering.
The decision to effect the Separation is based on a number of factors. The
Separation will provide both corporations with greater managerial, operational
and financial flexibility to focus on and respond to changing market
conditions in their respective business environments. The Company also
believes that its ability to pursue and finance acquisitions and other
business opportunities will be enhanced if the Company operates independently.
The Separation will provide the Company with direct access to capital markets,
subject to certain limitations for a two-year period following the Separation.
See "Risk Factors--Limitations on Ability to Raise Equity Capital and
Dependence on Alternative Financing." As a separate entity, the Company will
not be subject to Irex's capital structure restrictions and will be in a
better position to fund its operating and growth strategies. Furthermore,
financial advisors have advised Irex and the Company that equity capital
necessary to meet the business needs of Irex and the Company can be most
effectively raised through an initial public offering of the stock of the
Company following its Separation from Irex, rather than through a stock
offering by either Irex or the Company while Irex continues to hold a
substantial equity interest in the Company. In addition, management believes
the Separation will assist the Company in serving certain customers. Through
the specialty contracting businesses operated by its other subsidiaries, Irex
competes with customers whose business is solicited by the Company, and the
Company believes these customers will be more likely to purchase products from
the Company after it is independent from Irex. The Separation will also enable
the Company to provide its management and employees with incentive
compensation in the form of direct and indirect equity ownership in the
Company.
Immediately prior to consummation of the Separation, the Company will
declare a dividend to Irex in the amount of $10.5 million. This amount
corresponds to $10.5 million of outstanding Preferred Stock of Irex which will
remain Irex's obligation following the Separation. The Company has not had and
will not have any obligations or liabilities under the Preferred Stock
following the Separation. The Company will pay the dividend by executing a
note to Irex and the resulting indebtedness will be repaid with a portion of
the proceeds of the Offering. See "Use of Proceeds." In connection with the
Separation and the Offering, the Company will also pay approximately $9.1
million of debt owed by the Company to an affiliate which will be paid with
proceeds from the Offering, and approximately $17.8 million owed to Irex
pursuant to an intercompany account which the Company intends to pay with
borrowed funds from a credit facility.
Another subsidiary of Irex, ACandS, Inc. ("ACandS"), is engaged in the
thermal insulation contracting business. ACandS has been the subject of
numerous lawsuits seeking damages for injuries allegedly caused by exposure to
asbestos contained in insulation products installed or sold by ACandS before
1974. The Company
41
<PAGE>
has never been named as a defendant in any asbestos-related lawsuit, nor has
any asbestos-related claim been made against it. The Company's involvement
with the thermal insulation contracting business has been minimal, and, in the
Company's opinion, it has no material liability in connection with that
involvement. The Company believes that adequate insurance coverage is
available to ACandS and its affiliated companies, including the Company, for
asbestos-related suits.
AGREEMENTS WITH IREX
In connection with the Separation and the Offering, the Company will enter
into several agreements with Irex and its subsidiaries setting forth certain
interim and longer-term relationships between the companies. The following
summaries of the principal terms of these agreements are qualified in their
entirety by reference to the full text of such agreements. See "Additional
Information."
Corporate Separation Agreement. Prior to the consummation of the Separation
and the Offering, the Company and Irex and its subsidiaries (collectively, the
"Irex Companies") will enter into a separation agreement (the "Separation
Agreement") which sets forth certain agreements with respect to the Separation
and certain agreements between the Company and the Irex Companies governing
the relationship between them following the Separation and the Offering.
Pursuant to the Separation Agreement, Irex will provide the Company with
access to Irex's management information systems for a three-year period
following consummation of the Offering. Under the agreement, access to system
hardware and software and related support services maintained by Irex will be
made available on a quarterly fee basis based on a formula that takes into
account the Company's relative use of the system. The agreement also provides
for the Company to utilize customization capabilities of system programmers
employed by Irex on an hourly fee basis. The Separation Agreement also
provides reciprocal indemnification provisions between the Irex Companies and
the Company, pursuant to which the Irex Companies agree to indemnify the
Company for liabilities relating to their businesses arising at any time, and
the Company agrees to indemnify the Irex Companies for liabilities relating to
its business arising after December 23, 1981. The agreement also includes
provisions governing certain workers' compensation and liability insurance
payments, pursuant to which Irex will maintain responsibility for processing
payment claims occurring as a result of incidents involving the Company's
employees and arising prior to the date of the Separation, and the Company
will indemnify Irex for payments made by Irex as a result of such claims (up
to the amount of the deductible stated in the workers' compensation insurance
policies governing such claims). The agreement also provides for the Company
to reimburse Irex for all third-party expenses incurred in connection with the
Separation and Offering, including attorneys' and accountants' fees and
expenses, filing fees, listing fees, printing costs and similar items.
Pursuant to the Separation Agreement, intercompany accounts among Irex, Irex
affiliates and the Company will be settled as of the date of consummation of
the Separation. As of March 31, 1998, the settlement of those accounts would
result in a payment of $21.5 million from the Company to Irex.
Tax Sharing and Indemnification Agreement. Prior to the consummation of the
Separation, the Company and Irex will enter into a tax sharing and
indemnification agreement (the "Tax Agreement"). Pursuant to the Tax
Agreement, (i) the Company will generally be indemnified for tax liabilities
of any consolidated, combined and unitary group of corporations that includes
Irex and/or its subsidiaries (including the Company) (an "Irex Group") for
periods prior to the consummation of the Separation other than specified tax
liabilities attributable to the income or operations of the Company, (ii) the
Company will indemnify Irex and its subsidiaries for any other specified tax
liabilities of the Irex Group or the Company related to the Company for
periods prior to the consummation of the Separation, (iii) the Company will be
restricted, for a period of two years following the date of the consummation
of the Separation, from engaging in certain transactions (certain issuances of
stock, redemptions of stock or ceasing to engage in its trade or business)
without first obtaining either a ruling from the Internal Revenue Service or
an opinion from nationally recognized tax counsel that the transaction will
not affect the tax-free nature of the Separation to Irex or its shareholders
and (iv) the Company will be required to indemnify Irex and its shareholders
for tax liabilities that may be incurred by Irex or its shareholders as a
result of actions that the Company may undertake following the Separation and
that cause the Separation to be treated as a taxable transaction to Irex or
its shareholders. The Company does not expect these restrictions to materially
inhibit its operations or growth opportunities.
42
<PAGE>
Irex and the Company will receive an opinion of Dechert Price & Rhoads,
counsel to Irex and the Company, that for U.S. federal income tax purposes the
Separation should qualify as a tax-free spin-off. The opinion of counsel will
be based on certain assumptions and the accuracy of factual representations
made by Irex and the Company. Neither Irex nor the Company is aware of any
present facts or circumstances which should cause such representations and
assumptions to be untrue. However, the opinion of counsel is not binding on
either the Internal Revenue Service ("IRS") or the courts. A ruling has not
been, and will not be, sought from the IRS with respect to the U.S. federal
income tax consequences of the Separation, and it is possible that the IRS may
take the position that the Separation does not qualify as a tax-free spin-off.
See "Risk Factors--Potential Liability for Taxes Related to the Separation."
Benefits Sharing Agreement. Prior to the consummation of the Separation, the
Company and Irex will enter into a benefits sharing agreement (the "Benefits
Agreement") to set forth the manner in which assets and liabilities under
employee benefit plans and other employment-related liabilities will be
divided between them. In general, the Company will be responsible for
compensation and employee benefits relating to both its active and former
employees. Irex will generally remain responsible for compensation and
employee benefits relating to its active and former employees. The Company's
401(k) Plan will receive a transfer of plan assets from the Irex Employees'
Savings Incentive Plan equal to the account balances of the Company's active
and former employees. See "Management--401(k) Plan." Prior to the Separation,
Irex will amend its pension plan to cease future benefit accruals. In
connection with the Separation, the Company may make a payment to Irex for a
portion of the unfunded accrued liability under the Irex pension plan
attributable to the Company's employees and former employees. The Company does
not currently intend to sponsor a pension plan for periods immediately
following the Separation.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
and qualified in its entirety by reference to the Company's Restated Articles
of Incorporation, which have been filed as an exhibit to the Registration
Statement which includes this Prospectus.
As of the date of this Prospectus, after giving effect to the stock split
effected in connection with the Separation and the Offering, there are
2,913,547 shares of Common Stock issued and outstanding, all of which are held
of record by Irex and all of which will be distributed to the shareholders of
Irex common stock in the Separation. No shares of Preferred Stock are issued
or outstanding.
COMMON STOCK
The Company is authorized to issue up to 15 million shares of Common Stock,
par value $.01 per share ("Common Stock").
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by shareholders. Shareholders do not have cumulative
voting rights in the election of directors, meaning that the holders of a
majority of the shares entitled to vote in any election of directors may elect
all of the directors standing for election. Shareholders do not have the
preemptive right to purchase newly issued Common Stock before it is offered to
others by the Company. The bylaws provide that special meetings of the
shareholders of the Company may be called only by the Board of Directors.
Generally, whenever any corporate action is to be taken by vote of the
shareholders of the Company, or by vote of a class of such shareholders of the
Company, it shall be authorized upon receiving the affirmative vote of a
majority of the votes cast by such shareholders, or by such class of
shareholders, entitled to vote thereon.
PREFERRED STOCK
The Company is authorized to issue up to 15 million shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by law, without further shareholder approval, to issue such
43
<PAGE>
shares of Preferred Stock in one or more series, with such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be established by the Board of Directors at the time of issuance.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. The issuance of shares of
Preferred Stock could result in securities outstanding that would have
preference over the Common Stock with respect to dividends and in liquidation
and that could (upon conversion or otherwise) enjoy all of the rights of the
Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by third persons to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise, by making such attempts more difficult to achieve
or more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock. There are no agreements or
understandings for the issuance of Preferred Stock, and the Company has no
plans to issue any shares of Preferred Stock. See "Risk Factors--Anti-Takeover
Provisions."
CERTAIN PROVISIONS OF THE PENNSYLVANIA BUSINESS CORPORATION LAW
The Company is governed by Subchapter F of Chapter 25 of the PBCL. The
Company's restated articles of incorporation provide that the Company shall
not be governed by Subchapters E, G and H of Chapter 25 of the PBCL.
Subchapter F may have an anti-takeover effect and may delay, defer or prevent
a tender offer or takeover attempt that a shareholder might consider in his or
her best interest, including those attempts that might result in a premium
over the market price for the shares held by shareholders. In general,
Subchapter F delays for five years and imposes conditions upon "business
combinations" between an "interested shareholder" and the Company, unless
prior approval of the Board of Directors is given. The term "business
combination" is defined broadly to include various merger, consolidation,
division, exchange or sale transactions, including transactions utilizing the
Company's assets for purchase price amortization or refinancing purposes. An
"interested shareholder," in general, would be a beneficial owner of shares
entitling that person to cast at least 20% of the votes that all shareholders
would be entitled to cast in an election of directors of the Company. The
Company is also governed by other provisions of the PBCL which are designed to
support the validity of actions taken by the Board of Directors in response to
takeover bids, including specifically the board's authority to "accept, reject
or take no action" with respect to a takeover bid, and permitting the
unfavorable disparate treatment of a takeover bidder. Another provision of the
PBCL gives the directors broad discretion in considering the best interests of
the Company, including a provision which permits the board, in taking any
action, to consider various corporate interests, including employees,
suppliers, clients and communities in which the corporation is located, the
short and long-term interests of the corporation and the resources, intent and
conduct of any person seeking to acquire control of the corporation. These
provisions may have the effect of making more difficult and thereby
discouraging attempts to acquire control of the Company in a transaction that
the board or directors determines not to be in the best interests of the
Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As permitted by the PBCL, the Company's bylaws provide that a director shall
not be personally liable for monetary damages for any action taken, or any
failure to take any action, unless (i) the director has breached or failed to
perform the duties of his office under Section 8363 of the Pennsylvania
Directors Liability Act (relating to standard of care and justifiable
reliance) and (ii) the breach or failure to perform constitutes improper self-
dealing, willful misconduct or recklessness. Such limitation on liability does
not apply to the responsibility or liability of a director pursuant to any
criminal statute or the liability of a director for the payment of taxes
pursuant to local, state or federal law. In addition, the bylaws provide that
the Company shall indemnify any person who is a party or is threatened to be
made a party to any lawsuit or claim for damages arising by reason of the fact
that he is or was a director, officer or employee of the Company or any
subsidiary.
44
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the Common
Stock. No predictions can be made with respect to the effect, if any, that
public sales of shares of the Common Stock or the availability of shares for
sale will have on the market price of the Common Stock after this Offering.
Sales of substantial amounts of the Common Stock in the public market
following this Offering, or the perception that sales may occur, could
adversely affect the market price of the Common Stock or the ability of the
Company to raise capital through a sale of its equity securities.
Upon completion of the Separation and the Offering, 4,913,547 shares of
Common Stock will be outstanding (5,213,547 shares will be outstanding if the
Underwriters' over-allotment option is exercised in full). The 2,000,000
shares of Common Stock sold in the Offering (2,300,000 shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act,
unless acquired by an "affiliate" of the Company. An "affiliate" is defined in
Rule 144 promulgated by the Commission under the Securities Act ("Rule 144")
generally as a person who by equity ownership or otherwise controls, is
controlled by or is under common control with the Company. The 2,913,547
shares of Common Stock distributed to shareholders of Irex in the Separation
will be freely tradable following the Separation and Offering, except for
719,483 such shares distributed to affiliates of the Company, which shares
will be subject to (i) lock-up agreements entered into in connection with the
Separation (see below) and (ii) Rule 144, except for the holding period
requirement of Rule 144(d), absent registration or another appropriate
exemption under the Securities Act.
In general, Rule 144 will permit an affiliate or a person who has held
restricted shares for more than one year to sell within any three-month period
a number of shares that does not exceed the greater of 1% of the then-
outstanding shares of Common Stock or the average weekly trading volume of
such stock during the four calendar weeks preceding such sale, provided that
the Company has either filed certain periodic reports with the Commission or
made publicly available certain information concerning itself and provided
that such sales are made in normal "brokers' transactions" or in transactions
directly with a "market maker" without the solicitation of buy orders by the
brokers or such affiliates. A person who is deemed not to be an affiliate of
the Company at any time during the three months preceding a sale and who has
held restricted shares for more than two years may sell such shares under Rule
144 without regard to the volume limitations described above.
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "SPIE." Sales of substantial amounts of Common Stock
in the public market, including sales under Rule 144, could have a depressing
effect on the price of the Common Stock.
LOCK-UP AGREEMENTS
In connection with the Separation, certain shareholders will agree, subject
to certain exceptions, not to register for sale or offer, sell or transfer any
shares of Common Stock for a period of two years following consummation of the
Separation. These agreements will cover shares of Common Stock received by
such shareholders in the Separation. In addition, in connection with the
Offering, certain shareholders will agree, subject to certain exceptions, not
to register for sale or offer, sell or transfer any shares of Common Stock for
a period of 180 days after the date of this Prospectus without the prior
written consent of Legg Mason Wood Walker, Incorporated. These agreements will
cover all of the 719,483 shares of Common Stock held by such shareholders. See
"Separation from Irex" and "Underwriting."
45
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through their
representatives, Legg Mason Wood Walker, Incorporated and Advest, Inc. (the
"Representatives") expect to severally agree, subject to the terms and
conditions of the Underwriting Agreement, to purchase a total of 2,000,000
shares of Common Stock from the Company. The number of shares of Common Stock
that each Underwriter has agreed to purchase is set forth opposite its name
below. The Underwriters are committed to purchase all of such shares if any
are purchased. Under certain circumstances the commitments of non-defaulting
Underwriters may be increased. The names of the several Underwriters and the
respective number of shares to be purchased by each of them are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Legg Mason Wood Walker, Incorporated..................................
Advest, Inc...........................................................
---------
Total............................................................... 2,000,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price per share set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share, and the Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to other
dealers. After the commencement of the public offering of the shares of Common
Stock, the offering price and concession may be changed. The Company has
agreed to indemnify the several Underwriters against certain liabilities which
may be incurred in connection with the Offering, including liabilities under
the Securities Act.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 300,000 shares of Common Stock from the Company at the same price
per share as the public offering price. The Underwriters may exercise such
option only to cover over-allotments in the sale of the shares of Common Stock
that the Underwriters have agreed to purchase. To the extent the Underwriters
exercise this option, each of the Underwriters has a firm commitment, subject
to certain conditions, to purchase the same percentage of the option shares as
the number of shares to be purchased and offered by that Underwriter as shown
in the above table bears to the 2,000,000 shares of Common Stock initially
offered hereby.
All of the directors and executive officers of the Company expect to agree
with the Representatives not to sell or dispose of any shares owned by them
without the consent of the Representatives for a period of 180 days after the
date of this Prospectus. See "Shares Eligible for Future Sale."
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock in accordance with Regulation M
under the Securities Exchange Act of 1934, as amended, during the two business
day period before the commencement of offers of sales of the Common Stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must
display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters to bid for and purchase
the Common Stock. As an exception to these rules, the Representatives
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<PAGE>
are permitted to engage in certain transactions that stabilize the price of
the Common Stock. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Common Stock.
If Underwriters create a short position in the Common Stock in connection
with the offering thereof (i.e., if they sell more shares of Common Stock than
are set forth on the cover page of the Prospectus), the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option described in the Prospectus.
The Representatives also may impose a penalty bid on certain Underwriters.
This means that if the Representatives purchase Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Stock, they may reclaim the amount of the selling concession from
the Underwriters who sold those shares as part of this Offering.
In general, purchases of Common Stock for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the Common Stock to
be higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of the Common
Stock to the extent that it were to discourage resales of the Common Stock by
purchasers in this Offering.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor the Underwriters make any representation
that the Representatives will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Dechert Price & Rhoads, Philadelphia,
Pennsylvania. Certain matters in connection with this Offering will be passed
upon for the Underwriters by Stradley, Ronon, Stevens & Young, LLP,
Philadelphia, Pennsylvania.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under
the Securities Act with respect to the securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations
of the Commission. Statements made in this Prospectus as to the contents of
any agreement or other document referred to herein are not necessarily
complete, and reference is made to the copy of such agreement or other
document filed as an exhibit or schedule to the Registration Statement and
each such statement shall be deemed qualified in its entirety by such
reference. For further information, reference is made to the Registration
47
<PAGE>
Statement and to the exhibits and schedules filed therewith, which are
available for inspection without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W, Washington,
D.C. 20549. Copies of the material containing this information may be obtained
from the Commission upon payment of the prescribed fees.
After consummation of the Offering, the Company will be subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and, in accordance therewith, will be
required to file proxy statements, reports and other information with the
Commission. The Registration Statement, as well as any such report, proxy
statement and other information filed by the Company with the Commission, may
be inspected and copied at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company intends to furnish to its shareholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm accompanied by an opinion expressed by such independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information in each case prepared
in accordance with generally accepted accounting principles.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus that are not related to
historical results are forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed under "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
Further, certain forward-looking statements are based upon assumptions as to
future events that may not prove to be accurate. These forward-looking
statements involve risks and uncertainties including, but not limited to,
those set forth under "Risk Factors."
48
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Income for the years ended December 31, 1995,
1996 and 1997........................................................... F-4
Consolidated Statements of Shareholder's Equity for the years ended
December 31, 1995,
1996 and 1997........................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................................... F-6
Notes to Consolidated Financial Statements as of December 31, 1996 and
1997 and
for the years ended December 31, 1995, 1996 and 1997.................... F-7
Unaudited Condensed Consolidated Balance Sheets as of March 31, 1997 and
1998.................................................................... F-15
Unaudited Condensed Consolidated Statements of Income for the three
months ended
March 31, 1997 and 1998................................................. F-16
Unaudited Condensed Consolidated Statements of Cash Flows for the three
months ended
March 31, 1997 and 1998................................................. F-17
Notes to Unaudited Condensed Consolidated Financial Statements........... F-18
</TABLE>
F-1
<PAGE>
After the stock split-up effected in the form of a dividend discussed in
Note 11 to the Company's consolidated financial statements is effected, we
expect to be in a position to render the following audit report.
Arthur Andersen LLP
Lancaster, Pennsylvania
March 16, 1998, except with respect to certain information
in Note 11, as to which the date is April 9, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialty Products & Insulation Co.:
We have audited the accompanying consolidated balance sheets of Specialty
Products & Insulation Co. (a Pennsylvania corporation and a wholly owned
subsidiary of Irex Corporation) and subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholder's equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as, evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Specialty Products &
Insulation Co. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and
qualifying accounts is presented for purposes of complying with the Securities
and Exchange Commission rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Lancaster, Pennsylvania
F-2
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, 1997
------------------------------ -----------------------
PRO FORMA
1996 1997 (SEE NOTE 12)
-------------- -------------- -----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents.............. $ 78 $ 345 $ 345
Receivables, less reserves
of $466 in 1997 and $994
in 1996.................. 22,769 27,635 27,635
Inventories of materials
and supplies............. 13,117 15,667 15,667
Prepaid expenses.......... 408 173 173
Deferred income taxes..... 930 1,100 1,100
-------------- -------------- --------------
Total current assets.... 37,302 44,920 44,920
Property and Equipment, at
cost:
Buildings and
improvements............. 1,153 1,315 1,315
Machinery and equipment... 2,655 2,996 2,996
-------------- -------------- --------------
3,808 4,311 4,311
Less accumulated
depreciation............. (2,242) (2,543) (2,543)
-------------- -------------- --------------
1,566 1,768 1,768
Other Assets................ 67 963 963
-------------- -------------- --------------
$ 38,935 $ 47,651 $ 47,651
============== ============== ==============
LIABILITIES AND
SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-
term notes payable to
affiliates
and other long-term
debt..................... $ 1,436 $ 1,455 $ 1,455
Accounts payable.......... 6,261 7,360 7,360
Payable to affiliates..... 15,006 20,221 20,221
Accrued liabilities....... 2,746 4,108 4,108
Accrued income taxes...... 1,049 510 510
Dividend payable to Irex
Corporation.............. -- -- 10,490
-------------- -------------- --------------
Total current
liabilities............ 26,498 33,654 44,144
Deferred Income Taxes....... 88 -- --
Long-term notes payable to
affiliates, less current
portion.................... 5,928 4,742 4,742
Long-term debt, less current
portion.................... -- 75 75
Shareholder's Equity:
Preferred stock, $0.01 par
value per share;
15,000,000 shares
authorized; none issued.. -- -- --
Common stock, $0.01 par
value per share;
15,000,000 shares
authorized; 2,913,547
issued and outstanding... 29 29 29
Paid-in surplus........... 974 974 --
Retained earnings......... 5,418 8,177 (1,339)
-------------- -------------- --------------
Total shareholder's
equity................. 6,421 9,180 (1,310)
-------------- -------------- --------------
$ 38,935 $ 47,651 $ 47,651
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.............................. $ 118,395 $ 141,800 $ 158,510
Cost of sales.......................... 92,503 110,690 124,258
------------ ------------ ------------
Gross profit......................... 25,892 31,110 34,252
Selling, general and administrative
expenses.............................. 21,841 24,762 27,229
------------ ------------ ------------
Operating income..................... 4,051 6,348 7,023
Interest expense, net.................. 1,840 1,854 1,939
------------ ------------ ------------
Income before income taxes........... 2,211 4,494 5,084
Income tax provision................... 918 1,810 2,077
------------ ------------ ------------
Net income........................... $ 1,293 $ 2,684 $ 3,007
============ ============ ============
Net income per share--basic............ $ 0.44 $ 0.92 $ 1.03
============ ============ ============
Net income per share--diluted.......... $ 0.44 $ 0.92 $ 1.03
============ ============ ============
Weighted average shares outstanding--
basic................................. 2,913,547 2,913,547 2,913,547
============ ============ ============
Weighted average shares outstanding--
diluted............................... 2,913,547 2,913,547 2,913,547
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
PAID-IN
COMMON STOCK SURPLUS RETAINED EARNINGS
------------ ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1, 1995................. $29 $974 $2,652
Net income............................. -- -- 1,293
Distribution to parent................. -- -- (748)
--- ---- ------
Balance, December 31, 1995............... 29 974 3,197
Net income............................. -- -- 2,684
Distribution to parent................. -- -- (463)
--- ---- ------
Balance, December 31, 1996............... 29 974 5,418
Net income............................. -- -- 3,007
Distribution to parent................. -- -- (248)
--- ---- ------
Balance, December 31, 1997............... $29 $974 $8,177
=== ==== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income..................................... $ 1,293 $ 2,684 $ 3,007
Reconciliation of net income to net cash
provided by (used for) operating activities--
Depreciation and amortization................ 514 558 640
Deferred income tax (benefit) provision...... (6) (191) 364
Provision for losses on accounts receivable.. 830 1,120 71
(Gain) loss on sale of assets................ (2) 75 15
(Increase) decrease in assets--
Receivables.................................. (3,387) (1,590) (3,672)
Inventories.................................. (755) (1,934) (1,204)
Other prepaid expenses....................... 31 (182) 248
Other assets................................. (23) -- --
Increase (decrease) in liabilities--
Accounts payable............................. 640 39 1,042
Accrued liabilities and other................ 501 499 1,134
Accrued income taxes......................... 261 776 (495)
-------- -------- --------
Net cash (used for) provided by operating
activities................................ (103) 1,854 1,150
-------- -------- --------
Cash Flows From Investing Activities:
Additions to property and equipment............ (413) (559) (559)
Proceeds from sales of property and equipment.. 79 24 4
Acquisitions of certain businesses, net of cash
acquired
Assets, net of liabilities assumed.......... (961) (120) (2,523)
Intangibles.................................. -- (60) (930)
Other investing................................ -- (62) (33)
-------- -------- --------
Net cash used for investing activities..... (1,295) (777) (4,041)
-------- -------- --------
Cash Flows From Financing Activities:
Payments on long-term debt..................... -- (1,186) (1,186)
Increase in payable to affiliates.............. 1,429 97 4,344
-------- -------- --------
Net cash provided by (used for) financing
activities................................ 1,429 (1,089) 3,158
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 31 (12) 267
Cash and Cash Equivalents, Beginning of Year..... 59 90 78
-------- -------- --------
Cash and Cash Equivalents, End of Year........... $ 90 $ 78 $ 345
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Specialty Products & Insulation Co. and subsidiary (the Company), a wholly-
owned subsidiary of Irex Corporation (Irex) (See Note 11), is a distribution
and fabrication business that competes in the large and highly fragmented
building products industry. The Company broadly defines its two core markets
as mechanical insulation, consisting of pipe, duct, and equipment insulation
for commercial and industrial customers, and architectural/acoustical
products, consisting primarily of acoustical ceilings, fiberglass reinforced
panel, and other wall and ceiling products.
Basis of Presentation
The consolidated financial statements reflect the results of operations,
financial position, changes in shareholder's equity and cash flows of the
Company. The consolidated financial statements have been prepared using the
historical basis in the assets and liabilities and historical results of
operations of the Company.
The Company receives certain administrative services provided by Irex. The
cost of these services has been allocated to the Company based on the
estimated utilization of those services. In addition, those services not
allocated based on utilization are charged to the Company and its affiliates
through a management fee. These services are discussed further in Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Specialty
Products & Insulation Co. and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Estimates and Assumptions
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 sales and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally on a first-in, first-out (FIFO) basis. Included in inventory cost
are material costs and costs directly associated with the fabrication of the
Company's products.
Reserves for Certain Self-Insured Business Risks
The Company is self-insured against a portion of its workers' compensation
and other insurance risks. The process of determining reserve requirements for
losses within its self-insured retention limits utilizes historical trends,
involves an evaluation of claim frequency, severity and other factors and also
includes the effect of future inflation.
F-7
<PAGE>
Income Taxes
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are recognized using enacted tax rates,
for the estimated future tax effects of temporary differences between the
financial reporting and tax bases of assets and liabilities.
Property and Equipment
Property and equipment are depreciated using principally the straight-line
method over the following estimated useful lives of the assets. Expenditures
for maintenance and repairs are expensed as incurred.
<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED USEFUL LIVES
-------------- ----------------------
<S> <C>
Buildings......................................... 15 to 30 years
Leasehold improvements............................ 3 to 10 years
Machinery and equipment........................... 3 to 7 years
</TABLE>
Other Assets
Other assets consist of goodwill and other intangibles. Goodwill, which
represents the excess of cost over fair value of the net assets of acquired
businesses, is being amortized on a straight-line basis principally over 15
years. The Company develops operating income projections and evaluates the
recoverability and amortization period of goodwill using these projections.
Based upon management's current assessment, the estimated remaining
amortization period of goodwill is appropriate and the remaining balance is
fully recoverable. There was no unamortized goodwill at December 31, 1996. At
December 31, 1997, unamortized goodwill was $842,000.
Revenue Recognition
Sales are recorded as orders are shipped or picked up by the customer and
are reported net of discounts and returns.
Supplemental Cash Flow Information
The Company's state income tax payments, net of refunds, were $28,000,
$131,000 and $280,000 in 1995, 1996 and 1997, respectively. Interest on the
notes payable to affiliate and the payable to affiliates account are charged
to the payable to affiliates account.
Concentration of Credit Risk and Business
The Company is primarily engaged in the distribution of mechanical
insulational and architectural/acoustical products throughout the United
States.
The Company grants credit to customers after a thorough review of their
financial condition. The concentration of credit risk with respect to accounts
receivable is limited due to the Company's large customer base located
throughout the United States. For the years ended December 31, 1995, 1996, and
1997, no one customer accounted for more than 10% of sales.
The Company purchases materials for resale from a limited number of major
suppliers. Such concentration is normal for the industry and does not
represent an unreasonable risk or vulnerability to the Company.
3. ACQUISITIONS:
On October 17, 1997, the Company acquired all of the issued and outstanding
stock of Richlar Industries, Inc. (Richlar), located in East Syracuse, New
York, for cash consideration of approximately $866,000. Richlar is primarily
engaged in the business of precision die cutting, lamination, and specialty
fabrication.
On December 8, 1997, the Company acquired certain assets of Construction
Systems, Inc. (CSI), located in Houston, Texas, for cash consideration of
approximately $2,374,000. CSI was primarily engaged in the distribution of
architectural/acoustical products and specialty products from two distribution
centers in Houston, Texas.
On December 24, 1997, the Company acquired certain assets of the Louisville,
Kentucky distribution center of R. E. Kramig and Company, Inc. (Kramig) for
cash consideration of approximately $213,000. Kramig was primarily engaged in
the distribution of mechanical insulation.
F-8
<PAGE>
The acquisitions were accounted for using the purchase method of accounting,
and the financial statements reflect the results of operations and cash flows
of the operation from the dates of the acquisitions. Had the acquisitions
occurred at the beginning of the periods presented, sales and net income would
not have been materially different from reported results.
In January 1995, the Company acquired from Distribution International (DI),
the assets of four distribution centers in North Carolina and Tennessee for
cash consideration of approximately $961,000. DI was primarily engaged in the
distribution of mechanical insulation from these four distribution centers.
4. INCOME TAXES:
The Company's tax return is included in the consolidated federal income tax
returns of Irex. The current and deferred tax expense recorded by the Company
is based on what such amounts would have been had it filed a separate tax
return. All federal income tax payments are made by Irex.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Deferred income taxes are computed based on the differences between
financial reporting and income tax reporting bases of assets and liabilities
using enacted tax rates. The impact of changes in tax rates is reflected in
income in the period in which the change is enacted. In conformity with SFAS
109, deferred tax assets are classified based on the financial reporting
classification of the related liabilities and assets which give rise to
temporary book/tax differences. Deferred taxes relate to the following
temporary differences:
<TABLE>
<CAPTION>
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Insurance reserves......................................... $ 77 $ 574
Bad debt reserves.......................................... 387 181
Uniform cost capitalization on inventories................. 404 435
Other...................................................... (26) (89)
------ --------
$ 842 $ 1,101
====== ========
</TABLE>
The Company has determined that no valuation allowance for the deferred tax
asset is required as of December 31, 1996 and 1997 as it is considered more
likely than not that such benefits will be realized in the future through the
combination of carryback availability, certain tax planning strategies that
would allow for acceleration of deductible temporary differences to utilize
remaining carryback availability and through expected future taxable income.
Income tax provision (benefit) consists of :
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal........................................... $ 782 $ 1,608 $ 1,396
State............................................. 142 393 317
----- ------- -------
Total currently payable......................... 924 2,001 1,713
----- ------- -------
Deferred:
Federal........................................... (35) (135) 297
State............................................. 29 (56) 67
----- ------- -------
Total deferred.................................. (6) (191) 364
----- ------- -------
Total............................................... $ 918 $ 1,810 $ 2,077
===== ======= =======
</TABLE>
F-9
<PAGE>
The effective income tax rate is different from the statutory Federal income
tax rate as indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 34.0% 34.0% 34.0%
State income taxes ($171,000, $337,000 and $384,000), net
of federal benefit...................................... 5.1 5.0 5.0
Meals and entertainment.................................. 2.4 1.3 1.9
---- ---- ----
Effective income tax rate.............................. 41.5% 40.3% 40.9%
==== ==== ====
</TABLE>
5. EMPLOYEE BENEFIT PLANS:
Pension Plans
The Company's salaried employees participate in Irex's noncontributory
defined benefit pension plan. The benefits under the plan are based on years
of service and salary levels. Irex's policy is to fund pension costs in
accordance with the requirements of the Employee Retirement Income Security
Act of 1974. The Company receives an allocation of the plan's expenses from
Irex. In 1995, 1996, and 1997, the Company's share of the plan's total expense
was $230,000, $245,000, and $165,000, respectively. The Company will not
participate in the plan following its separation from Irex. All liabilities
associated with the plan will remain with Irex. The following table sets forth
the Plan's funded status and related amounts recognized in the consolidated
balance sheet of Irex and subsidiaries at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $5,568 and $6,629, respectively............ $ 6,039 $ 6,986
======= =======
Projected benefit obligation for service rendered to
date................................................... $ 7,698 $ 8,760
Plan assets at fair value............................... (7,528) (8,759)
------- -------
Projected benefit obligation in excess of plan assets... 170 1
Unrecognized net loss from past experience different
from that assumed and effects of changes in
assumptions............................................ 275 840
------- -------
Accrued pension cost.................................... $ 445 $ 841
======= =======
Assumptions used were as follows:
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Weighted average discount rates........................... 7.75% 7.25%
Rates of increase in future compensation levels........... 5.00% 5.00%
Expected long-term rate of return on assets............... 8.50% 8.50%
</TABLE>
The Company also maintains a defined contribution plan for its hourly-paid
employees. Company contributions to the plan are based on a percentage of
eligible employees' compensation. The expense for this plan was $69,000 in
1995, $108,000 in 1996, and $105,000 in 1997.
Postretirement Benefits Other Than Pensions
In addition to the pension plans, the Company's retired employees
participate in an Irex-sponsored plan that provides certain health care
benefits. Active salaried employees who were at least age 55 and had 10 years
of consecutive service at January 1, 1990, are eligible for these benefits
upon retirement. Also, active salaried
F-10
<PAGE>
employees of the Company whose age plus years of service equaled at least 55
at January 1, 1990, are eligible for these benefits upon retirement when they
attain age 62 as long as such employees have either 20 years of service or
their age plus years of service equals 90 upon retirement. Cash payments of up
to $60 per month are given to retirees over age 65 to purchase supplemental
Medicare coverage. Eligible retirees under age 65 are fully covered by Irex's
insurance plan. The number of retirees under age 65 currently participating in
the plan is not significant. Also the number of active employees of the
Company who may become eligible is not significant; further, the Company will
not participate in the plan following its separation from Irex. All
liabilities associated with the plan will remain with Irex.
The expected cost of these benefits is charged to expense during the years
that the employees render service. The transition obligation is being
amortized over 20 years. In 1995, 1996, and 1997 the Company's share of the
Plan's total expense was $22,000, $29,000, and $15,000, respectively.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet of Irex and subsidiaries at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Vested benefit obligation............................. $ 798 $ 798
Non-vested benefit obligation......................... 158 129
------- -------
956 927
Plan assets at fair value.............................. (51) --
------- -------
Accumulated postretirement benefit obligation in excess
of plan assets........................................ 905 927
Unrecognized transition obligation..................... (769) (721)
Unrecognized net gain.................................. 340 289
------- -------
Accrued postretirement benefit liability............... $ 476 $ 495
======= =======
</TABLE>
For measurement purposes, a 13% annual rate of increase in the per capita
cost of covered health care benefits was assumed for calendar 1997; the rate
was assumed to decrease to 10% in 1998 and 7% for 2001 and remain level
thereafter. Due to the provisions of the plan, increasing the assumed health
care cost trend rates by one percentage point in each year would not have a
significant impact on the accumulated postretirement benefit obligation or the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1997.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 7.25% at December 31, 1996 and
1997, respectively. The expected long-term rate of return on assets was 8.50%
at December 31, 1996.
Other
The Company has an incentive compensation plan covering substantially all of
its officers and key employees. The amount of incentive compensation is
dependent upon the rate of return on assets of the Company and the particular
regional or branch office. Total incentive compensation expense was $1,012,000
for 1995, $1,335,000 for 1996, and $1,428,000 for 1997.
Substantially all of the Company's salaried employees are covered by defined
contribution savings incentive and employee stock ownership plans (ESOP)
maintained by Irex. Contributions to the savings incentive plan are based on a
percentage of employee contributions to the plan, while ESOP contributions are
discretionary. The Company's share of these plans' total expense was $256,000
in 1995, $299,000 in 1996, and $259,000 in 1997.
F-11
<PAGE>
6. INCOME PER COMMON SHARE:
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128 "Earnings Per Share." SFAS No. 128 requires dual presentation
of basic and diluted earnings per share on the face of the income statement
for all entities with complex capital structures. The Company's basic income
per share is calculated as income available to shareholders divided by the
weighted average number of shares outstanding. Earnings per share have been
retroactively restated to reflect the 291.4 to 1 stock split-up effected in
the form of a dividend discussed in Note 11. For diluted income per share,
there are no common stock equivalents.
7. BORROWINGS:
Long-term notes payable to affiliates consists of the following at December
31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
9.25% unsecured notes payable to affiliate due in equal
annual installments
from May 1, 1996 to 2002................................... $ 7,114 $ 5,928
Unsecured note payable at prime commercial rate due to
affiliate on
December 1, 1998........................................... 250 250
------- -------
Total..................................................... 7,364 6,178
Less current portion...................................... 1,436 1,436
------- -------
$ 5,928 $ 4,742
======= =======
</TABLE>
Prime commercial rate is determined by the rate in effect on the previous
December 1 and June 1.
Other long-term debt is comprised of three unsecured notes totalling $94,000
as of December 31, 1997, with interest rates ranging from 6.63% to 8.16%,
payable in monthly and annual installments through July 10, 2009. As of
December 31, 1997, the current portion of other long-term debt is $19,000.
Other long-term debt was $0, as of December 31, 1996.
Interest expense for the notes payable to affiliate was $790,000 in 1995,
$725,000 in 1996, and $679,000 in 1997.
Any unpaid principal balance on each of the notes payable to affiliate may
be prepaid in whole or in part without premium or penalty provided that at the
time of any such prepayment all interest accrued to the date of prepayment on
the portion of the principal balance be simultaneously paid and all
prepayments be made on December 31 unless otherwise agreed by the holder.
Long-term borrowings maturing during the next five years are as follows (in
thousands):
<TABLE>
<S> <C>
1998............................................................. $ 1,455
1999............................................................. 1,200
2000............................................................. 1,192
2001............................................................. 1,192
2002............................................................. 1,192
</TABLE>
The payables to affiliates account, within current liabilities, includes the
Company's cumulative cash borrowings from Irex and affiliates. Interest
expense was $1,048,000 in 1995, $1,132,000 in 1996 and $1,249,000 in 1997. The
weighted average interest rate for the years ended December 31, 1995, 1996 and
1997 was 8%.
F-12
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
The Company leases distribution centers and sales offices under
noncancelable operating lease agreements. Rental expense for all operating
leases was $2,866,000 in 1995, $2,983,000 in 1996 and $3,624,000 in 1997. As
of December 31, 1997, the future minimum rental commitments under
noncancelable operating leases that have terms in excess of one year are as
follows (in thousands):
<TABLE>
<S> <C>
1998............................................................ $ 2,615
1999............................................................ 1,936
2000............................................................ 1,525
2001............................................................ 1,020
2002............................................................ 583
Subsequent years................................................ 299
-------
Total minimum rental obligations.............................. $ 7,978
=======
</TABLE>
The Company is involved from time to time in various claims and litigation
arising in the ordinary course of its business. Management believes the
outcome of such claims and litigation will not materially affect the Company's
long-term business, financial position or results of operations.
The Company, together with other subsidiaries of Irex, has guaranteed
certain obligations of Irex, which at December 31, 1997 totaled $27,604,000.
Such guarantees with respect to the Company will terminate upon completion of
the separation transaction discussed in Note 11.
9. ACCRUED LIABILITIES:
The components of accrued liabilities as of December 31, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries and wages......................................... $ 1,295 $ 1,404
Workers' compensation, general and auto liability insur-
ance...................................................... -- 1,263
Other...................................................... 1,451 1,441
------- -------
$ 2,746 $ 4,108
======= =======
</TABLE>
At December 31, 1996, an affiliate of the Company maintained the reserves
for workers' compensation, general and auto liability insurance. See note 10.
10. RELATED PARTIES:
The Company sells its products to the specialty contracting subsidiaries of
Irex. Sales to those affiliates are included in the Company's net sales as
reflected in the consolidated statements of income. Net sales to the Company's
affiliates were $10,682,000, $12,383,000 and $9,301,000 in 1995, 1996 and
1997, respectively.
Irex provides various administrative services to its affiliates, including
the Company. These services include, among others, management and maintenance
of the information systems, legal, credit and risk management, cash
management, tax, accounting and personnel administration. Irex allocates these
costs to its affiliates primarily based on the estimated utilization of the
services. Irex also charges a management fee to each of its affiliates,
including the Company, to distribute costs that are not allocated based on
utilization. The management fee is calculated as a percentage of net sales and
charged to each affiliate accordingly. Collectively, the allocation of
administrative expenses and management fee are reflected as selling, general
and administrative expenses in the Company's consolidated statements of
income. Management believes the methodology used to allocate these expenses is
reasonable. The Company was charged $1,616,000, $1,815,000 and $2,542,000 in
1995, 1996 and 1997, respectively. Amounts allocated to the Company by Irex in
excess of the actual costs incurred by Irex for these services are shown in
the statements of shareholder's equity as a distribution to parent.
Irex administers the Company's insurance program. Prior to 1997, the
reserves for workers' compensation and other insurance risks were not
reflected on the consolidated balance sheet of the Company. As indicated in
note 9 above, an affiliate of the Company maintained these reserves and made
payments on behalf of the Company. The appropriate charges to the Company were
recognized in the payable to affiliates account. The Company's expense related
to workers' compensation and other insurance programs was $484,000 in 1995,
$501,000 in 1996 and $606,000 in 1997.
F-13
<PAGE>
The Company's cash transactions flow through a consolidated banking
arrangement that is maintained by Irex. The Company, in the normal course of
business, receives credit for cash deposited or charges for working capital
needed. The payable to affiliates account, at December 31, 1997, includes the
Company's cumulative cash borrowings from Irex and affiliates. Based upon the
activity within the payable to affiliates account, the Company is charged
interest expense from Irex. Interest expense was $1,048,000 in 1995,
$1,132,000 in 1996 and $1,249,000 in 1997.
11. SUBSEQUENT EVENTS:
Separation
On January 19, 1998, Irex announced its intention to spin off Specialty
Products & Insulation Co. to its shareholders. Irex's Board of Directors, at
its February 26, 1998 meeting, approved the proposed transaction in which
shareholders of Irex Common stock will receive a dividend of the Company's
Common stock. This dividend is expected to be a tax-free distribution to
current shareholders of Irex Common stock. The transaction is expected to be
completed in the second or third quarter of 1998.
Concurrent with the spin off transaction described above, the Company
intends to file a registration statement on Form S-1 with the Securities and
Exchange Commission for purposes of registering shares of common stock.
On April 9, 1998, the Company filed Restated Articles of Incorporation which
increased the authorized number of shares of common stock to 15,000,000,
changed the common stock par value to $0.01 and authorized 15,000,000 shares
of Preferred stock at $0.01 par value. These changes have been retroactively
reflected in the accompanying financial statements.
In conjunction with the above transactions, the Company expects to enter
into several agreements with Irex.
.Corporate Separation Agreement--Pursuant to this agreement, Irex will
provide management information system services to the Company. These
services will be provided subject to a quarterly or hourly fee. In
addition, certain indemnifications, excluding tax related items, between
the Company and Irex are defined in this agreement.
.Tax Sharing and Indemnification Agreement--Tax related indemnifications
between the Company and Irex are defined within this agreement. These
indemnifications relate to the periods before and after the transactions
described above.
.Benefits Sharing Agreement--This agreement addresses the division of
employee benefit plans and other employment-related liabilities between the
Company and Irex.
Prior to the spin-off described above, the Company will declare a 291.4 to 1
stock split up effected in the form of a dividend. The stock split-up has been
retroactively reflected in the accompanying financial statements.
Acquisition
On March 1, 1998, the Company acquired the assets of Extol of Texas, Inc.
(Extol), located in Houston, Texas, for cash consideration of approximately
$5,558,000. Extol is primarily engaged in the distribution and fabrication of
commercial and industrial insulation systems, and other specialty products.
12. PRO FORMA INFORMATION (UNAUDITED):
The unaudited pro forma consolidated balance sheet of the Company as of
December 31, 1997 reflects the planned dividend (estimated at $10,490,000) to
be made to Irex through the execution of a note payable to Irex and
subsequently paid from the net proceeds of the Offering. See "Use of
Proceeds." Pursuant to the requirements of the Securities and Exchange
Commission, the dividend has been reflected in the pro forma balance sheet
without giving effect to any receipt of the net proceeds from the Offering. In
addition, pursuant to the requirements of the Securities and Exchange
Commission, the pro forma income per share data giving effect to the number of
shares whose proceeds were used to in effect pay the dividend on both a basic
and diluted basis is $0.78. Pro forma weighted average shares outstanding on
both a basic and diluted basis was 3,867,184.
F-14
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1997 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales............................................. $ 36,280 $ 42,669
Cost of sales......................................... 28,555 33,309
--------- ---------
Gross profit........................................ 7,725 9,360
Selling, general and administrative expenses.......... 6,588 7,992
--------- ---------
Operating income.................................... 1,137 1,368
Interest expense, net................................. 448 516
--------- ---------
Income before income taxes.......................... 689 852
Income tax provision.................................. 281 349
--------- ---------
Net income.......................................... $ 408 $ 503
========= =========
Net income per share--basic........................... $ 0.14 $ 0.17
========= =========
Net income per share--diluted......................... $ 0.14 $ 0.17
========= =========
Weighted average shares outstanding--basic............ 2,913,547 2,913,547
========= =========
Weighted average shares outstanding--diluted.......... 2,913,547 2,913,547
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
F-15
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
DEC. 1998
31, MARCH 31, PRO FORMA
1997 1998 (SEE NOTE 6)
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $ 345 $ 264 $ 264
Receivables, net............................... 27,635 30,735 30,735
Inventories of materials and supplies.......... 15,667 17,499 17,499
Prepaid expenses............................... 173 223 223
Deferred income taxes.......................... 1,100 1,100 1,100
------- ------- -------
Total current assets.......................... 44,920 49,821 49,821
------- ------- -------
Property and Equipment, net..................... 1,768 2,328 2,328
------- ------- -------
Other Assets.................................... 963 1,594 1,594
------- ------- -------
$47,651 $53,743 $53,743
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current portion of long-term notes payable to
affiliates and other
long-term debt................................ $ 1,455 $ 1,450 $ 1,450
Accounts payable............................... 7,360 11,618 11,618
Payable to affiliates.......................... 20,221 21,536 21,536
Accrued liabilities............................ 4,108 3,977 3,977
Accrued income taxes........................... 510 769 769
Dividend payable to Irex Corporation........... -- -- 10,490
------- ------- -------
Total current liabilities..................... 33,654 39,350 49,840
------- ------- -------
Long-term notes payable to affiliates, less
current portion................................ 4,742 4,742 4,742
Long-term debt, less current portion............ 75 64 64
Shareholder's Equity:
Preferred stock, $0.01 par value per share;
15,000,000 shares authorized; none issued..... -- -- --
Common stock, $0.01 par value per share;
15,000,000 shares authorized; 2,913,547 issued
and outstanding............................... 29 29 29
Paid-in surplus................................ 974 974 974
Retained earnings.............................. 8,177 8,584 (1,906)
------- ------- -------
Total shareholder's equity.................... 9,180 9,587 (903)
------- ------- -------
$47,651 $53,743 $53,743
======= ======= =======
</TABLE>
See notes to the condensed consolidated financial statements.
F-16
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH
31,
-------------
1997 1998
----- ------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 408 $ 503
Reconciliation of net income to net cash provided by
operating activities
Depreciation and amortization.......................... 151 182
Provision for losses on accounts receivable............ 98 173
(Increase) decrease in assets--
Receivables............................................ (675) (1,160)
Inventories............................................ (777) 370
Other prepaid expenses................................. 138 (50)
Increase (decrease) in liabilities--
Accounts payable....................................... 2,105 4,258
Accrued income taxes................................... 140 259
Accrued liabilities and other.......................... (660) (131)
----- ------
Net cash provided by operating activities............ 928 4,404
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment...................... (104) (130)
Acquisitions of certain business
Assets................................................. -- (4,908)
Intangibles............................................ -- (650)
----- ------
Net cash used for investing activities............... (104) (5,688)
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt............................... -- (16)
Increase in payable to affiliates........................ (75) 1,219
----- ------
Net cash (used for) provided by financing
activities.......................................... (75) 1,203
----- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 749 (81)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 78 345
----- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 827 $ 264
===== ======
</TABLE>
See notes to the condensed consolidated financial statements.
F-17
<PAGE>
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION:
Specialty Products & Insulation Co. (the Company) is a wholly owned
subsidiary of Irex Corporation (Irex). The consolidated financial
statements of the Company include the accounts of Specialty Products &
Insulation Co. and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosure normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements should be read in conjunction
with the Company's annual audited financial statements for the year ended
December 31, 1997.
The financial information presented herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for the
interim periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the full year.
2. RELATED PARTIES:
The Company sells its products to the specialty contracting subsidiaries of
Irex. Sales to those affiliates are included in the Company's net sales as
reflected in the consolidated statements of income. Net sales to the
Company's affiliates were $2,787,000 and $1,940,000, in the three months
ended March 31, 1997 and 1998, respectively.
Irex provides various administrative services to its affiliates, including
the Company. These services include, among others, management and
maintenance of the information systems, legal, credit and risk management,
cash management, tax, accounting and personnel administration. Irex
allocates these costs to its affiliates primarily based on the estimated
utilization of the services. Irex also charges a management fee to each of
its affiliates, including the Company, to distribute costs that are not
allocated based on utilization. The management fee is calculated as a
percentage of net sales and charged to each affiliate accordingly.
Collectively, the allocation of administrative expenses and management fee
are reflected as selling, general and administrative expenses in the
Company's consolidated statements of income. Management believes the
methodology used to allocate these expenses is reasonable. The Company was
charged $618,000 and $627,000 in the three months ended March 31, 1997 and
1998, respectively. Amounts allocated to the Company by Irex in excess of
the actual costs incurred by Irex for these services were $86,000 and
$96,000 for the three months ended March 31, 1997 and 1998, respectively,
and are considered to be a distribution to parent.
3. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company's state income tax payments, net of refunds, were $107,000 and
$99,000 for the first three months of 1997 and 1998, respectively. Interest
on the notes payable to affiliate and the payable to affiliates account are
charged to the payable to affiliates account.
4. SEPARATION:
On January 19, 1998, Irex announced its intention to spin off Specialty
Products & Insulation Co. to its shareholders. Irex's Board of Directors,
at its February 26, 1998 meeting approved the proposed transaction
F-18
<PAGE>
in which shareholders of Irex common stock will receive a dividend of the
Company's common stock. This dividend is expected to be a tax-free
distribution to current shareholders of Irex common stock. The transaction
is expected to be completed in the second or third quarter of 1998.
On April 9, 1998, the Company filed Restated Articles of Incorporation,
which increased the authorized number of common stock to 15,000,000,
changed the common stock par value to $0.01 and authorized 15,000,000
shares of preferred stock at $0.01 par value. These changes have been
retroactively reflected in the accompanying financial statements.
On April 10, 1998, the Company filed a registration statement with the
Securities and Exchange Commission relating to the initial public offering
of 2,000,000 shares of common stock. The spin-off described above will
occur immediately prior to the initial public offering. Following the spin-
off and initial public offering, the Company will be an independent
company.
Prior to the spin-off described above, the Company will declare a 291.4 to
1 stock split-up effected in the form of a dividend. The stock split-up has
been retroactively reflected in the accompanying financial statements.
5. CREDIT FACILITY:
Subject to completion of the offering and certain other conditions,
including execution of appropriate loan documentation, the Company executed
commitment letters related to a credit facility. The credit facility is an
unsecured line of credit aggregating $30 million with interest rates
related to short term rates.
6. ACQUISITIONS:
On March 1, 1998, the Company acquired the assets of Extol of Texas, Inc.
(Extol), located in Houston, Texas, for cash consideration of approximately
$5,558,000. Extol is primarily engaged in the distribution and fabrication
of commercial and industrial insulation systems, and other specialty
products. The acquisition was accounted for using the purchase method of
accounting, and the financial statements reflect the results of operations
and cash flows of the operation from the date of acquisition.
On May 13, 1998, the Company executed a letter of intent to purchase
certain assets of a mechanical insulation fabricator with fiscal year 1997
sales of approximately $4.0 million.
7. PRO FORMA INFORMATION:
The unaudited pro forma consolidated balance sheet of the Company as of
March 31, 1998, reflects the planned dividend (estimated at $10,490,000) to
be made to Irex through the execution of a note payable to Irex and
subsequently paid from the net proceeds of the initial public offering.
Pursuant to the requirements of the Securities and Exchange Commission, the
dividend has been reflected in the pro forma balance sheet without giving
effect to any receipt of the net proceeds of the initial public offering.
In addition, pursuant to the requirements of the Securities and Exchange
Commission, the pro forma income per share data giving effect to the number
of shares whose proceeds were used to in effect pay the dividend on both a
basic and diluted basis is $0.13. Pro forma weighted average shares
outstanding on both a basic and diluted basis are 3,867,184.
F-19
<PAGE>
[Inside back cover portrays photographs of Company products and the following
text:]
spi Specialty Products & Insulation Co.
Mechanical Insulation Products
Calcium Silicate
Cellular Glass
Ceramic Fiber
Coatings, Adhesives and Sealants
Expanded Perlite
Fiberglass
Mineral Wool
Polyisocyanurate
Polystyrene
PVC Products
Rubber
Textiles
Tools, Equipment and Accessories
Architectural/Acoustical Products
Acoustical Ceiling & Suspension Systems
Building Insulation
Decorative and Acoustical Wall Panels
Exterior Insulation Finish Systems
Passive Fire Protection Systems
Floor Tile
FRP Ceiling and Wall Panels
Tools, Equipment and Accessories
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE 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.
------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Dilution.................................................................. 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Acquisition and Expansion Background...................................... 24
Business.................................................................. 27
Management................................................................ 35
Principal Shareholders.................................................... 40
Separation from Irex...................................................... 41
Description of Capital Stock.............................................. 43
Shares Eligible for Future Sale........................................... 45
Underwriting.............................................................. 46
Legal Matters............................................................. 47
Experts................................................................... 47
Additional Information.................................................... 47
Cautionary Statement Regarding Forward-Looking Statements................. 48
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
[LOGO OF SPECIALITY PRODUCTS APPEARS HERE]
SPECIALTY PRODUCTS &
INSULATION CO.
COMMON STOCK
PROSPECTUS
LEGG MASON WOOD WALKER
INCORPORATED
ADVEST, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $8,142
NASD Filing Fee.................................................... $3,260
Nasdaq Filing Fee.................................................. *
Blue Sky Fees and Expenses......................................... *
Legal Fees and Expenses............................................ *
Accounting Fees and Expenses....................................... *
Registrar and Transfer Agent Fees.................................. *
Printing and Engraving Expenses.................................... *
Miscellaneous...................................................... *
------
Total............................................................ *
</TABLE>
--------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Bylaws of the Company provide that the Company shall indemnify any
person who is a party or is threatened to be made a party to any lawsuit or
claim for damages arising by reason of the fact that he is or was a director,
officer or employee of the Company or any subsidiary. The Company intends to
obtain directors' and officers' insurance against certain liabilities such
persons may incur on behalf of the Company.
Pennsylvania law permits the Registrant to provide similar indemnification
to employees and agents who are not directors or officers. The determination
of whether an individual meets the applicable standard of conduct may be made
by the disinterested directors, independent legal counsel or the stockholders.
Pennsylvania law also permits indemnification in connection with a proceeding
brought by or in the right of the Registrant to procure a judgment in its
favor. To the extent that an indemnification for liabilities arising under the
Securities Act is permitted to directors, officers, or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in that Act and is therefore unenforceable.
The Underwriting Agreement provides for indemnification by the Underwriters
of the registrant and its directors, officers and controlling persons for
certain liabilities, including liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has not issued any unregistered securities within the past three
years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Underwriting Agreement
3.1 Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1* Specimen Common Stock Certificate
5.1* Opinion of Dechert Price & Rhoads
10.1* Corporate Separation Agreement
10.2* Tax Sharing and Indemnification Agreement
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3* Benefits Sharing Agreement
10.4* 1998 Specialty Products & Insulation Co. Stock Option Plan
10.5* Form of Employment Agreement
21.1+ Subsidiary of the Registrant
23.1 Consent of Arthur Andersen LLP (included on page II-4)
23.2* Consent of Dechert Price & Rhoads (included in Exhibit 5.1)
24.1 Power of Attorney (included on Signature Page)
27.1 Financial Data Schedule
99.1+ Consent of W. Kirk Liddell
99.2+ Consent of William W. Adams
99.3+ Consent of David C. Kleinman
99.4+ Consent of Wilson D. McElhinny
99.5+ Consent of G. Clay von Seldeneck
99.6+ Consent of John O. Shirk
99.7+ Consent of Michael J. Hughes
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
(b) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
-------- -----------
<C> <S>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted because they are not required or applicable,
or because the information is included in the consolidated financial
statements or the notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) 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 Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) 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-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of East Petersburg and Commonwealth of
Pennsylvania on May 26, 1998.
Ronald L. King
By: ---------------------------------
RONALD L. KING
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald L. King and W. Kirk Liddell,
each and individually, his or her attorneys-in-fact, with full power of
substitution and resubstitution, for him or her in any and all capacities, to
sign any or all amendments or post-effective amendments to this Registration
Statement or any Registration Statement for the same offering that is
effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same with exhibits thereto and other
documents in connection therewith or in connection with the registration of
Common Stock under the Securities Exchange Act of 1934, as amended, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-
fact and agents full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each such attorney-in-fact, or his agent or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Ronald L. King President, Chief May 26, 1998
- ------------------------------------- Executive Officer
RONALD L. KING and Director
(principal
executive officer)
Michael J. Hughes Vice President, May 26, 1998
- ------------------------------------- Chief Financial
Officer, Secretary
MICHAEL J. HUGHES and Treasurer
(principal
financial and
principal
accounting officer)
</TABLE>
II-3
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Specialty Products & Insulation Co.
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Lancaster, Pennsylvania
May 26, 1998
II-4
<PAGE>
SCHEDULE II
SPECIALTY PRODUCTS & INSULATION CO. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT PROVISION BALANCE
BEGINNING CHARGED ACCOUNTS AT END
OF YEAR TO EXPENSE WRITTEN OFF OF YEAR
---------- ---------- ----------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for Doubtful Accounts..... $700 $ 830 $(936) $594
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts..... $594 $1,120 $(720) $994
YEAR ENDED DECEMBER 31, 1997
Allowance for Doubtful Accounts..... $994 $ 71 $(599) $466
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------- ----------- ------------
<C> <S> <C>
1.1* Underwriting Agreement..........................................
3.1 Restated Articles of Incorporation of the Company...............
3.2 Bylaws of the Company...........................................
4.1* Specimen Common Stock Certificate...............................
5.1* Opinion of Dechert Price & Rhoads...............................
10.1* Corporate Separation Agreement..................................
10.2* Tax Sharing and Indemnification Agreement.......................
10.3* Benefits Sharing Agreement......................................
10.4* 1998 Specialty Products & Insulation Co. Stock Option Plan......
10.5* Form of Employment Agreement....................................
21.1+ Subsidiary of the Registrant....................................
23.1 Consent of Arthur Andersen LLP (included on page II-4)..........
23.2* Consent of Dechert Price & Rhoads (included in Exhibit 5.1).....
24.1 Power of Attorney (included on Signature Page)..................
27.1 Financial Data Schedule.........................................
99.1+ Consent of W. Kirk Liddell......................................
99.2+ Consent of William W. Adams.....................................
99.3+ Consent of David C. Kleinman....................................
99.4+ Consent of Wilson D. McElhinny..................................
99.5+ Consent of G. Clay von Seldeneck................................
99.6+ Consent of John O. Shirk........................................
99.7+ Consent of Michael J. Hughes....................................
</TABLE>
--------
+ Previously filed.
* To be filed by amendment.
<PAGE>
Exhibit 3.1
-----------
RESTATED
ARTICLES OF INCORPORATION
OF
SPECIALTY PRODUCTS & INSULATION CO.
1. Name. The name of the corporation (hereinafter referred to as the
"Company") is: Specialty Products & Insulation Co.
2. Registered Agent. The name of the Company's registered agent in
Pennsylvania is CT Corporation System with a venue in the County of Lancaster.
3. Corporate Powers. The Company shall have unlimited power to engage in
and to do any lawful act concerning any or all lawful business for which
corporations may be incorporated under such Law.
4. Term. The term for which the Company is to exist is perpetual.
5. Capital Stock. The aggregate number of shares of capital stock which the
Company shall have authority to issue is thirty million shares divided into two
classes, consisting of (i) fifteen million shares of Preferred Stock, par value
$.01 and (ii) fifteen million shares of Common Stock, par value $.01.
The following is a statement of the designations, voting rights,
preferences, limitations, and the special rights granted to or imposed upon the
shares of each such class:
PREFERRED STOCK
(a) Issue in Series. Preferred Stock may be issued from time to time in
one or more series, each such series to have the terms stated herein and in
the resolution of the Board of Directors providing for its issue. All
shares of any one series of Preferred Stock shall be identical, but shares
of different series of Preferred Stock need not rank equally or be
identical except insofar as provided by law.
(b) Creation of Series. The Board of Directors shall have authority by
resolution to cause to be created one or more series of Preferred Stock,
and to determine and fix with respect to each series, prior to the issuance
of any shares of the series to which such resolution relates:
(i) the distinctive designation of the series and the number of shares
which shall constitute the series, which number may be increased or
decreased (but not below the number of shares then outstanding) from
time to time by action of the Board of Directors;
<PAGE>
(ii) the dividend rate and the times of payment of dividends on the
shares of the series, whether dividends shall be cumulative, and, if
so, from what date or dates;
(iii) the price or prices at which, and the terms and conditions on
which, the shares of the series may be redeemed at the option of the
Company;
(iv) whether or not the shares of the series shall be entitled to
the benefit of a retirement or sinking fund to be applied to the
purchase or redemption of such shares and, if so entitled, the amount
of such fund and the terms and provisions relative to the operation
thereof;
(v) whether or not the shares of the series shall be convertible
into, or exchangeable for, shares of any other series of the same or
any other class or classes of stock of the Company, and if so
convertible or exchangeable, the conversion price or prices, or the
rates of exchange, and any adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions
of such conversion or exchange;
(vi) the rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Company;
(vii) whether or not the shares of the series shall have priority
over or parity with or be junior to the shares of any other series or
class in any respect or shall be entitled to the benefit of
limitations restricting the issuance of shares of any other series or
class having priority over or being on a parity with the shares of
such series in any respect, or restricting the payment of dividends
on, or the making of other distributions in respect of shares of any
other series or class ranking junior to the shares of the series as to
dividends or assets, or restricting the purchase or redemption of the
shares of any such junior series or class, and the terms of any such
restrictions;
(viii) whether the series shall having voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such
voting rights; and
(ix) any other designations, voting rights, preferences,
limitations, or special rights of that series.
COMMON STOCK
(a) Dividends. Holders of Common Stock shall be entitled to receive such
dividends as may be declared by the Board of Directors, except that the
Company will not declare, pay or set apart for payment any dividend on
shares of Common Stock (other than dividends payable in Common Stock), or
directly or indirectly make any distribution on, redeem, purchase or
otherwise acquire any such shares, if at the time of such action the
Company is in default with respect to any dividend due and payable on, or
any sinking or
2
<PAGE>
purchase fund requirement relating to, any shares of Preferred Stock senior
in right to the Common Stock.
(b) Distribution of Assets. In the event of voluntary or involuntary
liquidation, dissolution or winding up of the Company, holders of Common
Stock shall be entitled to receive pro rata all of the remaining assets of
the Company available for distribution to its shareholders after all
amounts to which the holders of Preferred Stock senior in right to the
Common Stock are entitled have been paid or set aside in cash for payment.
(c) Voting Rights. Except as otherwise required by law or provided in any
certificate creating any series of Preferred Stock, the holders of Common
Stock shall be entitled to one vote for each share thereof held.
6. Directors
(a) Number, Election and Term. The authorized number of Directors of the
Company shall be not less than five (5) nor more than fifteen (15) and the
Board of Directors may, within the limits specified by this paragraph,
increase or decrease the exact number of Directors from time to time by
resolution duly adopted by such Board. No decrease in the number of
Directors shall have the effect of shortening the term of any incumbent
Director. The Directors shall be classified in respect to the time for
which they shall severally hold office by dividing them into three classes,
each to be as nearly equal in number as possible.
Each Director shall be elected for a term ending on the date of the third
annual meeting of shareholders following the annual meeting of shareholders
at which such Director was elected. At the annual meeting of shareholders
held in 1998, one class shall be originally elected for a term expiring at
the annual meeting of shareholders to be held in 1999, another class shall
be originally elected for a term expiring at the annual meeting of
shareholders to be held in 2000, and another class shall be originally
elected for a term expiring at the annual meeting of shareholders to be
held in 2001, with the members of each class to hold office until their
successors are elected and qualified. At each succeeding annual meeting of
the shareholders of the Company, the successors of the class of Directors
whose term expires at that meeting shall be elected by plurality vote of
all votes cast at such meeting to hold office for a term expiring at the
annual meeting of shareholders held in the third year following the year of
their election.
(b) Vacancies. Vacancies in the Board of Directors, including vacancies
resulting from an increase in the number of Directors, shall be filled by a
majority of the Directors then in office, though less than a quorum, and
each person so elected shall be a Director to serve for the balance of the
unexpired term and until his successor is duly elected and qualified.
(c) Removal. The entire Board of Directors, or any class of the Board, or
any individual Director may be removed from office by the vote of
shareholders entitled to
3
<PAGE>
vote thereon only for cause. The amendment or repeal of this provision
shall not apply to any incumbent Director during the balance of the term
for which he was elected.
(d) Cumulative Voting. Shareholders shall not have cumulative voting
rights in the election of Directors.
(e) Inapplicability of Certain Directors Fiduciary Duty Provisions. The
provisions of Section 1715 of the Pennsylvania Business Corporation
Law shall not be applicable to the Company.
7. Opt-out. Subchapters E, G and H of Chapter 25 of the Business Corporation
Law of 1988, as amended, shall not be applicable to the Company.
8. Amendment. The Company reserves the right, from time to time, to amend,
alter or repeal any provision contained in these Restated Articles of
Incorporation in the manner now or hereafter provided by statute for the
amendment of articles of incorporation.
4
<PAGE>
Exhibit 3.2
-----------
BYLAWS OF
SPECIALTY PRODUCTS & INSULATION CO.
ARTICLE I
SHAREHOLDERS
------------
1.1. Meetings.
--------
(a) Place. Meetings of the shareholders shall be held at such place as
-----
may be designated by the Board of Directors.
(b) Annual Meeting. An annual meeting of the shareholders for the
--------------
election of Directors and for other business shall be held at such time as may
be fixed by the Board of Directors, on the last Thursday of April in each year
(or if such is a legal holiday, on the next following business day), or on such
other day as may be fixed by the Board of Directors.
(c) Special Meetings. Special meetings of the shareholders may be called
----------------
at any time by the Chairman of the Board, president or a majority of the Board
of Directors.
(d) Notice. Written notice of the time and place of all meetings of
------
shareholders and of the general nature of the business to be transacted at each
special meeting of shareholders shall be given to each shareholder entitled to
vote at the meeting at least five days before the date of the meeting unless a
greater period of notice is required by law in a particular case.
(e) Quorum. The presence, in person or by proxy, of the holders of a
------
majority of the outstanding shares of stock of the Company entitled to vote on a
particular matter shall constitute a quorum for the purpose of considering such
matter. If a quorum is not present, no business shall be transacted except to
adjourn to a future time.
(f) Business at Meetings. Except as otherwise provided by law
--------------------
(including but not limited to Rule 14a-8 of the Securities and Exchange Act of
1934, as amended, or any successor provision thereto) or in these Bylaws, the
business which shall be conducted at any meeting of the shareholders shall (a)
have been specified in the written notice of the meeting (or any supplement
thereto) given by the Company, or (b) be brought before the meeting at the
direction of the Board of Directors or the Chief Executive Officer, or (c) be
brought before the meeting by the presiding officer of the meeting unless either
a majority of the Directors then in office or the Chief Executive Officer object
to such business being conducted at the meeting, or (d) have been specified in a
written notice given to the Secretary of the Company, by or on behalf of any
<PAGE>
shareholder of record on the record date for such meeting and who shall continue
to be entitled to vote thereat (the "Shareholder Notice"), in accordance with
the following requirements:
(1) each Shareholder Notice must be delivered to, or mailed and
received at, the principal executive offices of the Company (i) in the case of
an annual meeting that is called for a date that is within 30 days before or
after the anniversary date of the immediately preceding annual meeting of the
shareholders, not less than 60 days nor more than 90 days prior to such
anniversary date, and (ii) in the case of an annual meeting that is called for a
date that is not within 30 days before or after the anniversary date of the
immediately preceding annual meeting, not later than the close of business on
the tenth day following the day on which notice of the date of the meeting was
mailed or public disclosure of the date of the meeting was made, whichever
occurs first; and
(2) each such Shareholder Notice must set forth (i) the name and
address of the shareholder who intends to bring the business before the meeting;
(ii) the general nature of the business which such shareholder seeks to bring
before the meeting and, if a specific action is to be proposed, the text of the
resolution or resolutions which the proposing shareholder proposes that the
shareholders adopt; and (iii) a representation that the shareholder is a holder
of record of the stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to bring the business
specified in the Shareholder Notice before the meeting. The presiding officer
of the meeting may, in his or her sole discretion, refuse to acknowledge any
business proposed by a shareholder not made in compliance with the foregoing
procedure.
ARTICLE II
DIRECTORS
---------
2.1. Number. The Board of Directors shall consist of such number of members as
------
determined in the Articles of Incorporation.
2.2. Eligibility. Except as provided herein, no person shall be elected a
-----------
Director who on the date of such election, is 72 years old or more. If any
Director attains the age of 72 while serving on the Board of Directors, such
Director shall be deemed to have tendered his resignation from the Board of
Directors on the last day of the month in which he attained the age of 72. The
Board of Directors shall accept or reject such resignation within 30 days after
the date of such resignation.
If the employment by the Company of any person who is both a Director and an
employee is terminated for any reason whatsoever, such person shall be deemed to
have tendered his resignation from the Board of Directors on the date of such
termination. The Board of Directors shall accept or reject such resignation
within 30 days after the date of termination of employment.
-2-
<PAGE>
2.3. Powers. The business of the Company shall be managed by the Board of
------
Directors which shall have all powers conferred by law and these bylaws,
including the power to regulate the internal affairs and business of the Company
in such manner as the Board may determine.
2.4. Meetings.
--------
(a) Place. Meetings of the Board of Directors shall be held at such
-----
place as may be designated by the Board or in the notice of the meeting.
(b) Regular Meetings. Regular meetings of the Board of Directors shall
----------------
be held at such times as the Board may designate by resolution. Notice of
regular meetings need not be given.
(c) Special Meetings. Special meetings of the Board of Directors may be
----------------
called at any time by the chairman or the president and shall be called by the
president upon the written request of one-third of the Directors. Notice (which
need not be written) of the time and place of each special meeting shall be
given to each Director at least two days before the meeting.
(d) Quorum. A majority of all Directors in office shall constitute a
------
quorum for the transaction of business at any meeting and, except as otherwise
provided herein, the acts of a majority of the Directors present at any meeting
at which a quorum is present shall be the acts of the Board of Directors.
(e) Participation. One or more Directors may participate in a meeting of
-------------
the Board or a committee of the Board by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
(f) Informal Action. Any action which may be taken at a meeting of the
---------------
Directors or the Executive or other committees of the Board of Directors may be
taken without a meeting if, prior or subsequent to the action, consents thereto
by all of the Directors in office or members of the committee, as the case may
be, are filed with the secretary of the Company.
2.5. Nominations. Nominations for the election of Directors may be made by the
-----------
Board of Directors, a committee appointed by the Board of Directors or by any
shareholder of record entitled to vote on the election of Directors who is a
shareholder at the record date of the meeting and also on the date of the
meeting on which Directors are to be elected; provided, however, that with
respect to a nomination made by a shareholder, such shareholder must provide
timely written notice to the secretary of the Company in accordance with the
following requirements:
(a) To be timely, a shareholder's notice must be delivered to, or mailed
and received at, the principal executive offices of the Company (i) in the case
of an annual meeting that is called for a date that is within 30 days before or
after the anniversary date of the immediately preceding annual meeting of
shareholders, not less than 60 days nor more than 90 days prior to such
anniversary date, and (ii) in the case of an annual meeting that is called for a
date that is not within
-3-
<PAGE>
30 days before or after the anniversary date of the immediately preceding annual
meeting, or in the case of a special meeting of shareholders called for the
purpose of electing Directors, not later than the close of business on the tenth
day following the day on which notice of the date of the meeting was mailed or
public disclosure of the date of the meeting was made, whichever occurs first;
and
(b) Each such written notice must set forth: (i) the name and address of
the shareholder who intends to make the nomination; (ii) the name and address of
the person or persons to be nominated; (iii) a representation that the
shareholder is a holder of record of the stock of the Company entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iv) a description of
all arrangements or understandings between the shareholder and each nominee and
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (v) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (vi) the consent of
each nominee to serve as a Director of the Company if so elected. The presiding
officer at the meeting may refuse, in his or her sole discretion, to acknowledge
the nomination of any person not made in compliance with the foregoing
procedure.
2.6. Committees. The Board of Directors may by resolution adopted by a
----------
majority of the whole Board designate one or more committees, each committee to
consist of two or more Directors and such alternate members (also Directors) as
may be designated by the Board. Any such committee, to the extent provided in
such resolution, may exercise the authority of the Board of Directors in the
management of the business and affairs of the Company.
In the absence or disqualification of any member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another Director
to act at the meeting in the place of any such absent or disqualified member.
2.7. Limitation on Liability. A Director shall not be personally liable for
-----------------------
monetary damages for any action taken, or any failure to take any action unless
(i) the Director has breached or failed to perform the duties of his office
under Sections 1711-1718 of the Pennsylvania Business Corporation (relating to
fiduciary duty) and (ii) the breach or failure to perform constitutes self-
dealing, willful misconduct or recklessness. The provisions of this Section 2.7
shall not apply to (i) the responsibility or liability of a Director pursuant to
any criminal statute or (ii) the liability of a Director for the payment of
taxes pursuant to local, state or federal law. Any repeal or modification of
this Section 2.7 shall be prospective only, and shall not affect, to the
detriment of any Director, any limitation on the personal liability of a
Director of the corporation existing at the time of such repeal or modification.
-4-
<PAGE>
ARTICLE III
OFFICERS
--------
3.1. Election. At its first meeting after each annual meeting of the
--------
shareholders, the Board of Directors shall elect a chairman, president,
treasurer, secretary and such other officers as it deems advisable, provided
that no person shall be elected as chairman who, on the date of such election,
is 68 years old or more. Any number of offices may be held by the same person.
3.2. Authority and Duties. The officers shall have such authority and perform
--------------------
such duties as may be determined by resolution of the Board of Directors. Except
as otherwise provided by Board resolution: (i) the chairman shall preside at all
meetings of the Board and the shareholders, (ii) the president shall be the
chief executive officer of the Company, shall have general supervision over the
business and operations of the Company, and may perform any act and execute any
instrument for the conduct of such business and operations, (iii) the other
officers shall have the duties usually related to their offices, and (iv) the
officers, in the order determined by the Board, shall, in the absence of the
president because of his incapacity, physical or mental disability or other
extended illness, have the authority and perform the duties of the president.
ARTICLE IV
INDEMNIFICATION
---------------
4.1. Right to Indemnification. 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 or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he is or was a Director, officer, or
employee of the Company or any subsidiary thereof, or is or was serving at the
request of the Company or any subsidiary thereof as a Director, officer,
employee, or agent of another domestic or foreign corporation for-profit or not-
for-profit, 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 or proceeding, whether or not the indemnified liability arises or arose
from any threatened, pending or completed action by or in the right of the
Company or any subsidiary, to the extent that the power to indemnify such person
has been or may in the future be granted by statute and that such person is not
insured or otherwise indemnified.
4.2. Advance of Expenses. Expenses incurred by a Director, officer, or
-------------------
employee in defending a civil or criminal action, suit or proceeding shall be
paid by the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the Company.
-5-
<PAGE>
4.3. Procedure for Determining Permissibility. The procedure for determining
----------------------------------------
the permissibility of indemnification under the standards contained in this
Article IV (including the advance of expenses) shall be that set forth in
Subsections (1) (2) and (3) of Section 410D of the Pennsylvania Business
Corporation Law, provided that, if there has been a change in control of the
Company between the time of the action or failure to act giving rise to the
claim for indemnification and such claim, at the option of the person seeking
indemnification, the permissibility of indemnification shall be determined by
independent legal counsel selected jointly by the Company and the person seeking
indemnification. The reasonable expenses of any Director or officer in
prosecuting a successful claim for indemnification, and the fees and expenses of
any special legal counsel engaged to determine permissibility of
indemnification, shall be borne by the Company.
4.4. Contractual Obligations. The obligations of the Company to indemnify a
-----------------------
person under this Article IV, including the duty to advance expenses, shall be
considered a contract between the Company and such person, and no modification
or repeal of any provision of this Article IV shall affect, to the detriment of
such person, such obligations of the Company in connection with a claim based on
any act or failure to act occurring before such modification or repeal.
4.5. Indemnification Not Exclusive; Inuring or Benefit. The indemnification and
-------------------------------------------------
advancement of expenses provided by this Article IV shall not be deemed
exclusive of any other right to which one indemnified may be entitled under any
agreement, vote of shareholders or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office, and shall inure to the benefit of the heirs, executors and
administrators of any such person.
4.6. Insurance, Security and Other Indemnification. The Board of Directors
---------------------------------------------
shall have the power to (i) purchase and maintain, at the Company's expense,
insurance on behalf of the Company and others to the extent that power to do so
has not been prohibited by applicable law, (ii) create any fund of any nature,
whether or not under the control of a trustee, or otherwise secure any of its
indemnification obligations and (iii) give other indemnification to the extent
not prohibited by law.
ARTICLE V
STOCK CERTIFICATES
------------------
5.1. Stock Certificates. Every shareholder of record shall be entitled to a
------------------
stock certificate representing the shares held by him. Every stock certificate
shall bear the corporate seal (which may be a facsimile) and the signature of
the president or a vice-president and the secretary or an assistant secretary or
the treasurer or an assistant treasurer of the Company. Where a certificate is
signed by a transfer agent or registrar, the signature of any corporate officer
may be a facsimile.
5.2. Transfers. Transfers of stock certificates and the shares represented
---------
thereby shall be made on the books of the Company only by the registered holder
or by duly authorized attorney. Transfers shall be made only on surrender of the
stock certificate or certificates.
ARTICLE VI
-6-
<PAGE>
FISCAL YEAR
-----------
The fiscal year of the corporation shall end on the 31st day of December.
ARTICLE VII
AMENDMENTS
----------
These bylaws may be amended at any regular or special meeting of the Board
of Directors by the vote of a majority of all the Directors in office or at any
annual or special meeting of shareholders by the vote of the holders of a
majority of the outstanding stock entitled to vote. Notice of any such meeting
of shareholders shall set forth the proposed change or a summary thereof.
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 345 264
<SECURITIES> 0 0
<RECEIVABLES> 28,101 30,735
<ALLOWANCES> 466 0
<INVENTORY> 15,667 17,499
<CURRENT-ASSETS> 44,920 49,821
<PP&E> 4,311 2,328
<DEPRECIATION> 2,543 0
<TOTAL-ASSETS> 47,651 53,743
<CURRENT-LIABILITIES> 33,654 39,350
<BONDS> 4,817 4,806
0 0
0 0
<COMMON> 29 29
<OTHER-SE> 9,151 9,558
<TOTAL-LIABILITY-AND-EQUITY> 47,651 53,743
<SALES> 158,510 42,669
<TOTAL-REVENUES> 158,510 42,669
<CGS> 124,258 33,309
<TOTAL-COSTS> 124,258 33,309
<OTHER-EXPENSES> 27,158 7,822
<LOSS-PROVISION> 71 170
<INTEREST-EXPENSE> 1,939 516
<INCOME-PRETAX> 5,084 852
<INCOME-TAX> 2,077 349
<INCOME-CONTINUING> 3,007 503
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,007 503
<EPS-PRIMARY> 1.03 0.17
<EPS-DILUTED> 1.03 0.17
</TABLE>
